-----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, BOy6zHwCHTt4aBSWr7GEyZc2VkmJ+0hkNRQyabMz9i7owc4aSJUQAeAIt6Cpsu0I /du9O6LQaX3AgMunSZZbog== 0001201800-08-000176.txt : 20081216 0001201800-08-000176.hdr.sgml : 20081216 20081216171755 ACCESSION NUMBER: 0001201800-08-000176 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20081102 FILED AS OF DATE: 20081216 DATE AS OF CHANGE: 20081216 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: 081253049 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-nov08finalfinal.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: November 2, 2008 ---------------- 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 Identification Number) incorporation or organization) 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): [ ] Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer 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 12, 2008 - 13,559,427 shares of Common Stock are outstanding. HERLEY INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q
PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements: Condensed Consolidated Balance Sheets - November 2, 2008 (Unaudited) and August 3, 2008 2 Condensed Consolidated Statements of Operations (Unaudited) - For the thirteen weeks ended November 2, 2008 and October 28, 2007 3 Condensed Consolidated Statements of Cash Flows (Unaudited) - For the thirteen weeks ended November 2, 2008 and October 28, 2007 4 Notes to Condensed Consolidated Financial Statements (Unaudited) 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16 Item 4 - Controls and Procedures 16 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 1A- Risk Factors 17 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 3 - Defaults Upon Senior Securities 17 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 5 - Other Information 18 Item 6 - Exhibits 18 Signatures 18
Part I - Financial Information Item I - Financial Statements HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
November 2, 2008 August 3, (Unaudited) 2008 ----------- --------- ASSETS Current Assets: Cash and cash equivalents $ 11,949 $ 14,347 Trade accounts receivable, net 24,559 27,003 Income Taxes Receivable 2,056 2,056 Costs incurred and income recognized in excess of billings on uncompleted contracts and claims 14,703 19,490 Other receivables 1,302 1,286 Inventories, net 62,695 61,559 Deferred income taxes 11,991 11,263 Assets held for sale (Note 3) 19,633 - Other current assets 1,823 1,276 ------- ------- Total Current Assets 150,711 138,280 Property, Plant and Equipment, net 34,429 30,552 Goodwill 85,980 73,900 Intangibles, net of accumulated amortization of $5,171 at November 2, 2008 and $7,505 at August 3, 2008 13,586 16,145 Other Assets 1,068 541 ------- ------- Total Assets $ 285,774 $ 259,418 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 2,332 $ 1,394 Current portion of employment settlement agreement - (net of imputed interest of $122 at November 2, 2008 and $138 at August 3, 2008) 1,136 1,119 Current portion of litigation settlement - (net of imputed interest of $29 at November 2, 2008 and $46 at August 3, 2008) 971 954 Accounts payable and accrued expenses 24,240 27,546 Billings in excess of costs incurred and income recognized on uncompleted contracts 199 613 Income taxes payable 94 43 Accrual for contract losses 2,805 2,994 Accrual for warranty costs 1,016 1,142 Advance payments on contracts 7,772 8,120 Liabilities of business held for sale (Note 3) 4,633 - ------- ------- Total Current Liabilities 45,198 43,925 Long-term Debt 34,727 7,092 Long-term Portion of Employment Settlement Agreement - (net of imputed interest of $339 at November 2, 2008 and $387 at August 3, 2008) 2,792 3,074 Long-term Portion of litigation settlement - (net of imputed interest of $93 at November 2, 2008 and $108 at August 3, 2008) 907 892 Other Long-term Liabilities 1,993 1,652 Deferred Income Taxes 8,941 8,839 Accrued Income Taxes Payable 509 509 ------- ------- Total Liabilities 95,067 65,983 ------- ------- Commitments and Contingencies Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 13,526,402 at November 2, 2008, and 13,521,902 at August 3, 2008 1,352 1,352 Additional paid-in capital 101,608 101,403 Retained earnings 87,719 89,058 Accumulated other comprehensive income 28 1,622 ------- ------- Total Shareholders' Equity 190,707 193,435 ------- ------- Total Liabilities and Shareholders' Equity $ 285,774 $ 259,418 ======= =======
See notes to condensed consolidated financial statements. 2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except per share data)
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ------------- ------------ Net sales $ 35,344 $ 32,538 ------------- ------------ Cost and expenses: Cost of products sold 28,741 23,226 Selling and administrative expenses 7,323 7,075 Gain on sale of assets (618) - Litigation costs 558 513 Litigation settlement - 6,042 ------------- ------------ 36,004 36,856 Operating loss (660) (4,318) ------------- ------------ Other (expense) income: Investment income 18 417 Interest expense (223) (25) Foreign exchange transactions (losses) gains (360) 146 ------------- ------------ (565) 538 ------------- ------------ Loss from continuing operations before income taxes (1,225) (3,780) Income taxes benefit (342) (1,551) ------------- ------------ Loss from continuing operations $ (883) $ (2,229) ------------- ------------ Discontinued operations (Note 3): Loss from operations of discontinued subsidiary (734) (539) Income taxes benefit (278) (177) ------------- ------------ Loss from discontinued operations $ (456) $ (362) ------------- ------------ Net loss $ (1,339) $ (2,591) ============= ============ Loss per common share - Basic and Diluted Loss from continuing operations $ (.07) $ (.16) Loss from discontinued operations (.03) (.03) --- --- Net loss - basic and diluted $ (.10) $ (.19) === === Basic and diluted weighted average shares 13,525 13,965 ====== ======
See notes to condensed consolidated financial statements. 3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ---------- ---------- Cash flows from operating activities: Net Loss $ (1,339) $ (2,591) --------- --------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,148 1,846 Gain on sale of fixed assets (618) - Loss from goodwill impairment of discontinued subsidiary 1,000 - Stock-based compensation costs 148 247 Excess tax benefit from exercises of stock options (19) (13) Litigation settlement costs - 5,942 Imputed interest related to employment settlement liability 96 80 Foreign exchange transactions losses (gains) 360 (146) Inventory valuation reserve charges 400 481 Reduction in accrual for contract losses - (826) Warranty reserve charges 343 348 Deferred tax benefit (620) (1,742) Changes in operating assets and liabilities: Cash of discontinued subsidiary (712) - Trade accounts receivable 896 2,379 Costs incurred and income recognized in excess of billings on uncompleted contracts and claims 4,786 (3,047) Other receivables 399 463 Inventories, net (375) (2,173) Other current assets (579) (791) Accounts payable and accrued expenses (4,093) 1,687 Billings in excess of costs incurred and income recognized on uncompleted contracts 252 542 Income taxes payable 70 (208) Accrual for contract losses (55) 151 Employment settlement agreement (330) (302) Advance payments on contracts (117) (45) Other, net (920) (188) --------- --------- Total adjustments 2,460 4,685 --------- --------- Net cash provided by operating activities 1,121 2,094 --------- --------- Cash flows from investing activities: Acquisition of business, net of cash acquired of $417 (30,010) - Capital expenditures (2,044) (966) --------- --------- Net cash used in investing activities (32,054) (966) --------- --------- Cash flows from financing activities: Borrowings under bank line of credit 20,000 4,900 Borrowings - other 10,000 - Proceeds from exercise of stock options 38 34 Excess tax benefit from exercises of stock options 19 13 Payments of long-term debt (441) (425) Payments under bank line of credit (1,000) (4,900) Purchase of treasury stock - (1,288) --------- --------- Net cash provided by (used in) financing activities 28,616 (1,666) --------- --------- Effect of exchange rate changes on cash (81) - --------- --------- Net decrease in cash and cash equivalents (2,398) (538) Cash and cash equivalents at beginning of period 14,347 35,181 --------- --------- Cash and cash equivalents at end of period $ 11,949 $ 34,643 ========= =========
See notes to condensed consolidated financial statements. 4 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 1. Principles of Consolidation and Basis of Presentation The unaudited condensed 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and note disclosures normally included in annual financial statements as 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 items, as well as the recording of the operations of a discontinued subsidiary and the acquisition of a business as discussed in Notes 3 and 2, respectively) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for this quarter are not necessarily indicative of the results of operations that may be expected for any other interim period or for the 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 2008 Annual Report on Form 10-K for the fiscal year ended August 3, 2008 as filed with the Securities and Exchange Commission ("SEC"). The accounting policies used in preparing these unaudited condensed interim financial statements are consistent with those described in the August 3, 2008 audited financial statements. The consolidated balance sheet at August 3, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management of the Company make certain estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. The most significant estimates include: valuation and recoverability of long-lived assets; income taxes; recognition of revenue and costs on production contracts; the valuation of inventory; and stock-based compensation costs. Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the net realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company's financial position and results of operations. The remaining accrual for contract losses as of July 29, 2007 associated with the ICI acquisition in the amount of $826,000 was eliminated in the thirteen weeks ended October 28, 2007 (which is included as a reduction of costs of products sold) as a result of the customer not exercising the remaining two contract options under the contract. Shipments under the contract were completed during the thirteen weeks ended October 28, 2007 and the remaining options under the contract had expired. Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. 2. Business combinations The Company entered into an Asset Purchase Agreement ("Asset Agreement") dated as of August 1, 2008 to acquire the business and certain assets subject to the assumption of certain liabilities of Eyal Industries ("EMI" or "Eyal") a privately held Israeli company for cash of $30 million. The transaction closed on September 16, 2008. The business operates as a wholly-owned subsidiary of General Microwave Israel (1987) Ltd. EMI is a leading supplier of a broad range of innovative, high reliability RF, microwave and millimeter wave components and customized subsystems for the global defense industry. Based in Kibbutz Eyal, Israel, the company has approximately 175 employees. Eyal's core capabilities include complex integrated microwave assemblies and "off-the-shelf" components for radar, ESM, ECM and communication systems which complement and expand the Company's current product line. Eyal's customers and programs further strengthen the Company's presence in the international marketplace. Funding for the purchase was provided through a $20 million loan under the Company's existing credit facility through its current bank which matures on March 31, 2010; and a new term loan in the amount of $10 million for a period of 10 years through the Company's bank in Israel. The new loan is payable in quarterly installments of $250,000 over a period of 10 years with interest at LIBOR plus 1.5%. The acquisition has been accounted for under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations", which requires that all business combinations be accounted for using the purchase method. The results of operations of Eyal are included in the condensed consolidated financial statements from September 1, 2008 (the designated "effective date") in accordance with SFAS No. 141. 5 The following information is provided with respect to the operations of Eyal from September 1, 2008 to November 2, 2008 (in thousands): Net Sales $ 3,325 ===== Operating income 101 === Income before income taxes 137 === The preliminary allocation of the aggregate purchase price (including acquisitions costs of approximately $427,000), based on a detailed review of the fair value of assets acquired and liabilities assumed including the fair value of identified intangible assets is as follows: Aggregate purchase price $ 30,427 ====== Current assets $ 8,668 Furniture and equipment 3,721 Intangibles 5,446 Goodwill 16,870 Current liabilities (3,920) Other long-term liabilities (358) The final determination of the fair value of assets acquired and liabilities assumed and the final allocation of the purchase price is expected to be completed in the fourth quarter for fiscal 2009 and may differ from the amounts included in the accompanying condensed consolidated financial statements. 3. Disposals of long-lived assets On September 18, 2008, the Company executed an agreement (the "Agreement") with a foreign defense company to divest its ICI subsidiary located in McLean, Virginia. ICI is a communications technology development firm specializing in research, design, development, production, and support of wireless data communications products and services. The Agreement provides for an all cash transaction valued at approximately $15 million and includes a significant contingency requiring U.S. Government approval on or before November 5, 2008 or the Agreement will be void. The U.S. Government approval was received by the Company on November 3, 2008. In accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the disposal of the business of Innovative Concepts Inc. is presented as assets and liabilities held for sale and as discontinued operations in the condensed consolidated financial statements. On November 10, 2008, the Company sold substantially all of the assets, net of the assumption of certain liabilities of ICI for approximately $15 million in cash of which $750,000 is held in escrow as security for certain indemnification obligations. Assets held for sale -------------------- The major categories of assets and liabilities held for sale included in the condensed consolidated balance sheet at November 2, 2008 were as follows:
Assets held for sale: Cash $ 712 Receivables - net 4,884 Inventories 3,441 Other current assets 33 Property, plant and equipment - net 398 Goodwill 3,047 Intangible assets, net 7,118 ------------- Total assets held for sale $ 19,633 ============= Liabilities of business held for sale: Accounts payable $ 1,486 Accrued expenses and other current liabilities 3,147 ------------- Total current liabilities of business held for sale $ 4,633 =============
6 Discontinued operations ----------------------- The following results of operations of ICI have been presented as loss from discontinued operations in the consolidated statement of operations:
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ------------ ------------ Net sales $ 5,953 $ 3,356 Cost of products sold and other expenses 5,687 3,895 Impairment of goodwill 1,000 - ------------ ------------ (Loss) before income taxes (734) (539) (Benefit) provision for income taxes (278) (177) ------------ ------------ (Loss) from discontinued operations $ (456) $ (362) ============ ============
Disposal of other long lived assets ----------------------------------- On October 31, 2008, we completed the sale of the assets of our machine shop located at our MSI operation to a third party in the amount of $675,000. Payment terms are $1,000 due at closing and the balance of $674,000 payable over six years in accordance with the terms of an interest bearing Note. The Note provides for minimum monthly payments of $9,000. The current portion of $108,000 is included in Other receivables and the balance of $566,000 is included in Other Assets on the Condensed Consolidated Balance Sheet at November 2, 2008. The sale of assets resulted in a net gain of approximately $618,000 as reported in the results of continuing operations in the quarter ended November 2, 2008. 4. Goodwill and Intangibles The changes in Goodwill and Intangible assets during the thirteen weeks ended November 2, 2008 is as follows (in thousands):
Goodwill Intangibles -------- ----------- Balance at August 3, 2008 $ 73,900 $ 16,145 Goodwill and intangibles acquired - EYAL 17,039 5,446 Impairment of Goodwill - discontinued operations (1,000) - Goodwill and Intangibles of discontinued business (3,047) (7,118) Foreign currency translation adjustment (912) (140) ------------ ------------ 85,980 14,333 Less amortization for the thirteen weeks ended November 2, 2008 - (747) ------------ ------------ $ 85,980 $ 13,586 ============ ============
5. Inventories The major components of inventories are as follows (in thousands):
November 2, August 3, 2008 2008 ------------- ---------- Purchased parts and raw materials $ 33,334 $ 32,439 Work in process 33,979 33,663 Finished products 3,218 2,623 ------------- ---------- 70,531 68,725 Less: Allowance for obsolete and slow moving inventory 6,615 6,476 Unliquidated progress payments 1,221 690 ------------- ---------- $ 62,695 $ 61,559 ============= ==========
6. Income Taxes The income tax benefit recognized for continuing operations in the first quarter of fiscal 2009 was $342,000 (an effective income tax benefit rate of 27.9%) as compared to a benefit of $1,551,000 in the prior year's first quarter. The estimated effective income tax rate for fiscal 2009 is 28.1% which is less than the statutory rate of 35.0% primarily due to the Company's foreign earnings attributable to our Israeli subsidiary which is 7 taxed at an estimated rate of 10% for fiscal 2009, thereby reducing the effective income tax rate by approximately 7%. 7. 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 thirteen weeks ended November 2, 2008 and October 28, 2007 (in thousands):
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ------------ ------------ Balance at beginning of period $ 1,142 $ 1,106 Provision for warranty obligations 343 348 Liability of business held for sale (250) - Warranty costs charged to the reserve (219) (373) ------------ ------------ Balance at end of period $ 1,016 $ 1,081 ============ ============
8. Litigation In June and July 2006, the Company was served with several class-action complaints against the Company and certain of its officers in the United States District Court for the Eastern District of Pennsylvania. The claims are made under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. All defendants in the class-action complaints filed motions to dismiss on April 6, 2007. On July 17, 2007, the Court issued an order denying the Company's and its former Chairman's motion to dismiss and granted, in part, the other defendants' motion to dismiss. Specifically, the Court dismissed the Section 10(b) claim against the other defendants and denied the motion to dismiss the Section 20(a) claim against them. On July 18, 2007, the Court granted defendant's motion to stay these actions until after the trial of certain criminal matters which were settled out of court in May 2008. On February 8, 2008, the Court issued an Order allowing for certain document discovery to commence. On May 9, 2008, the Court lifted the stay. A Scheduling Order has now been entered requiring the parties to complete discovery by January 2009. At this stage of the proceedings, it is not possible to predict what, if any, liability the Company may have from the Securities Class Actions. In July and August 2006, the Company and certain of its current and former officers and directors were also served with two separate derivative complaints for breach of fiduciary duty brought pursuant to Rule 23.1 of the Federal Rules of Civil Procedure. The complaints relate to the Company's indictment in 2006 and were consolidated into one action on March 9, 2006. All defendants in the derivative complaints filed motions to dismiss on February 26, 2007. On July 20, 2007, the Court issued an order denying defendants' motions in part and granting them in part. Specifically, the Court dismissed the claim that the named officers and directors failed to oversee the former Chairman's actions and denied the motions with respect to the other alleged claims. The Court also granted defendants' motion to stay the action until after the trial of the criminal matters which were settled out of court in May 2008. On February 8, 2008, the Court issued an Order allowing for certain document discovery to commence. On May 9, 2008, the Court lifted the stay. A Scheduling Order has now been entered requiring the parties to complete discovery by January 2009. At this stage of the proceedings, it is not possible to predict what, if any, liability the Company may have from the Derivative Actions. The Company believes it is entitled to recovery of certain legal fees associated with the above matters under its Directors and Officers ("D&O") insurance policy. As of November 2, 2008, the Company has aggregate claims of approximately $7,657,000 (net of a deductible of $500,000) and has received partial payments of approximately $2,236,000. The Company has entered into an agreement dated January 11, 2007 with the insurance carrier whereby if it is determined by final decision of an arbitration panel, or by final judgment of a court, or other final decision of a tribunal having jurisdiction thereof, that any amount paid by the insurance carrier was not a loss, as that term is defined in the policy, we shall repay to the insurance carrier any such uncovered sums previously advanced to us. The insurance carrier asserted in a letter their determination that they are not liable for certain of the legal costs incurred by the Company. The Company responded with a letter, supported by court case citations, that all the submitted costs represent valid claims under the policy and that the insurance company is liable. However, based on the insurance company's position and in accordance with the guidance in AICPA Statement of Position 96-1, "Environmental Remediation Liabilities" and Securities and Exchange Commission Staff Accounting Bulletin No. 92 "Accounting and Disclosures Relating to Loss Contingencies", the Company is not permitted to record a potential claim for recovery under its insurance policy. While there are no assurances, the Company believes its aggregate claims of approximately $7,657,000 represent a loss under its D&O policy and such costs are recoverable. In November 2008, the Company filed a complaint against the insurance carrier to recover the legal costs. 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 other litigation will not have a material adverse effect on the Company's financial position or results of operations. 8 9. Comprehensive Loss Comprehensive loss for the thirteen weeks ended November 2, 2008 and October 28, 2007 is as follows (in thousands):
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ----------- ----------- Net loss $ (1,339) $ (2,591) Unrealized loss on interest rate swap (8) (10) Foreign currency translation (loss) gain (1,586) 42 ----------- ----------- Comprehensive loss $ (2,933) $ (2,559) =========== ===========
The foreign currency translation (loss) gain relates to the Company's investment in its U.K. subsidiary and fluctuations in exchange rates between its local currency and the U.S. dollar. The components of accumulated other comprehensive income is as follows (in thousands):
November 2, August 3, 2008 2008 ------------- ------------- Unrealized loss on interest rate swap, net of taxes $ (62) $ (54) Foreign currency translation gain 90 1,676 ------------- ------------- $ 28 $ 1,622 ============= =============
10. Share-Based Compensation The Company has various fixed stock option plans which are described in Note N of the Company's August 3, 2008 Annual Report on Form 10-K that provide for the grant of stock options to eligible employees and directors. The Company recorded total share-based costs related to stock options, included as compensation costs in operating expenses, of $148,000 and $247,000 for the thirteen weeks ended November 2, 2008 and October 28, 2007, respectively. As of November 2, 2008, there were 3,506,325 stock options outstanding. Options for 5,000 shares of common stock at an exercise price of $17.09 per share were granted during the thirteen weeks ended November 2, 2008 with a fair value of approximately $30,600. The aggregate value of unvested options as of November 2, 2008, as determined using a Black-Scholes option valuation model was approximately $790,000 (net of estimated forfeitures) which is expected to be recognized over a weighted-average period of 1.55 years. Options for 4,500 shares of common stock were exercised during the thirteen weeks ended November 2, 2008 at an exercise price of $8.42 per share and options for 6,400 shares of common stock expired or were forfeited during the quarter. The total intrinsic value of options exercised during the thirteen weeks ended November 2, 2008, based on the difference between the Company's stock price at the time of exercise and the related exercise price, was approximately $51,000. There are 3,197,925 vested options outstanding as of November 2, 2008 at a weighted average exercise price of $14.60 and an aggregate intrinsic value of approximately $4,141,000. Included in the vested options outstanding are 1,616,400 options with exercise prices greater than the closing stock price of $13.30 as of November 2, 2008. 9 11. Loss per Common Share ("EPS") The following table shows the components used in the calculation of basic and diluted loss per common share (in thousands):
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ------------- ------------- Numerator: Loss from continuing operations $ (883) $ (2,229) ============== ============ Loss from discontinued operations $ (456) $ (362) ============== ============ Net Loss $ (1,339) $ (2,591) ============== ============ Denominator: Basic weighted-average shares 13,525 13,965 Effect of dilutive securities: Employee stock options - - --------------- ------------ Diluted weighted-average shares 13,525 13,965 ============== ============ Stock options not included in computation 3,506 3,581 ============== ============
Employee stock options with prices ranging from $7.63 to $21.18 per share were not considered in the computation of diluted net loss per share for the thirteen weeks ended November 2, 2008 and October 28, 2007 as their effect is anti-dilutive. The options which were outstanding as of November 2, 2008 and excluded from the computation in the table above expire at various dates through June 8, 2017. 12. Geographic Information and Major Customers Revenues for the thirteen weeks ended November 2, 2008 and October 28, 2007 were as follows: defense electronics, $33,493,000 and $29,602,000, respectively; and commercial technologies, $1,851,000 and $2,936,000, respectively. Net sales directly to the U.S. Government in the thirteen weeks ended November 2, 2008 and October 28, 2007 accounted for approximately 11% and 12% of net sales, respectively. Lockheed Martin and Northrop Grumman each accounted for approximately 12% of net sales in the thirteen weeks ended November 2, 2008; and approximately 13% of net sales in the thirteen weeks ended October 28, 2007. No other customer accounted for 10% or more of consolidated net sales in the periods presented. Foreign sales amounted to approximately $14,051,000 (40%) and $11,187,000 (34%) in the thirteen weeks ended November 2, 2008 and October 28, 2007, respectively. Geographic net sales for the first quarter based on place of contract performance, were as follows (in thousands):
Thirteen weeks ended -------------------- November 2, October 28, 2008 2007 ----------- ----------- United States $ 27,208 $ 27,837 Israel 6,806 4,422 England 1,330 279 ----------- ----------- $ 35,344 $ 32,538 =========== ===========
Net property, plant and equipment by geographic area were as follows (in thousands):
November 2, August 3, 2008 2008 ------------- ------------ United States $ 26,084 $ 25,864 Israel 8,109 4,495 England 236 193 ------------- ------------ $ 34,429 $ 30,552 ============= ============
10 13. Supplemental Cash Flow information is as follows (in thousands):
Thirteen weeks ended -------------------- November 2, 2008 October 28, 2007 ---------------- ---------------- Net cash paid during the period for: Interest $ 85 $ 106 Income taxes $ 118 $ 221 Non-cash financing transactions: Retirement of 84,944 shares of treasury stock - $1,288
14. New Accounting Pronouncements In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 was adopted by the Company effective August 4, 2008. Adoption of SFAS 159 had no impact on the Company's consolidated financial position, results of operations or cash flows. In April 2008, the FASB issued Staff Position ("SFP") No. FAS 142-3, "Determination of the Useful Life of Intangible Assets", which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." The intent of FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), "Business Combinations", and other U.S. generally accepted accounting principles. FAS 142-3 is effective for fiscal years and interim periods beginning after December 15, 2008 and only applies prospectively to intangible assets acquired after the effective date. Early adoption is not permitted. The Company must adopt FAS 142-3 in the first quarter of fiscal 2010 and is currently evaluating the impact this statement will have on its consolidated financial position, cash flows and results of operations. In March 2008, the FASB issued SFAS No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities--an amendment of FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities in order to better convey the purpose of derivative use in terms of risk management. Disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows, are required. This statement retains the same scope as SFAS 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS 161 will have on its consolidated financial position, cash flows and results of operations. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 (i) establishes a single definition of fair value and a framework for measuring fair value, (ii) sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and (iii) requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FSP No. 157-1 and No. 157-2, which, respectively, remove leasing transactions from the scope of SFAS 157 and defer its effective date for one year relative to certain non-financial assets and liabilities. As a result, the application of the definition of fair value and related disclosures of SFAS 157 (as impacted by these two FSPs) became effective for the Company's fiscal year beginning August 2008 on a prospective basis with respect to fair value measurements of (a) non-financial assets and liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Adoption of these provisions had no impact on the Company's consolidated financial position, results of operations or cash flows. The remaining aspects of SFAS 157 for which the effective date was deferred under FSP No. 157-2 are currently being evaluated by the Company and will be effective for the Company's fiscal year beginning August, 2009. Areas impacted by the deferral relate to non-financial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or non-financial long-lived asset groups measured at fair value for an impairment assessment. The effects of the remaining aspects of SFAS 157 and FSP No. 157-2 are currently being evaluated by the Company but are not expected to have a material impact on its consolidated financial position, cash flows and results of operations. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"). The objective of this statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination. Specifically, it establishes principles and requirements over how the acquirer (1) recognizes and measures the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase, and; (3) determines what information to disclose to enable users 11 of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. This statement is effective for fiscal years beginning after December 15, 2008 (the Company's 2010 fiscal year). SFAS 141(R) would have an impact on accounting for any businesses acquired after the effective date of this pronouncement. In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51" (SFAS 160). The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the non-controlling interest in a subsidiary (minority interests) and for the deconsolidation of a subsidiary. SFAS 160 also requires that a retained non-controlling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company would be required to report any non-controlling interests as a separate component of shareholders' equity. The Company would also be required to present any net income allocable to non-controlling interests and net income attributable to the shareholders of the Company separately in its consolidated statements of income. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008 (the Company's 2010 fiscal year). SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests, and would have an impact on the presentation and disclosure of the non-controlling interest of any non wholly-owned businesses acquired in the future. 15. Related Party Transactions The Company leases one of its buildings in Fort Walton Beach, Florida from MSI Investments, a Florida General Partnership which is owned by four individuals, two of whom are currently employees of MSI and one who serves as a consultant. Rent expense in the thirteen weeks ended November 2, 2008 and October 28, 2007 was approximately $71,000 and $79,000, respectively. The Company leases its facilities in Farmingdale, New York from a partnership partially owned by the children of an officer of the Company. Rent expense in the thirteen weeks ended November 2, 2008 and October 28, 2007 was approximately $160,000 and $138,000, respectively. 12 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 All statements other than statements of historical fact included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" which follows are forward-looking statements. Forward-looking statements involve various important assumptions, risks, uncertainties and other factors which could cause our actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this discussion can be identified by words such as "anticipate," "believe," "could," "estimate," "expect," "plan," "intend," "may," "should" or the negative of these terms or similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievement. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, competitive factors and pricing pressures, changes in legal and regulatory requirements, cancellation or deferral of customer orders, technological change or difficulties, difficulties in the timely development of new products, difficulties in manufacturing, commercialization and trade difficulties and general economic conditions as well as the factors set forth in our public filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report or the date of any document incorporated by reference, in this Quarterly Report. We are under no obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934. Explanatory Note We begin Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Herley Industries, Inc. with a business overview. This is followed by a discussion of the critical accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results, which we discuss under "Results of Operations." We then provide an analysis of cash flows under "Liquidity and Capital Resources." This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto, the other unaudited financial data included elsewhere in this 10-Q and our 2008 Form 10-K. 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 Northrop Grumman Corporation, Lockheed Martin Corporation, Raytheon Company, The Boeing Company, BAE Systems and Harris Corporation), the U.S. Government (including the Department of Defense, NASA and other U.S. Government agencies) and international customers (including the Egyptian, German, Japanese and South Korean militaries and suppliers to international militaries). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors and electronic warfare systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices 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 E-2C/D Hawkeye, EA-18G Growler, the AEGIS class surface combatants, the EA-6B Prowler, the AMRAAM air to air missile, CALCM (Conventional Air Launch Cruise Missile), Multi-mission Maritime Aircraft and unmanned aerial vehicles, or UAVs, as well as high priority national security programs such as National Missile Defense and the Trident II D-5. Critical Accounting Policies Our significant accounting policies are described in Note A of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 3, 2008 ("Report"); and a discussion of these critical accounting policies and estimates are included in Management's Discussion and Analysis of Results of Operations and Financial Condition of that Report. Management has discussed the development and selection of these policies with the Audit Committee of the Company's Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company's disclosures of these policies. There have been no material changes to the critical accounting policies or estimates reported in Management's Discussion and Analysis section of the audited financial statements for the fiscal year ended August 3, 2008 as filed with the Securities and Exchange Commission. Results of Operations Our Company's senior management regularly reviews the performance of our operations including reviews of key performance metrics as well as the status of operating initiatives. We review information on the financial performance of the operations, new business opportunities, customer relationships and initiatives, IR&D activities, human resources, manufacturing effectiveness, cost reduction activities, as well as other subjects. We compare performance against budget, against prior comparable periods, and against our most recent internal forecasts. The following table presents a financial summary comparison (in thousands) of the key performance metrics concerning our continuing operations. 13
First Quarter ------------------------------------- 2009 2008 % Change ------------------------------------- Key performance metrics of continuing operations: Net sales $35,344 $32,538 9 % Gross profit $6,603 $9,312 (29)% Gross profit percentage 18.7% 28.6% (35)% Operating loss ($660) ($4,318) 85 % Bookings $61,051 $38,003 61 % Backlog $183,161 $137,906 33 %
During the first quarter, we completed the divestiture of Innovative Concepts which is now reported as discontinued operations. We also completed the acquisition of Eyal Microwave in Israel and its results are included within the results from continuing operations beginning in September of fiscal 2009. The closure of our manufacturing operation at Farmingdale is proceeding according to plan including the transition of its business to four other Herley manufacturing locations. The operational improvement initiatives that began in fiscal 2008 are continuing and are impacting results across our operating facilities. We established four improvement objectives across all locations: improve cycle time, reduce defects, improve customer satisfaction, and increase Herley pride. We motivated our employees to actively engage in this program and we are pleased with the excitement and participation across the Company. This process improvement culture is taking root in our operations and we reasonably expect the success of the program to continue. However, there are no representations as to future results or performance or that achievements will be realized. Similarly, we formed five Councils which are: Technology, Operations, Business Development, Finance, and Contracts. Each Council has a representative from each of our locations and is chartered with the objective of implementing process improvements in their respective discipline that crosses all locations as well as sharing of best practices across Herley. The Councils are now into their second year and each has again identified specific, measurable objectives which are expected to be achieved on or before the end of fiscal 2009. During the first quarter, the Company recorded record bookings resulting in a record level of backlog. At the same time, the overall prospect for new business continues to be promising as proposal activity remains high. Still, the business continues to face a number of operational challenges across our locations and we are addressing those challenges aggressively. Among other changes, we are implementing certain cost containment measures throughout our Company, including the reduction of personnel. Accordingly, we believe we are taking appropriate and aggressive actions to meet the challenges facing our Company and we remain optimistic that the Company's performance should continue to improve. Thirteen weeks ended November 2, 2008 and October 28, 2007 - ---------------------------------------------------------- Net sales from continuing operations for the thirteen weeks ended November 2, 2008 were approximately $35.3 million, as compared to $32.5 million in the thirteen weeks ended October 28, 2007, an increase of $2.8 million (8.6%). Net sales exclude the operations of ICI for the thirteen weeks ended November 2, 2008 and October 28, 2007 which were approximately $6.0 million and $3.4 million, respectively. (See Note 3 to Condensed Consolidated Financial Statements.) Net sales include $3.3 million of revenue from the recent acquisition of Eyal in Israel, which reflects two months of Eyal's operations during the thirteen weeks ended November 2, 2008. Revenues at Herley Lancaster increased by $2.5 million due in part to revenue associated with the Trident program, as well as other shipments of products across multiple programs. Revenues also increased at Herley New England ($0.5 million) and at EWST ($0.9 million) due to increased productivity. Offsetting these increases was a total decrease of $4.4 million across MSI ($1.0 million), CTI ($0.6 million), Herley Israel ($0.9 million), and Herley Farmingdale ($1.9 million) largely due to the timing of customer scheduled shipments, and the closure of the Farmingdale manufacturing facility. Domestic and foreign sales from all locations were 67% and 33% respectively of total net sales from continuing operations in the quarter, versus 66% and 34% respectively in the prior year quarter. Bookings from continuing operations in the first quarter were approximately $61.0 million, and were 76% domestic and 24% foreign. This compares to bookings of approximately $38 million in the prior year first quarter which were 71% domestic and 29% foreign. The gross profit margin from continuing operations in the thirteen weeks ended November 2, 2008 was 18.7% compared to 28.6% in the first quarter of fiscal 2008, a decrease of 9.9%. The primary contributors to the decrease in gross profit margin for the quarter are the following: At Herley Farmingdale, a decrease of approximately $2.1 million due to (a) reduced sales volume and (b) unabsorbed overhead expenses, including severance costs of approximately $311,000, resulting from the closure of the facility which will be completed by December 31, 2008. At Herley Israel, a decrease of approximately (a) $0.9 million due to sales volume and product mix and (b) $0.4 million due to the effects of the exchange 14 rate of the New Israeli Shekel versus the U.S. dollar. The operations at Eyal, the recently acquired company in Israel, delivered a 17% gross margin in the period. Management plans to institute a number of performance improvement initiatives at this new Herley operation that are expected to significantly improve the financial performance at Eyal in future periods. Selling and administrative expenses for the thirteen weeks ended November 2, 2008 were $7.3 million versus approximately $7.1 million in the first quarter of fiscal 2008 and was 20.7% of net sales as compared to 21.7% in fiscal 2008. This first quarter of fiscal 2009 includes approximately $0.5 million of selling and administrative costs relating to Eyal, including approximately $0.2 million of amortization expense relating to intangibles. On October 31, 2008, we completed the sale of the assets of our machine shop located at our MSI operation to a third party in the amount of $675,000. Payment terms are $1,000 due at closing and the balance of $674,000 payable over six years in accordance with the terms of an interest bearing Note. The sale of assets resulted in a net gain of approximately $618,000 as reported in the results of operations in the quarter ended November 2, 2008. Loss from operations for the first quarter of fiscal 2009 was approximately $0.7 million or 1.9% of net sales, as compared to a loss from operations of approximately $4.3 million or 13.3% of net sales in the prior year. The loss from operations for the first quarter of the prior year was largely impacted by the $6.0 million litigation settlement costs. Other income (expense) was an expense of $0.6 million in the first quarter of fiscal 2009 versus other income in the prior year first quarter of approximately $0.6 million. Investment income declined by $0.4 million as compared to the prior year first quarter due to significantly lower cash balances in the first quarter of 2009. Interest expense increased by $0.2 million in the first quarter of fiscal 2009 versus the prior year driven primarily by the debt incurred related to the purchase of Eyal. We recognized net foreign exchange losses of $0.4 million versus a gain of $0.1 million in the first quarter of fiscal 2008. These foreign exchange losses and gains are attributable to fluctuations in exchange rates between the U.S. dollar and the local currency of our U.K. subsidiary primarily in connection with temporary advances we have made to them in U.S. dollars. The income tax benefit recognized for continuing operations in the first quarter of fiscal 2009 was $0.3 million (an effective income tax benefit rate of approximately 28%) as compared to a benefit of $1.6 million in the prior year's first quarter. The estimated effective tax rate for fiscal year 2009 is approximately 28%, which is less than the statutory rate of 35% primarily due to the foreign earnings attributable to our Israeli subsidiary which is taxed at an estimated rate of 10% for fiscal 2009, thereby reducing the effective income tax rate by approximately 7%. On September 18, 2008, we executed an agreement (the "Agreement") with a foreign defense company to divest our ICI subsidiary located in McLean, Virginia. ICI is a communications technology development firm specializing in research, design, development, production, and support of wireless data communications products and services. The Agreement provided for an all cash transaction valued at approximately $15 million and the required U.S. Government approval was granted on November 3, 2008. As the transaction is completed, ICI is reported as a discontinued operation. The pre-tax loss from operations of this discontinued subsidiary was approximately $0.7 million in the first quarter and was comprised of (a) a non-cash charge to earnings of approximately $1.0 million to reflect the difference between the sale price pursuant to the Agreement and the net carrying value of the assets held for sale and (b) income from the operations of the discontinued subsidiary of approximately $0.3 million. Basic and diluted loss per common share for the thirteen weeks ended November 2, 2008 were $.10 per common share each as compared to basic and diluted loss per common share of $.19 each in the prior year's first quarter. In the first quarter of fiscal 2009, the loss included $.07 from continuing operations and $.03 from discontinued operations, versus $.16 from continuing operations and $.03 from discontinued operations in the first quarter of fiscal 2008. Liquidity and Capital Resources - ------------------------------- As of November 2, 2008 and August 3, 2008, working capital was $105.5 million and $94.4 million, respectively, and the ratio of current assets to current liabilities was 3.3 to 1 and 3.1 to 1, respectively. As is customary in the defense industry, inventory is partially financed by progress payments. In addition, it is customary for us to receive advanced payments from customers on major contracts at the time a contract is entered into. The un-liquidated balance of progress payments was approximately $1.2 million at November 2, 2008 and $0.7 million at August 3, 2008. The balance of advanced payments was approximately $7.8 million at November 2, 2008 and $8.1 million at August 3, 2008. Net cash provided by operating activities during the thirteen weeks ended November 2, 2008 was approximately $1.1 million as compared to $2.1 million during the first quarter of the prior year, a net decrease of approximately $1.0 million. We had a net loss in the first quarter of the current fiscal year of $1.3 million versus a loss of $2.6 million in the prior year first quarter, a decrease of approximately $1.3 million. The first quarter of fiscal 2008 was impacted by the litigation settlement and related costs of approximately $6.6 million. Other significant increases in cash provided by operating activities during the thirteen weeks ended November 2, 2008 include a decrease in cost incurred and 15 income recognized in excess of billings on uncompleted contracts of $4.8 million due to the shipment and billing of contracts on percentage of completion, offset primarily by a reduction in accounts payable and accrued expenses of $4.1 million. Net cash used in investing activities relates to the acquisition of Eyal for cash of $30.0 million (including acquisition costs of $0.4 million less cash acquired of $0.4 million), and capital expenditures of $2.0 million. Net cash provided by financing activities includes borrowings under our bank line of credit of $20.0 million and of $10.0 million from a new term loan in Israel to fund the acquisition of Eyal; less payments of $1.0 million and $0.4 million related to our bank line of credit and long-term debt, respectively. We believe that presently anticipated future cash requirements will be provided by internally generated funds, our existing unsecured credit facility, and existing cash balances. A significant portion of our revenue for fiscal 2009 will be generated from our existing backlog of sales orders. The funded backlog of orders at November 2, 2008 was approximately $183 million. In the event of the cancellation of a significant amount of government contracts included in our backlog, we will be required to rely more heavily on our existing credit facility to fund operations. We are not aware of any events which are reasonably likely to result in any cancellation of our government contracts. As of November 2, 2008, we have approximately $3.2 million available under our bank credit facility (net of outstanding stand-by letters of credit of approximately $15.3 million and borrowings of $21.5 million) and cash of approximately $12.0 million. In November 2008 we repaid $14.0 million of our line of credit loans from the proceeds of the sale of ICI. Contractual Financial Obligations, Commitments and Off-Balance Sheet Arrangements Our financial obligations and commitments to make future payments under contracts include purchase orders, debt and lease agreements, and contingent commitments such as stand-by letters of credit. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction, with the result that some are recorded as liabilities on the Balance Sheet, while others are required to be disclosed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis. The Company's contractual financial obligations and other contingent commitments are disclosed in our Annual Report on Form 10-K for the fiscal year ended August 3, 2008 under Management's Discussion and Analysis. In addition to the financial obligations contained therein, the following payments (including imputed interest), are required under the terms of the financing discussed in Note 2 (in thousands):
Within 2-3 4-5 After 5 Obligations Total 1 Year Years Years Years ----------- ----- ------ ----- ----- ----- Revolving loan facility $ 21,660 820 20,840 - - ====== === ====== ===== ===== Notes Payable - bank $ 12,242 1,421 2,711 2,536 5,574 ====== ===== ===== ===== =====
As noted above, in November 2008 we repaid $14.0 million of the above referenced revolving credit loan out of the proceeds of the sale of ICI. New Accounting Pronouncements For a discussion of new accounting standards, see Note 13 to our Condensed Consolidated Financial Statements - (Unaudited) in Item 1. Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company's exposures to market risk have not changed significantly since August 3, 2008. Item 4: Controls and Procedures (a) Evaluation of disclosure controls and procedures. The term "disclosure controls and procedures" are 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 November 2, 2008. (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 November 2, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 16 PART II - OTHER INFORMATION Item 1 - Legal Proceedings: In June and July 2006, the Company was served with several class-action complaints against the Company and certain of its officers in the United States District Court for the Eastern District of Pennsylvania. The claims are made under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. All defendants in the class-action complaints filed motions to dismiss on April 6, 2007. On July 17, 2007, the Court issued an order denying the Company's and its former Chairman's motion to dismiss and granted, in part, the other defendants' motion to dismiss. Specifically, the Court dismissed the Section 10(b) claim against the other defendants and denied the motion to dismiss the Section 20(a) claim against them. On July 18, 2007, the Court granted defendant's motion to stay these actions until after the trial of certain criminal matters which were settled out of court in May 2008. On February 8, 2008, the Court issued an Order allowing for certain document discovery to commence. On May 9, 2008, the Court lifted the stay. A Scheduling Order has now been entered requiring the parties to complete discovery by January 2009. At this stage of the proceedings, it is not possible to predict what, if any, liability the Company may have from the Securities Class Actions. In July and August 2006, the Company and certain of its current and former officers and directors were also served with two separate derivative complaints for breach of fiduciary duty brought pursuant to Rule 23.1 of the Federal Rules of Civil Procedure. The complaints relate to the Company's indictment in 2006 and were consolidated into one action on March 9, 2006. All defendants in the derivative complaints filed motions to dismiss on February 26, 2007. On July 20, 2007, the Court issued an order denying defendants' motions in part and granting them in part. Specifically, the Court dismissed the claim that the named officers and directors failed to oversee the former Chairman's actions and denied the motions with respect to the other alleged claims. The Court also granted defendants' motion to stay the action until after the trial of the criminal matters which were settled out of court in May 2008. On February 8, 2008, the Court issued an Order allowing for certain document discovery to commence. On May 9, 2008, the Court lifted the stay. A Scheduling Order has now been entered requiring the parties to complete discovery by January 2009. At this stage of the proceedings, it is not possible to predict what, if any, liability the Company may have from the Derivative Actions. The Company believes it is entitled to recovery of certain legal fees associated with the above matters under its Directors and Officers ("D&O") insurance policy. As of November 2, 2008, the Company has aggregate claims of approximately $7,657,000 (net of a deductible of $500,000) and has received partial payments of approximately $2,236,000. The Company has entered into an agreement dated January 11, 2007 with the insurance carrier whereby if it is determined by final decision of an arbitration panel, or by final judgment of a court, or other final decision of a tribunal having jurisdiction thereof, that any amount paid by the insurance carrier was not a loss, as that term is defined in the policy, we shall repay to the insurance carrier any such uncovered sums previously advanced to us. The insurance carrier asserted in a letter their determination that they are not liable for certain of the legal costs incurred by the Company. The Company responded with a letter, supported by court case citations, that all the submitted costs represent valid claims under the policy and that the insurance company is liable. However, based on the insurance company's position and in accordance with the guidance in AICPA Statement of Position 96-1, "Environmental Remediation Liabilities" and Securities and Exchange Commission Staff Accounting Bulletin No. 92 "Accounting and Disclosures Relating to Loss Contingencies", the Company is not permitted to record a potential claim for recovery under its insurance policy. While there are no assurances, the Company believes its aggregate claims of approximately $7,657,000 represent a loss under its D&O policy and such costs are recoverable. In November 2008, the Company filed a complaint against the insurance carrier to recover the legal costs. 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 other litigation will not have a material adverse effect on the Company's financial position or results of operations. Item 1A - Risk Factors In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed under Part 1 - "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended August 3, 2008, which could materially adversely affect our business, financial condition, operating results and cash flows. The risks and uncertainties described in our Form 10-K for the year ended August 3, 2008 are not the only ones we face. Risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results or cash flows. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds: None Item 3 - Defaults Upon Senior Securities: None 17 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. 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/ Kevin J. Purcell ----------------------------------------- Kevin J. Purcell, Chief Financial Officer DATE: December 16, 2008 18 EX-31 2 hrly10qnov08-ex31.txt CERTIFICATIONS EXHIBIT 31 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) I, Myron Levy, 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 November 2, 2008 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 16, 2008 By: /S/ Myron Levy -------------------------- Name: Myron Levy Title: Chairman of the Board and Chief Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) I, Kevin J. Purcell, 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 November 2, 2008 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 16, 2008 By: /S/ Kevin J. Purcell ------------------------ Name: Kevin J. Purcell Title: Chief Financial Officer EX-32 3 hrly10qnov08-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 November 2, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myron Levy, 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 16, 2008 By: /S/ Myron Levy ------------------------------------ Name: Myron Levy Title: 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 November 2, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin J. Purcell, 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 16, 2008 By: /S/ Kevin J. Purcell ------------------------------------ Name: Kevin J. Purcell Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----