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: January 29, 2006
----------------
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
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(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
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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 March 6, 2006 - 14,522,566 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 -
January 29, 2006 and July 31, 2005 2
Consolidated Statements of Income -
For the Thirteen and Twenty-six weeks ended
January 29, 2006 and January 30, 2005 3
Consolidated Statement of Shareholders' Equity-
For the Twenty-six weeks ended January 29, 2006 4
Consolidated Statements of Cash Flows -
For the Twenty-six weeks ended
January 29, 2006 and January 30, 2005 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 - Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 4 - Submission Of Matters To A Vote Of Security Holders 20
Item 6 - Exhibits 21
Signatures 22
Part I - Financial Information
Item 1 - Financial Statements
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
January 29, July 31,
2006 2005
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 21,769 $ 20,331
Trade accounts receivable 28,549 27,258
Costs incurred and income recognized in excess
of billings on uncompleted contracts, including claims 18,923 16,058
Other receivables 1,642 1,414
Inventories, net of allowance of $4,844 in fiscal 2006
and $4,492 in fiscal 2005 56,671 53,668
Deferred taxes and other 3,853 3,782
-------------- --------------
Total Current Assets 131,407 122,511
Property, Plant and Equipment, net 29,722 29,461
Goodwill 73,372 70,831
Intangibles, net of accumulated amortization of $2,574 in fiscal 2006
and $1,680 in fiscal 2005 20,497 20,554
Other Assets 703 744
-------------- --------------
$ 255,701 $ 244,101
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 219 $ 797
Accounts payable and accrued expenses 21,523 24,477
Billings in excess of costs incurred and
income recognized on uncompleted contracts 995 538
Income taxes payable 4,690 3,760
Reserve for contract losses 3,219 630
Advance payments on contracts 5,704 3,966
-------------- --------------
Total Current Liabilities 36,350 34,168
Long-term Debt 4,805 5,000
Other Long-term Liabilities 1,228 1,042
Deferred Income Taxes 6,263 6,254
-------------- --------------
48,646 46,464
-------------- --------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
14,478,975 in fiscal 2006 and 14,389,625 in fiscal 2005 1,448 1,439
Additional paid-in capital 110,564 109,118
Retained earnings 93,871 85,932
Accumulated other comprehensive income 1,172 1,148
-------------- --------------
Total Shareholders' Equity 207,055 197,637
-------------- --------------
$ 255,701 $ 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 Twenty-six weeks ended
-------------------- ----------------------
January 29, January 30, January 29, January 30,
2006 2005 2006 2005
------------- ------------- ------------ -------------
Net sales $ 45,839 $ 33,754 $ 87,777 $ 67,344
------------- ------------- ------------ -------------
Cost and expenses:
Cost of products sold 32,351 24,405 60,164 47,189
Selling and administrative expenses 8,238 6,874 16,825 12,676
------------- ------------- ------------ -------------
40,589 31,279 76,989 59,865
------------- ------------- ------------ -------------
Operating Income 5,250 2,475 10,788 7,479
------------- ------------- ------------ -------------
Other income (expense), net:
Investment income 199 292 309 516
Interest expense (91) (58) (174) (137)
Foreign exchange gain (loss) (10) 185 103 185
------------- ------------- ------------ -------------
98 419 238 564
------------- ------------- ------------ -------------
Income before income taxes 5,348 2,894 11,026 8,043
Provision for income taxes 1,384 817 3,087 2,413
------------- ------------- ------------ -------------
Net income $ 3,964 $ 2,077 $ 7,939 $ 5,630
============= ============= ============ =============
Earnings per common share - Basic $ .27 $ .14 $ .55 $ .39
============= ============= ============ =============
Basic weighted average shares 14,474 14,335 14,460 14,294
============= ============= ============ =============
Earnings per common share - Diluted $ .26 $ .14 $ .52 $ .38
============= ============= ============ =============
Diluted weighted average shares 15,091 15,044 15,173 14,990
============= ============= ============ =============
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Twenty-six weeks ended January 29, 2006
(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 89,350 9 990 999
Stock option compensation 213 213
Tax benefit upon exercise of stock
options 243 243
------------- -------- ---------- --------- --------------- -----------
Subtotal 14,478,975 1,448 110,564 85,932 1,148 199,092
------------- -------- ---------- --------- --------------- -----------
Net income 7,939 7,939
Other comprehensive income, net of tax:
Unrealized gain on
Unrealized gain on interest rate swap 18 18
Foreign currency translation gain 6 6
-----------
Comprehensive income 7,963
------------- -------- ---------- --------- --------------- -----------
Balance at January 29, 2006 14,478,975 $ 1,448 110,564 93,871 1,172 $ 207,055
============= ======== ========== ========= =============== ===========
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)
Twenty-six weeks ended
January 29, January 30,
2006 2005
-------------- --------------
Cash flows from operating activities:
Net income $ 7,939 $ 5,630
-------------- --------------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 3,466 2,389
Stock-based compensation expense 213 -
Increase in deferred tax assets (81) -
Foreign exchange (gain) loss (36) 22
Gain on sale of securities - (20)
Equity in income of limited partnership - (6)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (1,291) 6,610
Increase in costs incurred and income
recognized in excess of billings on
uncompleted contracts, and claims (2,865) (2,593)
Increase in other receivables (228) (123)
(Increase) decrease in inventories (3,003) 484
Increase in deferred taxes and other (71) (549)
Decrease in accounts payable
and accrued expenses (2,954) (3,121)
Increase (decrease) in billings in excess of
costs incurred and income recognized
on uncompleted contracts 457 (1,022)
Increase in income taxes payable 930 1,708
Increase in accrual for contract losses 85 22
Increase (decrease) in advance payments on contracts 1,738 (281)
Other, net 248 220
-------------- --------------
Total adjustments (3,392) 3,740
-------------- --------------
Net cash provided by operating activities 4,547 9,370
-------------- --------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired - (3,753)
Acquisition of technology license (825) (1,000)
Deposit on purchase price of acquired business - (1,014)
Proceeds from sale of securities - 165
Partial distribution from limited partnership 11 78
Capital expenditures (2,785) (3,274)
-------------- --------------
Net cash used in investing activities (3,599) (8,798)
-------------- --------------
Cash flows from financing activities:
Borrowings under bank line of credit 8,000 -
Proceeds from exercise of stock options 999 1,599
Payments of long-term debt (753) (734)
Payments under bank line of credit (8,000) -
Income tax benefit from exercise of stock options 244 330
-------------- --------------
Net cash provided by financing activities 490 1,195
-------------- --------------
Net increase in cash and cash equivalents 1,438 1,767
Cash and cash equivalents at beginning of period 20,331 66,181
-------------- --------------
Cash and cash equivalents at end of period $ 21,769 $ 67,948
============== ==============
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.
6
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):
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 19,693
Current liabilities (258) (2,436) (12,364)
------- -------- --------
Aggregate purchase price $ 3,753 $ 20,685 $ 26,969
======= ======== ========
The Company adjusted its valuation of the assets acquired and liabilities
assumed in the acquisition of ICI in accordance with the provisions of SFAS
No. 141 during the quarter ended January 29, 2006. Accordingly, the
Company's consolidated financial statements reflect an adjustment of
$2,504,000 to the reserve for contract losses relating to a contract in
ICI's backlog at the date of acquisition.
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 $287,000 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 January 29, 2006 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 January 29, 2006 and July 31, 2005 are summarized as follows
(in thousands):
January 29, 2006 July 31, 2005
---------------- -------------
Purchased parts and raw materials $ 25,337 $ 23,838
Work in process 34,134 32,026
Finished products 2,044 2,296
-------- --------
61,515 58,160
Less reserve for excess and obsolete materials 4,844 4,492
-------- --------
$ 56,671 $ 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.
7
The change in the carrying amount of goodwill for the six months ended
January 29, 2006 is as follows (in thousands):
Balance at July 31, 2005 $ 70,831
Change in fair value of liabilities assumed
in connection with the ICI acquisition (Note 2) 2,504
Foreign currency translation adjustment 37
--------
Balance at January 29, 2006 $ 73,372
========
Intangible Assets consist of the following (in thousands):
January 29, July 31, Estimated
2006 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 201 189
------- -------
19,946 19,934
Accumulated amortization 2,574 1,680
------- -------
17,372 18,254
Technology license (for millimeter wave applications;
purchased from Xytrans) 3,125 2,300 (see below)
------- -------
$ 20,497 $ 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. No royalties have been earned as of January 29, 2006.
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. In the second quarter of fiscal 2006, additional
contingent payments totaling $450,000 were made by the Company.
The investment in this licensed technology of $3,125,000 as of January 29,
2006 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.
8
Amortization expense for the thirteen weeks ended January 29, 2006 and
January 30, 2005 was approximately $447,000 and $82,000, respectively, and
for the twenty-six weeks ended January 29, 2006 and January 30, 2005 was
approximately $894,000 and $177,000, 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
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 quarter and six months ended January 29, 2006 (in thousands):
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
January 29, January 30, January 29, January 30,
2006 2005 2006 2005
---- ---- ---- ----
Balance at beginning of period $ 776 $ 581 $ 799 $ 580
Provision for warranty obligations 28 161 167 315
Warranty costs charged to the reserve (58) (159) (220) (312)
---------- --------- ---------- ---------
Balance at end of period $ 746 $ 583 $ 746 $ 583
========== ========= ========== =========
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.
8. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
January 29, January 30, January 29, January 30,
2006 2005 2006 2005
---- ---- ---- ----
Net income 3,964 2,077 7,939 5,630
Unrealized gain (loss) on interest rate swap 6 21 18 (13)
Foreign currency translation gain (21) 164 6 279
------------- -------------- ------------- -------------
Comprehensive income 3,949 2,262 7,963 5,896
============= ============== ============= =============
The components of accumulated other comprehensive income is as follows (in
thousands):
January 29, 2006 July 31, 2005
---------------- -------------
Unrealized loss on interest rate swap $ (37) $ (55)
Foreign currency translation gain 1,209 1,203
-------- ----------
Accumulated other comprehensive income $ 1,172 $ 1,148
======== ==========
9
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 and
twenty-six weeks ended January 29, 2006 is approximately $ 135,000 and $
213,000, respectively 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 for the quarter and six months by approximately $ 135,000 and $
213,000, respectively, while net income was reduced by approximately
$99,000 and $154,000 respectively, or approximately $0.01 per basic and
diluted share in each period.
Income tax benefits relating to the exercise of stock options during the
twenty-six weeks ended January 29, 2006 and January 30, 2005 amounting to
$243,000 and $330,000, respectively, are classified as a financing cash
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 January 29, 2006, there were 3,648,180 stock options outstanding. The
aggregate value of unvested options, as determined using a Black-Scholes
option valuation model was approximately $757,000 (net of estimated
forfeitures). During the quarter ended January 29, 2006, the Company
granted 19,500 non-qualified stock options, with a fair value of
approximately $132,000. Options for 10,100 shares of common stock were
exercised, and 26,000 options were forfeited during the second quarter. 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 and twenty-six weeks
ended January 30, 2005, 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 Twenty-six weeks ended
January 30, 2005 January 30, 2005
---------------- ----------------
Net income - as reported $ 2,077 $ 5,630
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (635) (797)
------------- -------------
Net income - pro forma $ 1,442 $ 4,833
============= =============
Earnings per share - as reported
Basic $ 0.14 $ 0.39
Diluted 0.14 0.38
Earnings per share - pro forma
Basic $ 0.10 $ 0.34
Diluted 0.10 0.32
10
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 periods presented using the Black-Scholes option valuation model
are as follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
January 29, January 30, January 29, January 30,
2006 2005 2006 2005
---- ---- ---- ----
Weighted average fair value of options granted $ 6.78 $4.00 $ 6.81 $ 4.00
Expected life (years) 3.58 3.69 3.61 3.69
Expected volatility 0.44 0.44 0.44 0.44
Risk-free interest rate 4.28 3.80 4.28 3.80
Expected dividend yield zero zero zero zero
The expected life of options granted during the periods presented above is 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.
The following table summarizes the non-qualified stock option activity during
the twenty-six weeks ended January 29, 2006:
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
Cancelled (2,000) 19.83 19.83
-------------- ------------------- -------------
Outstanding October 30, 2005 3,664,780 $ 4.06 - 20.45 $ 14.49 $ 11,394
Exercisable October 30, 2005 3,481,280 $ 14.28 $ 11,394
Granted 19,500 17.11 - 20.85 18.59
Exercised (10,100) 8.38 - 13.10 10.00
Cancelled (26,000) 19.03 - 19.83 19.26
Outstanding January 29, 2006 3,648,180 $ 4.06 - 20.85 $ 14.49 $ 12,104
Exercisable January 29, 2006 3,445,180 $ 14.28 $ 12,104
Vested and expected to vest 3,615,856 $ 14.46 $ 12,104
<FN>
(1) Excludes 1,552,000 vested options with an exercise price greater than the
closing stock price of $16.96 as of January 29, 2006.
</FN>
11
Options outstanding and exercisable by price range as of January 29, 2006,
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 - 9.30 755,580 3.6 $ 8.41 755,580 $ 8.41
9.54 - 13.10 1,111,400 4.8 11.93 1,111,400 11.93
14.25 - 17.50 58,200 4.5 16.25 46,200 16.01
17.98 - 17.98 873,000 6.6 17.98 700,000 17.98
18.39 - 20.85 850,000 5.3 19.54 832,000 19.53
--------- --- ----------- --------- -----------
$ 4.06 - 20.85 3,648,180 5.1 $ 14.49 3,445,180 $ 14.28
========= =========
As of January 29, 2006, the total future compensation cost related to
nonvested options not yet recognized in the consolidated statement of
income was approximately $975,000 ($757,000 net of estimated forfeitures)
and the weighted average period over which these options are expected to be
recognized was 2.3 years.
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 Twenty-six weeks ended
-------------------- ----------------------
January 29, January 30, January 29, January 30,
2006 2005 2006 2005
---- ---- ---- ----
Numerator:
Net Income $ 3,964 $ 2,077 $ 7,939 $ 5,630
====== ====== ====== ======
Denominator:
Basic weighted-average shares 14,474 14,335 14,460 14,294
Effect of dilutive securities:
Employee stock options 617 709 713 696
------ ------ ------ -----
Diluted weighted-average shares 15,091 15,044 15,173 14,990
====== ====== ====== ======
Stock options not included in computation 1,762 122 1,041 704
====== ====== ====== ======
Exercise Price Range $17.11 - $20.85 $19.66 - $20.45 $17.11 - $20.85 $19.22 - $20.45
The number of stock options not included in the computation of diluted EPS
relates to stock options having exercise prices which are greater than the
average market price of the common shares during the periods presented, and
therefore, are anti-dilutive. The options which were outstanding as of
January 29, 2006 expire at various dates through February 4, 2015.
12
11. Geographic Information
The Company operates as a single integrated business and as such has one
operating segment. Geographic net sales for the second quarter, based on
place of contract performance, were as follows (in thousands):
Thirteen weeks ended Twenty-six weeks ended
--------------------- ----------------------
January 29, January 30, January 29, January 30,
2006 2005 2006 2005
---- ---- ---- ----
United States $ 39,754 $ 28,278 $ 77,608 $ 56,974
Israel 3,309 3,150 6,420 6,184
England 2,776 2,326 3,749 4,186
------------- ------------- ------------- -------------
45,839 33,754 87,777 67,344
============= ============= ============= =============
Net property, plant and equipment by geographic area was as follows (in
thousands):
January 29, 2006 July 31, 2005
---------------- -------------
United States $ 24,436 $ 24,318
Israel 4,646 4,376
England 640 767
-------- --------
$ 29,722 $ 29,461
======== ========
12. Supplemental cash flow information is as follows (in thousands):
Twenty-six weeks ended
----------------------
January 29, 2006 January 30, 2005
---------------- ----------------
Net cash paid during the period for:
Interest $ 148 $ 156
Income taxes 1,832 194
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.
13
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.
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155 "Accounting for Certain Hybrid Financial Instruments,"
("SFAS 155") an amendment of FASB Statements No. 133 and 140. SFAS 155
permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principal-only strips are not
subject to the requirements of Statement 133; establishes a requirement to
evaluate interests in securitized financial assets to identify interests
that are freestanding derivatives or that are hybrid financial instruments
that contain an embedded derivative requiring bifurcation; clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and amends Statement 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. The new standard is effective for all
financial instruments acquired or issued after the beginning of the
Company's first fiscal year that begins after September 15, 2006. The
Company does not expect the adoption of SFAS 155 to have a material impact
on its consolidated financial position, results of operations or cash
flows.
14
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, General Dynamics, 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 technologies for use in command and control systems, flight
instrumentation, weapons sensors, high power amplifiers, electronic warfare
systems, wireless data communications products and services, 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
Twenty-six weeks ended January 29, 2006 and January 30, 2005
- ------------------------------------------------------------
Net sales for the twenty-six weeks ended January 29, 2006 were approximately
$87,777,000 compared to $67,344,000 in the first six months of fiscal 2005, an
increase of $20 million (30.3%). Net sales at our two acquisitions completed in
the third quarter of fiscal 2005, MSI and ICI, accounted for an increase of
approximately $19 million, or 28.6% of the increase for the two quarters ended
January 2006. We also experienced an approximate $1 million net increase in
sales at our other operations; attributable to the general increases in the U.S.
defense budget, as follows:
- -- 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; and
- -- An increase in sales at our GMC facility of approximately $2.5 million in
power amplifier sales to Government of Israel for multiplatform
communications,
offset by
- -- A decline of $2.8 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.
The gross profit margin in the twenty-six weeks ended January 29, 2006 was 31.5%
compared to 29.9% in the first two quarters of fiscal 2005, an increase of 1.6%.
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 claim due to customer delays and changes in specification and designs
under a major program.
We experienced decreases in gross margins at EWST and RSS, principally due to
changes in contract cost estimates in fiscal 2006 at these operations versus
contract cost estimates in the first six months of fiscal 2005.
15
Selling and administrative expenses for the twenty-six weeks ended January 29,
2006 were 19.2% of net sales as compared to 18.8% in the first two quarters of
fiscal 2005, or an increase of approximately $4.1 million. Large increases
during the period included:
- -- Increases of approximately $3.4 million attributable to selling and
administrative expenses related to the two acquisitions completed in the
third quarter of fiscal 2005 (MSI and ICI);
- -- An increase of approximately $345,000 (from $680,000 in fiscal 2005 to
$1,025,000 in fiscal 2006) 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 six months was $10,788,000 or 12.3% of net sales, as
compared to $7,479,000 or 11.1% of net sales in 2005. The increase in operating
income as a percentage of net sales is primarily attributable to the 1.6%
improvement in gross margin percentage (for the reasons outlined above), offset
by the 0.4% increase in selling and administrative costs as a percentage of net
sales, and by the beneficial impact of the $20 million increase in revenue for
the six months ended January 29, 2006. Our foreign operations contributed
approximately $1.4 million in operating income for the six months as compared to
$1.2 million in fiscal 2005.
Investment income decreased by $207,000 in the first two quarters of fiscal 2006
because of a decline on average of approximately $49 million in funds invested,
offset by an increase of approximately 89% in the rate of interest earned on the
investment of excess cash reserves during the period as compared to interest
rates in the prior year. The reduction in the average balance of funds invested
in the first two quarters of fiscal 2006 versus the prior year was caused by the
investments and capital expenditures financed out of our investment funds,
including recent acquisitions.
The Company recognized a net foreign exchange gain of $103,000 through the
second quarter of fiscal 2006, versus a gain of $185,000 in fiscal 2005. The
foreign exchange gains are attributable to our UK subsidiary primarily in
connection with temporary advances we have made to them.
Provision for income taxes for the first six months of fiscal 2006 was
$3,087,000 representing an effective tax rate of approximately 28%, as compared
to an effective tax rate of 30% in the first six months of fiscal 2005. The
decrease in the effective rate in fiscal 2006 is due to various favorable tax
benefits, including a lower effective tax rate on foreign source income, the tax
benefit attributable to extra territorial income, research and development tax
credits, the exercise of stock options, and tax exempt interest income.
Thirteen weeks ended January 29, 2006 and January 30, 2005
- ----------------------------------------------------------
Net sales for the thirteen weeks ended January 29, 2006 were approximately
$45,839,000, as compared to $33,754,000 in the thirteen weeks ended January 30,
2005, an increase of $12 million (35.8%). Net sales at our two acquisitions
completed in fiscal 2005, MSI and ICI, accounted for an increase of
approximately $10 million, or 30% of the increase for the quarter ended January
2006. We experienced an approximate $2.0 million increase in net sales at our
other operations. Some of the larger changes contributing to this increase in
net sales included the following:
- -- An increase in net sales at Herley Power Amplifier Systems of approximately
$1.7 million, most of which was attributable to power amplifier products
sold primarily to General Dynamics for Naval Communications; and
- -- An increase in sales at our EWST operations of $0.5 million, under the
percentage of completion method for revenue recognition,
offset by
- -- A decrease in net sales occurred at our CTI facility due to the reduction
in VTDRO shipments to Nortel/Flextronics in the second quarter.
The gross profit margin in the thirteen weeks ended January 29, 2006 was 29.4%
compared to 27.7% in the second quarter of fiscal 2005, an increase of 1.7%. The
revenue generated by the two acquisitions completed in the third quarter of
fiscal 2005 (MSI and ICI), resulted in an increase in gross profit margins of
approximately 0.9%. Increases in the gross margin for the two domestic microwave
component divisions were due to the increase product margins at MDI and
increased net sales at GMC for the second quarter.
16
Selling and administrative expenses for the thirteen weeks ended January 29,
2006 were 18.0% of net sales as compared to 20.3% in the second quarter of
fiscal 2005, an increase approximately $1.4 million. Large increases during the
period included:
- -- Increases of approximately $1.6 million attributable to selling and
administrative expenses related to the two acquisitions completed in the
third quarter of fiscal 2005 (MSI and ICI),
offset by
- -- A decrease in legal costs from $620,000 in the second quarter of fiscal
2005 to $450,000 in the second quarter of fiscal 2006 attributable to the
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 second quarter of fiscal 2006 was $5.3 million or 11.5%
of net sales, as compared to $2.5 million or 7.3% of net sales in the prior
year. The increase in operating income as a percentage of net sales is primarily
attributable to the 2.3% decrease in selling and administrative costs as a
percentage of net sales, as well as the 1.7% improvement in the gross profit
margin (for the reasons outlined above) and the beneficial impact of the $12.1
million increase in revenue for the quarter. Our foreign operations contributed
$1.1 million in operating income for the quarter as compared to $683,000 in the
second quarter of fiscal 2005.
Investment income decreased by $93,000 in the second quarter of fiscal 2006 due
to a decline on average of approximately $49 million in funds invested, offset
by an increase of approximately 90% in the rate of interest earned on the
investment of excess cash reserves as compared to the prior year. The reduction
in the average balance of funds invested during the quarter versus the prior
year is due to the funding of the acquisitions of MSI and ICI.
In the thirteen weeks ended January 29, 2006 the Company recognized a foreign
exchange loss of $10,000 versus a gain of $185,000 in the second quarter of
fiscal 2005. In fiscal 2005 the Company recognized a net foreign exchange gain
of $185,000 primarily at our UK subsidiary in connection with temporary advances
made to our UK subsidiary that previously were characterized as a long term
investment.
Provision for income taxes for the second quarter of fiscal 2006 was $1,384,000
representing an effective tax rate of approximately 26%, as compared to an
effective tax rate of 28% in the prior year's second quarter (and an effective
rate of 28% for the whole of fiscal year 2005.) The comparatively lower
effective tax rate for fiscal year 2006 included the recognition of certain
favorable tax benefits attributable to extra territorial income, research and
development tax credits, the exercise of stock options, an increase in tax
exempt interest income, and a lower effective tax rate on foreign source income.
Liquidity and Capital Resources
- -------------------------------
As of January 29, 2006 and July 31, 2005, working capital was $95,057,000 and
$88,343,000, respectively, and the ratio of current assets to current
liabilities was 3.6 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 $5,704,000 at January 29, 2006, and
$3,966,000 at July 31, 2005.
Net cash provided by operations during the twenty-six weeks ended January 29,
2006 was approximately $4,547,000 as compared to $9,370,000 during the
comparable period in the prior year, a decrease of approximately $4,823,000.
Income from operations [adjusted for depreciation, amortization, and foreign
exchange (gain) loss] was $11,369,000 in the first six months of the current
fiscal year versus $8,041,000 in the similar period in the prior year, an
increase of approximately 3,328,000. Significant items contributing to the
overall decrease in cash provided by operations of $4,823,000 include the
following:
1. a decrease of approximately $7.9 million in cash generated from collection
of accounts receivable during the first six 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. This 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. Additionally, an increase of approximately $3.1 million in
shipments in January 2006 versus January 2005 resulted in higher accounts
receivable at the close of the quarter;
2. an increase of approximately $3.5 million in the amount of cash invested in
inventories during the second 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; and
3. an increase of approximately $0.3 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;
17
offset primarily by
1. an increase of approximately $1.5 million in cash generated from billings
in excess of costs incurred and income recognized on uncompleted contracts
during the course of the six month period; and
2. an increase of approximately $2.0 million in advanced payments from
customers on contracts in progress.
Net cash used in investing activities includes capital expenditures of
$2,785,000 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 during the first three months of the current fiscal
year.
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 March 31, 2008 (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 4.25% and 4.57%, respectively, at
January 29, 2006. 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 January 29, 2006 and July
31, 2005. Stand-by letters of credit were outstanding in the amount of
approximately $10,591,000 under the credit facility at January 29, 2006, 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 January 29, 2006.
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 January 29, 2006 was approximately $146 million of which $139 million
are orders covered by funded signed contracts or purchase orders. The remaining
$7 million of backlog is "unfunded" and consists of the portion of a contract
expected to be recognized as our customer increases the funding allotment for
completion of the aggregate firm contract award. 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 January 29, 2006, the Company
has approximately $39,409,000 available under its bank credit facility, net of
outstanding stand-by letters of credit of approximately $10,591,000, and cash
reserves of approximately $21,769,000.
18
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.
19
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 January 29, 2006.
(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
January 29, 2006 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:
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
Item 3 - Defaults Upon Senior Securities:
None
Item 4 - Submission Of Matters To A Vote Of Security Holders:
(1) The Registrant held its Annual Meeting of Stockholders on February 23,
2006.
(2) Three directors were elected at the Annual Meeting of Stockholders as
follows:
Class III - To hold office until the 2008 Annual Meeting of
Stockholders.
Name Votes For Votes Withheld
---- --------- --------------
John A. Thonet 8,791,688 3,811,172
Carlos C. Campbell 8,953,408 3,649,452
Adm. Robert M. Moore (Ret.) 8,545,505 4,057,355
(3) The 2006 Stock Option Plan and 2006 Stock Plan were defeated as
follows:
Votes For Votes Against Abstained
--------- ------------- ---------
2006 Stock Option Plan 4,951,952 5,616,227 595,672
2006 Stock Plan 2,264,821 8,302,858 596,172
20
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.
21
FORM 10-Q
SIGNATURES
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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.
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Registrant
BY: /S/ Myron Levy
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Myron Levy, Chief Executive Officer
BY: /S/ Anello C. Garefino
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Anello C. Garefino, Acting Chief Financial Officer
DATE: March 10, 2006
22