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
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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
--------------
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
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(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
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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