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 1, 2009
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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.
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(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
incorporation or organization) Identification Number)
3061 Industry Drive, Lancaster, Pennsylvania 17603
- -------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 397-2777
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101 North Pointe Boulevard, Suite 200, Lancaster, Pennsylvania 17601
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(Former Address of Principal Executive Offices) (Zip Code)
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of "large accelerated," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
[ ] Large accelerated filer [X] Accelerated filer
[ ] Non-accelerated filer [ ] Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of December 8, 2009 - 13,689,024 shares of Common Stock are outstanding.
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
November 1, 2009 (Unaudited) and August 2, 2009 2
Condensed Consolidated Statements of Operations (Unaudited) -
for the thirteen weeks ended November 1, 2009 and November 2, 2008 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
for the thirteen weeks ended November 1, 2009 and November 2, 2008 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 17
Item 4 - Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 1A - Risk Factors 18
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3 - Defaults upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits 18
Signature 19
Part I - Financial Information
Item I - Financial Statements
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
November 1,
2009 August 2,
(Unaudited) 2009
----------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,832 $ 14,820
Trade accounts receivable, net 30,015 28,687
Costs incurred and income recognized in excess
of billings on uncompleted contracts and claims 6,226 10,396
Inventories, net 57,471 57,804
Deferred income taxes 18,171 19,380
Other current assets 3,770 2,816
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Total Current Assets 129,485 133,903
Property, plant and equipment, net 32,877 32,872
Goodwill 43,722 43,722
Intangibles, net 9,167 9,619
Deferred income taxes 7,616 7,571
Other assets 550 598
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Total Assets $ 223,417 $ 228,285
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,386 $ 1,595
Current portion of employment settlement agreements 1,284 7,400
Current portion of litigation settlements 971 954
Accounts payable and accrued expenses 22,366 26,447
Billings in excess of costs incurred and
income recognized on uncompleted contracts 101 261
Accrual for contract losses 2,290 3,440
Advance payments on contracts 10,256 12,698
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Total Current Liabilities 38,654 52,795
Long-term debt, net of current portion 18,807 12,246
Long-term portion of employment settlement agreements 2,469 2,827
Other long-term liabilities 8,190 8,361
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Total Liabilities 68,120 76,229
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Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized 20,000,000 shares;
issued and outstanding 13,689,024 at November 1, 2009
and 13,719,926 at August 2, 2009 1,369 1,372
Additional paid-in capital 102,799 103,113
Retained earnings 51,433 47,882
Accumulated other comprehensive loss (304) (311)
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Total Shareholders' Equity 155,297 152,056
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Total Liabilities and Shareholders' Equity $ 223,417 $ 228,285
=========== ===========
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
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November 1, November 2,
2009 2008
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Net sales $ 47,679 $ 35,344
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Cost and expenses:
Cost of products sold 34,392 28,741
Selling and administrative expenses 7,681 7,323
Gain on sale of assets - (618)
Litigation costs 540 558
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42,613 36,004
Operating income (loss) 5,066 (660)
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Other (expense) income:
Interest income 11 18
Interest expense (165) (223)
Foreign exchange transaction losses (42) (360)
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(196) (565)
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Income (loss) from continuing operations
before income taxes 4,870 (1,225)
Provision (benefit) for income taxes 1,319 (342)
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Income (loss) from continuing operations 3,551 (883)
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Discontinued operations:
Loss from operations of discontinued subsidiary - (734)
Benefit for income taxes - (278)
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Loss from discontinued operations - (456)
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Net income (loss) $ 3,551 $ (1,339)
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Earnings (loss) per common share - Basic
Income (loss) from continuing operations $ .26 $ (.07)
Loss from discontinued operations - (.03)
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Net income (loss) - basic $ .26 $ (.10)
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Basic weighted average shares 13,704 13,525
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Earnings (loss) per common share - Diluted
Income (loss) from continuing operations $ .26 $ (.07)
Loss from discontinued operations - (.03)
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Net income (loss) - diluted $ .26 $ (.10)
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Diluted weighted average shares 13,878 13,525
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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 1, November 2,
2009 2008
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Cash flows from operating activities:
Net income (loss) $ 3,551 $ (1,339)
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Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,845 2,148
Gain on sale of fixed assets - (618)
Impairment of goodwill of discontinued subsidiary - 1,000
Stock-based compensation costs 124 148
Excess tax benefit from exercises of stock options - (19)
Imputed interest on employment and litigation
settlement liabilities 45 96
Foreign exchange transaction losses - 360
Inventory valuation reserve charges 299 400
Warranty reserve charges 542 343
Deferred tax provision (benefit) 1,162 (620)
Changes in operating assets and liabilities:
Cash of discontinued subsidiary - (712)
Trade accounts receivable (1,304) 896
Costs incurred and income recognized in excess
of billings on uncompleted contracts and claims 4,158 4,786
Inventories, net 35 (375)
Other current assets (952) (180)
Accounts payable and accrued expenses (4,639) (4,093)
Billings in excess of costs incurred and
income recognized on uncompleted contracts (158) 252
Accrual for contract losses (1,150) (55)
Litigation settlement payments (2,000) -
Employment settlement payments (6,502) (330)
Advance payments on contracts (443) (117)
Other, net (124) (850)
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Total adjustments (9,062) 2,460
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Net cash (used in) provided by operating activities (5,511) 1,121
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Cash flows from investing activities:
Acquisition of business, net of cash acquired - (30,010)
Capital expenditures (1,398) (2,044)
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Net cash used in investing activities (1,398) (32,054)
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Cash flows from financing activities:
Borrowings under bank line of credit 7,000 20,000
Borrowings - term loan - 10,000
Proceeds from exercise of stock options - 38
Excess tax benefit from exercises of stock options - 19
Payments of long-term debt (642) (441)
Payments under bank line of credit - (1,000)
Purchase of treasury stock (441) -
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Net cash provided by financing activities 5,917 28,616
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Effect of exchange rate changes on cash 4 (81)
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Net decrease in cash and cash equivalents (988) (2,398)
Cash and cash equivalents at beginning of period 14,820 14,347
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Cash and cash equivalents at end of period $ 13,832 $ 11,949
============ ==============
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. ("Herley"), a Delaware corporation, and
its wholly-owned subsidiaries (collectively the "Company"), which are
engaged in the design, development and manufacture of microwave technology
solutions for the defense, aerospace and medical industries worldwide with
four domestic and three foreign manufacturing facilities and two
engineering offices in the U.S. Herley's corporate office is in Lancaster,
Pennsylvania. Herley's primary business units include: Herley Lancaster;
Herley New England; Herley Israel; Micro Systems, Inc. ("MSI"); Herley-CTI;
Eyal Industries ("Eyal"); and EW Simulation Technology ("EWST"). In the
first quarter of fiscal 2009 ended November 2, 2008, the Company sold its
Innovative Concepts, Inc. ("ICI") business. The results of operations for
ICI have been reported as discontinued operations in the Condensed
Consolidated Statements of Operations for all periods presented. 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
("U.S. GAAP") 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 2009
Annual Report on Form 10-K/A for the fiscal year ended August 2, 2009 as
filed with the Securities and Exchange Commission ("SEC") on November 30,
2009. The accounting policies used in preparing these unaudited condensed
consolidated interim financial statements are consistent with those
described in the August 2, 2009 audited financial statements. The Condensed
Consolidated Balance Sheet at August 2, 2009 has been derived from the
audited consolidated financial statements at that date but does not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements. Certain prior-period balances have been reclassified
to conform to the current period's financial statement presentation.
The preparation of financial statements in conformity with U.S. GAAP
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 goodwill and long-lived assets; income taxes; recognition
of revenue and costs on production contracts; the valuation of inventory;
accrual of litigation settlements and other contingencies; 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,
forecasted cash flows, 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.
2. Business Combination
The Company entered into an Asset Purchase Agreement, dated as of August 1,
2008, to acquire the business and certain assets subject to the assumption
of certain liabilities of Eyal, a privately-held Israeli company for
$30,000,000. The transaction closed on September 16, 2008. The business
operates as a wholly-owned subsidiary of General Microwave Israel (1987)
Ltd. Eyal 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 $20,000,000
loan under the Company's existing credit facility and a term loan in the
amount of $10,000,000 through a bank in Israel. The term loan is payable in
quarterly installments of $250,000 over a period of ten years with interest
at LIBOR plus 1.5%.
The acquisition has been 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".
5
The allocation of the aggregate purchase price (including acquisition 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
identifiable intangible assets, is as follows (in thousands):
Aggregate purchase price $ 30,427
========
Current assets (including cash of $418) $ 8,499
Furniture and equipment 3,721
Intangibles 5,446
Goodwill 17,039
Current liabilities (3,920)
Other long-term liabilities (358)
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$ 30,427
=========
The excess of the total purchase price over the fair value of the net
assets acquired, including the value of the identifiable intangible assets,
has been allocated to goodwill. Goodwill will be amortized, for ten years,
for tax purposes but not for financial reporting purposes. The intangible
assets subject to amortization will be amortized for tax and financial
reporting purposes and have been assigned useful lives as follows:
Technology $2,929 13 years
Backlog 1,259 2 years
Trademarks 1,258 13 years
------
$5,446
======
3. Discontinued Operations and Disposal of Long-Lived Assets
Discontinued operations
On September 18, 2008, the Company executed an 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. On November 10, 2008, the Company
sold the stock of ICI for approximately $15,000,000 in cash, of which
$726,000 is held in escrow as security for certain indemnification
obligations. The disposal of the business of ICI is presented as
discontinued operations in the Condensed Consolidated Statements of
Operations for the thirteen weeks ended November 2, 2008.
The following results of operations of ICI have been presented as
discontinued operations in the Condensed Consolidated Statements of
Operations (in thousands):
Thirteen
weeks ended
November 2,
2008
-----------------
Net sales $ 5,953
Cost of products sold and other expenses 5,687
Impairment of goodwill 1,000
----------------
Loss before income taxes (734)
Benefit for income taxes (278)
----------------
Loss from discontinued operations $ (456)
================
Disposal of long-lived assets
On October 31, 2008, the Company completed the sale of assets of its
machine shop located at its 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 current assets" and the
balance of $422,000 and $460,000 is included in "Other assets" in the
Condensed Consolidated Balance Sheets at November 1, 2009 and August 2,
2009, respectively. The sale of assets resulted in a net gain of
approximately $618,000 and is included in "Gain on sale of assets" in the
Condensed Consolidated Statements of Operations for the fiscal quarter
ended November 2, 2008.
6
4. Goodwill and Intangibles, net
The changes in Goodwill and Intangibles, net during the thirteen weeks
ended November 1, 2009 is as follows (in thousands):
Goodwill Intangibles
------------ ------------
Balance at August 2, 2009 $ 43,722 $ 9,619
Less: amortization for the thirteen
weeks ended November 1, 2009 - (452)
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$ 43,722 $ 9,167
============ ============
There have been no triggering events or indicators of impairment that have
occurred during the thirteen weeks ended November 1, 2009 that would
require additional impairment testing of goodwill or long-lived intangible
assets.
5. Inventories, net
The major components of inventories, net are as follows (in thousands):
November 1, August 2,
2009 2009
------------- ---------------
Purchased parts and raw materials $ 34,369 $ 36,034
Work in process 28,549 28,686
Finished products 2,465 2,246
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65,383 66,966
Less:
Allowance for obsolete and slow moving inventory 7,312 7,314
Unliquidated progress payments 600 1,848
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$ 57,471 $ 57,804
============= ===============
6. Income Taxes
The provision for income taxes related to continuing operations for the
thirteen weeks ended November 1, 2009 was $1,319,000 as compared to a
benefit of $342,000 for the first quarter of the prior year. The estimated
effective income tax rate for fiscal 2010 is 27.1%, which is lower than the
statutory rate of 35.0%, primarily due to the favorable mix of earnings
generated from our Israeli operations that are taxed at lower rates.
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 1, 2009 and November 2, 2008,
respectively (in thousands):
Thirteen weeks ended
--------------------
November 1, November 2,
2009 2008
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Balance at beginning of period $ 938 $ 1,142
Provision for warranty obligations 579 343
Warranty liability of business sold - (250)
Warranty costs charged to the reserve (489) (219)
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Balance at end of period $ 1,028 $ 1,016
=============== ==============
8. Litigation
In June and July 2006, the Company was served with several class-action
complaints against the Company and certain of its current and former
officers and directors ("other defendants") 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. The plaintiffs seek unspecified damages on behalf of a
purported class of purchasers of the Company's securities during various
periods before June 14, 2006. 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 9, 2008, plaintiffs filed a Motion for Class Certification.
7
On March 4, 2009, all defendants filed an Opposition to Plaintiffs' Motion
for Class Certification. On May 18, 2009, plaintiffs filed a reply in
support of their motion for class certification. Oral argument regarding
the plaintiffs' motion for class certification was held on July 17, 2009.
On October 9, 2009, the Court issued an order granting plaintiffs' motion
for class certification. The Court certified a class consisting of all
purchasers of Herley stock between October 1, 2001 and June 14, 2006, who
sustained a loss as a result of that acquisition. The parties have
completed fact and expert discovery and, on October 30, 2009, the
plaintiffs' and the Company each filed a Motion for Summary Judgment. The
Company and the individual defendants are vigorously defending against
these lawsuits. At this stage of the proceedings, it is not possible to
predict what, if any, liability the Company may have from the Securities
Class Action.
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 parties have
completed fact and expert discovery and, on October 30, 2009, the Company
filed a Motion for Summary Judgment. 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. The Company 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, the Company shall repay to the insurance carrier any
such uncovered sums previously advanced. 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. In
November 2008, the Company filed a complaint against the insurance carrier
to recover the legal costs. The insurance carrier answered the complaint
and filed a counterclaim seeking to recover prior advances of approximately
$2,236,000. Discovery on this phase of the case concluded and the Company
and the insurance carrier filed cross motions for summary judgment relating
to certain defenses. On August 25, 2009, the Court ruled against the
Company and found that the legal fees incurred on behalf of the Company in
the Securities Class Action are not covered. The fees paid on behalf of
individual defendants in the Securities Class Action were not challenged.
The Company has filed a Notice of Appeal in the United States Court of
Appeal for the Third Circuit. The likelihood of success on appeal cannot be
predicted at this time.
By letter dated May 28, 2009, the Company was advised that a contract with
General Microwave Corporation, a wholly owned subsidiary of the Company,
doing business as Herley Farmingdale ("GMC") in the aggregate amount of
approximately $4,900,000 was being terminated for default. By letter dated
June 1, 2009, the customer demanded a return of approximately $3,800,000,
which represented an alleged progress payment made under the contract to
GMC. On June 8, 2009, GMC filed suit against EDO Communications and
Countermeasures, Inc. doing business as ITT Force Protection Systems
("EDO") in the United States District Court for the Eastern District of New
York (the "New York Action") seeking a Declaratory Judgment, pursuant to 28
U.S.C. ss. 2201 et. seq. and for breach of contract related to EDO's
decision to terminate the contract for default. On August 13, 2009, EDO
filed suit against GMC and the Company in the Superior Court of California,
Ventura County, for breach of contract, unjust enrichment, and money had
and received (the "California Action"). On October 8, 2009, all parties
entered into an agreement to settle this matter. Under the terms of the
settlement, the Company paid $2,000,000 to EDO and the parties mutually
agreed to a termination of the purchase order for convenience without
further liability to either party.
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.
9. Line of Credit, Long-Term Debt and Stand-by Letters of Credit
The Company has a $40,000,000 Revolving Credit Loan Agreement with two
banks on an unsecured basis, as modified in October 2009, which may be used
for general corporate purposes, including business acquisitions and
stand-by letters of credit. The agreement requires the payment of interest
only on a monthly basis and payment of the outstanding principal balance on
March 31, 2011. The Company may elect to borrow with interest at (A) the
bank's prime rate of interest minus 0.50% or (B) the greater of (i) LIBOR
plus a margin of 2.50% or (ii) 3.50%. There is a fee of 20 basis points per
annum on the unused portion of the credit facility payable quarterly and a
fee of 1.25% per annum on outstanding stand-by letters of credit. The
agreement contains various financial covenants, including, among other
matters, minimum tangible net worth, total liabilities to tangible net
worth, debt service coverage and restrictions on other borrowings. The
Company is in compliance with all of its financial covenants at November 1,
2009.
At November 1, 2009, the Company had net borrowings under its bank line of
credit of $7,000,000, which were drawn in the first quarter of fiscal 2010
primarily to satisfy certain employment settlements, litigation and related
matters. The balance of the Company's debt approximates fair value.
Stand-by letters of credit in the amount of approximately $11,306,000 were
outstanding at November 1, 2009. The Company had approximately $23,825,000
available under its line at November 1, 2009. There were no borrowings
under the line of credit at August 2, 2009.
8
10. Stock Buyback Program
In October 2007, the Company's Board of Directors approved an expansion of
its existing stock buyback program to make additional purchases of up to
1,000,000 shares of its common stock in the open market or in private
transactions, in accordance with applicable SEC rules, to an aggregate of
3,000,000 shares. As of August 2, 2009, the Company had repurchased and
retired approximately 2,386,000 shares. During the thirteen weeks ended
November 1, 2009, the Company repurchased and retired 35,902 shares of its
common stock pursuant to this program at an aggregate cost of approximately
$441,000, including transaction costs. There were no stock repurchases in
fiscal 2009. Funds to acquire the shares came from excess cash reserves.
The timing, actual number and value of any additional shares that may be
repurchased under this program will depend on a number of factors,
including the Company's future financial performance, the Company's
available cash resources and competing uses for the cash, prevailing market
prices of the Company's common stock and the number of shares that become
available for sale at prices that the Company believes are attractive. As
of November 1, 2009, approximately 578,000 shares are eligible for future
purchase under the Company's buyback program.
11. Comprehensive Income (Loss)
Comprehensive income (loss) for the periods presented is as follows (in
thousands):
Thirteen weeks ended
--------------------
November 1, November 2,
2009 2008
--------------- ---------------
Net income (loss) $ 3,551 $ (1,339)
Unrealized gain (loss) on interest rate swap 4 (8)
Translation of foreign financial statements 3 (1,586)
--------------- ---------------
Comprehensive income (loss) $ 3,558 $ (2,933)
=============== ===============
The foreign currency translation gain (loss) 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 loss is as follows (in
thousands):
November 2, August 2,
2009 2009
------------ ------------
Unrealized loss on interest rate swap, net of tax $ (73) $ (77)
Translation of foreign financial statements (231) (234)
------------ ------------
Accumulated other comprehensive loss $ (304) $ (311)
============ ============
12. Share-Based Compensation
The Company has various fixed stock option plans which are described in
Note O of its August 2, 2009 Annual Report on Form 10-K/A that provide for
the grant of stock options and restricted stock to eligible employees and
directors.
The Company recorded total share-based costs related to stock options,
included as compensation costs in operating expenses, of $124,000 and
$148,000 for the thirteen weeks ended November 1, 2009 and November 2,
2008, respectively.
As of November 1, 2009, there were 3,182,000 stock options outstanding.
Options for 10,000 shares of common stock at an exercise price of $12.45
per share and 5,000 shares of restricted stock were granted to an employee
during the thirteen weeks ended November 1, 2009 with a fair value of
approximately $43,000 and $62,000, respectively. The aggregate value of
unvested options as of November 1, 2009, as determined using a
Black-Scholes option valuation model, was approximately $153,000 (net of
estimated forfeitures), which is expected to be recognized over a
weighted-average period of 1.6 years. The aggregate value of unvested
restricted stock as of November 1, 2009 was approximately $1,035,000, which
is expected to be recognized over a weighted-average period of 4.2 years.
No options were exercised during the thirteen weeks ended November 1, 2009
and options for 18,800 shares of common stock expired or were forfeited
during the period.
There are 3,019,600 vested stock options outstanding as of November 1, 2009
at a weighted average exercise price of $15.08. Included in the vested
stock options outstanding are 2,320,000 options with exercise prices
greater than the closing stock price of $11.31 as of November 1, 2009.
9
13. Earnings (loss) per Common Share ("EPS")
The following table shows the components used in the calculation of basic
and diluted earnings (loss) per common share (in thousands):
Thirteen weeks ended
--------------------
November 1, November 2,
2009 2008
---- ----
Numerator:
Income (loss) from continuing operations $ 3,551 $ (883)
Loss from discontinued operations - (456)
----------- -----------
Net income (loss) $ 3,551 $ (1,339)
=========== ===========
Denominator:
Basic weighted-average shares 13,704 13,525
Effect of dilutive securities:
Employee stock options 174 -
----------- -----------
Diluted weighted-average shares 13,878 13,525
=========== ===========
Stock options not included in computation 2,404 3,506
=========== ===========
Exercise price range of options excluded $12.58 - $21.18 $7.63 - $21.18
=============== ==============
The options which were outstanding as of November 1, 2009 and excluded from
the computation in the table above because their effect is anti-dilutive
expire at various dates through June 8, 2017. No employee stock options
were considered in the computation of diluted per share data for the
thirteen weeks ended November 2, 2008 as their effect is anti-dilutive.
14. Geographic Information and Major Customers
Net sales directly to the U.S. Government for the thirteen weeks ended
November 1, 2009 and November 2, 2008 were approximately 16.5% and 10.8% of
consolidated net sales from continuing operations, respectively. Northrop
Grumman Corporation and Lockheed Martin Corporation accounted for
approximately 16.5% and 12.3%, respectively, of consolidated net sales for
the thirteen weeks ended November 1, 2009, and 11.5% and 12.4%,
respectively, for the thirteen weeks ended November 1, 2008. No other
customer accounted for 10% or more of consolidated net sales in the periods
presented. Foreign sales amounted to approximately $16,923,000 (35%) and
$11,558,000 (33%) for the thirteen weeks ended November 1, 2009 and
November 2, 2008, respectively.
Geographic net sales from continuing operations for the first quarter based
on place of contract performance were as follows (in thousands):
Thirteen weeks ended
--------------------
November 1, November 2,
2009 2008
-------------- --------------
United States $ 35,060 $ 27,208
Israel 11,348 6,806
England 1,271 1,330
-------------- --------------
$ 47,679 $ 35,344
============== ==============
Net property, plant and equipment by geographic area were as follows (in
thousands):
November 1, August 2,
2009 2009
------------- ------------
United States $ 24,953 $ 25,011
Israel 7,749 7,703
England 175 158
------------- ------------
$ 32,877 $ 32,872
============= ============
10
15. Supplemental Cash Flow information is as follows (in thousands):
Thirteen weeks ended
----------------- ----------------
November 1, 2009 November 2, 2008
----------------- ----------------
Net cash paid during the period for:
Interest $123 $85
Income taxes $32 $118
Non-cash financing transactions:
Retirement of 35,902 shares of treasury stock $441 $-
16. New Accounting Pronouncements
Newly issued effective accounting pronouncements:
In June 2009, the FASB issued Accounting Standards Codification 105,
"Generally Accepted Accounting Principles" ("ASC 105"). On July 1, 2009,
the FASB completed ASC 105 as the single source of authoritative U.S.
generally accepted accounting principles ("GAAP"), superseding all
then-existing authoritative accounting and reporting standards, except for
rules and interpretive releases for the SEC under authority of federal
securities laws, which are sources of authoritative GAAP for Securities and
Exchange Commission registrants. ASC 105 reorganizes the authoritative
literature comprising U.S. GAAP into a topical format that eliminates the
current GAAP hierarchy. ASC 105 was effective for the Company in its first
quarter ended November 1, 2009. ASC 105 is not intended to change U.S. GAAP
and will have no impact on the Company's consolidated financial position,
results of operations or cash flows. However, since it completely
supersedes existing standards, it will affect the way the Company
references authoritative accounting pronouncements in its financial
statements and other disclosure documents.
In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the
Useful Life of Intangible Assets", codified primarily in ASC Subtopic
350-30, "General Intangibles Other than Goodwill" ("ASC 350-30"), 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. The intent of ASC 350-30 is to improve the consistency
between the useful life of a recognized intangible asset under ASC 350 and
the period of expected cash flows used to measure the fair value of the
asset under ASC 805, "Business Combinations", and other generally accepted
accounting principles. ASC 350-30 is effective for fiscal years beginning
after December 15, 2008 and only applies prospectively to intangible assets
acquired after the effective date. Early adoption is not permitted. The
Company's adoption of ASC 350-30 in its first quarter of fiscal year 2010
beginning August 3, 2009 did not have a material impact on its consolidated
financial position, cash flows and results of operations.
In December 2007, the FASB issued Accounting Standards Codification 805,
"Business Combinations" ("ASC 805"), which established principles and
requirements for the acquirer of a business to recognize and measure in its
financial statements the identifiable assets (including in-process research
and development and defensive assets) acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. ASC 805 is effective for
financial statements issued for fiscal years beginning after December 15,
2008. Prior to the adoption of ASC 805, in-process research and development
costs were immediately expensed and acquisition costs were capitalized.
Under ASC 805, all acquisition costs are expensed as incurred. The standard
also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to
enable users of financial statements to evaluate the nature and financial
effects of the business combination. In April 2009, the FASB updated ASC
805 to amend the provisions for the initial recognition and measurement,
subsequent measurement and accounting, and disclosures for assets and
liabilities arising from contingencies in business combinations. This
update also eliminates the distinction between contractual and
non-contractual contingencies. ASC 805 will have an impact on the Company's
consolidated financial statements, but the nature and magnitude of the
specific effects will depend upon the nature, terms and size of the
acquisitions the Company consummates after the August 3, 2009 effective
date.
Effect of newly issued but not yet effective accounting pronouncements:
In September 2009, the FASB reached a consensus on Accounting Standards
Update ("ASU") 2009-13, "Revenue Recognition (Topic 605) --
Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13") and ASU 2009-14,
"Software (Topic 985) -- Certain Revenue Arrangements That Include Software
Elements" ("ASU 2009-14"). ASU 2009-13 modifies the requirements that must
be met for an entity to recognize revenue from the sale of a delivered item
that is part of a multiple-element arrangement when other items have not
yet been delivered. ASU 2009-13 eliminates the requirement that all
undelivered elements must have either: i) Vendor Specific Objective
Evidence ("VSOE") or ii) third-party evidence ("TPE") before an entity can
recognize the portion of an overall arrangement consideration that is
attributable to items that already have been delivered. In the absence of
VSOE or TPE of the standalone selling price for one or more delivered or
undelivered elements in a multiple-element arrangement, entities will be
required to estimate the selling prices of those elements. Overall
arrangement consideration will be allocated to each element (both delivered
and undelivered items) based on their relative selling prices, regardless
of whether those selling prices are evidenced by VSOE or TPE or are based
on the entity's estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. ASU 2009-14 modifies the
software revenue recognition guidance to exclude from its scope tangible
products that contain both software and non-software components that
function together to deliver a product's essential functionality. These new
updates are effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early
11
adoption is permitted. The Company is currently evaluating the impact, if
any, of the adoption of these ASUs on its consolidated financial
statements.
17. Related Party Transaction
The Company leases one of its buildings in Fort Walton Beach, Florida from
MSI Investments, a Florida General Partnership which is owned, in part, by
two current employees of MSI and one individual who serves MSI as a
consultant. Rent expense for the thirteen weeks ended November 1, 2009 and
November 2, 2008 was approximately $74,000 and $71,000, respectively.
18. Subsequent Event
The Company evaluated events occurring subsequent to November 1, 2009
through December 10, 2009 for potential recognition and disclosure in the
Condensed Consolidated Financial Statements. No events have occurred that
would require adjustment to the Condensed Consolidated Financial
Statements, which were issued on December 10, 2009.
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 this
Quarterly Report, including without limitation statements under, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
regarding our financial position, business strategy and our plans and objectives
of management for future operations, 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 Quarterly Report 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 ("SEC").
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 Quarterly Report on Form 10-Q and our
2009 Annual Report on Form 10-K/A filed with the SEC on November 30, 2009.
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
Israeli, Egyptian, German, Japanese, Taiwanese, Spanish, Australian 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, the 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
("UAVs"), as well as high priority national security programs such as National
Missile Defense and the Trident II D-5.
Critical Accounting Policies and Estimates
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/A
for the fiscal year ended August 2, 2009 (the "Report") filed with the SEC on
November 30, 2009; 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. As part of our oversight
responsibilities, we continually evaluate the propriety of our accounting
methods as new events occur. We believe that our policies are applied in a
manner which is intended to provide the user of our financial statements a
current, accurate and complete presentation of information in accordance with
accounting principles generally accepted in the United States of America.
Important accounting practices that require the use of assumptions and judgments
are outlined therein. 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 Report
as filed with the Securities and Exchange Commission.
13
Results of Operations
Thirteen weeks ended November 1, 2009 and thirteen weeks ended November 2, 2008
Our senior management regularly reviews the performance of our operations,
including reviews of key performance metrics and 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
operating results from continuing operations and certain key performance
indicators.
-----------------------------------------
November 1, November 2,
2009 2008 % Change
-----------------------------------------
Net sales $47,679 $35,344 35 %
Gross profit $13,287 $6,603 101 %
Gross profit percentage 27.9% 18.7%
Operating income (loss) $5,066 ($660)
Bookings $34,973 $61,051 (43)%
Backlog (end of period) $170,734 $164,241 4 %
Last year, during the first quarter of fiscal 2009, we completed the acquisition
of Eyal Microwave in Israel and its operating results are included within the
results from continuing operations beginning in September 2008. In addition,
during the second quarter of fiscal 2009, we completed the divestiture of
Innovative Concepts, Inc. ("ICI") which is reported as discontinued operations.
The table above and discussion that follows excludes the results of ICI.
Net sales for the first quarter of fiscal 2010 were approximately $47.7
million compared to $35.3 million in fiscal 2009, an increase of $12.4 million,
or 34.9%. The increase in net sales is primarily related to increased deliveries
under major production programs. In addition, an increase of approximately $2.0
million in sales was due to the inclusion of three months of Eyal's revenues in
the first quarter of fiscal 2010 compared to the inclusion of two months of its
revenues since its acquisition last year.
Domestic and foreign sales were 65% and 35%, respectively, of net sales for the
quarter compared to 67% and 33%, respectively, in the prior-year quarter.
Bookings were approximately $35.0 million, of which 66% were domestic and 34%
were foreign. This compares to bookings of approximately $61.1 million in the
prior-year quarter, of which 76% were domestic and 24% were foreign. Bookings in
the current quarter were down $26.1 million, or 42.7%, primarily due to
significant bookings last year that included approximately $12.1 million related
to two (2) Trident lots booked for which none were planned in the current
quarter, as well lower-than-planned bookings this quarter of approximately $12.3
million, primarily due to the delayed timing of those orders that, for the most
part, are still expected in fiscal 2010.
Gross profit in the quarter was $13.3 million (27.9% gross profit margin)
compared to $6.6 million (18.7% gross profit margin) last year, an increase of
$6.7 million. Contributing to the increase in gross profit and gross profit
percentage during fiscal 2010 is principally a result of the sales increase and
anticipated improvements in margins related to manufacturing efficiencies and a
favorable program mix. The prior-year quarter was adversely impacted by the
lower volume of sales that reduced overhead absorption and by the transition
(and related technical difficulties) of the Herley Farmingdale programs.
Selling and administrative (S&A) expenses for the quarter were $7.7 million, or
16.1% of sales, compared to $7.3 million, or 20.7% of sales, in the prior-year
quarter. The $.4 million increase in S&A expenses is primarily attributable to
an increase of approximately $.9 million in commissions and related sales
expenses associated with the increase in sales and approximately $.2 million due
to the inclusion of a full quarter of Eyal's expenses since its acquisition in
the first quarter of fiscal 2009, partially offset by approximately $.7 million
related to cost reductions, including payroll-related expenses. S&A expenses as
a percent of sales decreased 460 basis points due to leveraging our fixed cost
structure.
We had operating income during the quarter of $5.1 million compared to an
operating loss of $.7 million last year. The prior-year quarter included a gain
on the sale of certain assets of approximately $.6 million.
Interest expense was $165,000, decreasing $58,000 from last year, primarily
attributable to lower average borrowings during the respective periods, as well
as lower average interest rates.
We recognized an insignificant net foreign exchange loss in the quarter compared
to $.4 million last year. 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.
The provision for income taxes from continuing operations in the quarter was
$1.3 million, representing an effective income tax rate of 27.1% compared to an
effective income tax benefit rate of 31.7% last year. The current quarter rate
is less than the statutory rate of 35% primarily due to the favorable mix of
foreign earnings which are taxed at lower rates.
14
Basic and diluted earnings per common share from continuing operations for the
quarter were both $.26 compared to a $(.07) loss per basic and diluted common
share for the prior-year quarter.
Liquidity and Capital Resources
We believe that anticipated cash flows from operations, together with existing
cash and cash equivalents and our bank line availability will be adequate to
finance presently anticipated working capital, capital expenditure requirements
and other contractual obligations and to repay our long-term debt as it matures.
A significant portion of our revenue for fiscal 2010 is expected to be generated
from our existing backlog of sales orders. The funded backlog of orders at the
beginning of our fiscal 2010 (August 3, 2009) was approximately $182 million, of
which approximately 80% is expected to ship in fiscal 2010. The funded backlog
of orders at November 1, 2009 was approximately $171 million. All orders
included in this backlog are covered by signed contracts or purchase orders.
Nevertheless, contracts involving government programs may be terminated at the
discretion of the government. In the event of the cancellation of a significant
amount of government contracts included in our backlog, we would be required to
rely more heavily on cash balances and our existing credit facility to fund our
operations. We are not aware of any events which are reasonably likely to result
in any cancellation of our government contracts, nor does our historical
experience with the government indicate any reasonable likelihood of such
cancellations.
A small number of customers have accounted for a substantial portion of
historical net sales and we expect that a limited number of customers will
continue to represent a substantial portion of sales for the foreseeable future.
Approximately 16.5% and 12.3% of total net sales from continuing operations for
the first quarter of fiscal 2010 were made to Northrop Grumman Corporation and
to Lockheed Martin Corporation, respectively. Future operating results will
continue to substantially depend on the success of our largest customers and our
relationship with them. Orders from these customers are subject to fluctuation
and may be reduced materially. The loss of all or a portion of the sales volume
from any one of these customers would have an adverse affect on our liquidity
and operations.
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 unliquidated balance of progress payments was approximately $.6
million at November 1, 2009 and $1.8 million at August 2, 2009. The balance of
advanced payments was approximately $10.3 million at November 1, 2009 and $12.7
million at August 2, 2009. The fiscal 2010 decrease relates to the timing of
payments pursuant to the terms of various contracts.
As of November 1, 2009, we have approximately $13.8 million in cash and cash
equivalents and approximately $23.8 million available under our bank credit
facility, net of outstanding stand-by letters of credit of $11.3 million. As of
November 1, 2009 and August 2, 2009, working capital was $90.8 million and $81.1
million, respectively, and the ratio of current assets to current liabilities
was 3.3 to 1 and 2.5 to 1, respectively.
Net cash used in operations during the first quarter of fiscal 2010 was
approximately $5.5 million compared to net cash provided by operations of $1.1
million in the prior year, a net operating cash flow decrease of approximately
$6.6 million.
Significant changes in net cash from operating activities during fiscal 2010
include:
o net income in the current period of $3.6 million versus a net loss of
$1.3 million in the prior year;
o payments related to employment settlements of $6.5 million;
o a final payment on the EDO litigation settlement of $2.0 million;
o a partial receipt on the Lockheed claim settlement of $1.0 million;
o a reduction in cost incurred and income recognized in excess of
billings on uncompleted contracts of approximately $4.2 million due to
the shipment and billing of contracts on percentage of completion;
o an increase in trade accounts receivable of approximately $1.3 million
primarily due to the increased sales volume; and
o a decrease in accounts payable and accrued expenses of approximately
$4.7 million primarily as a result of the timing of purchases.
As of August 2, 2009, we have available net operating loss carry-forwards for
federal income tax reporting purposes of approximately $20.7 million, net of
carryback, and available net operating loss carry-forwards for state income tax
purposes of approximately $30.7 million, with expiration dates through 2029. As
a result, we do not expect to make cash payments for federal or state income
taxes in fiscal 2010 based on our internal projections.
Net cash used in investing activities of approximately $1.4 million were solely
related to capital expenditures. Investing activities in the prior-year period
of $32.1 million were primarily related to the acquisition of Eyal and included
approximately $2.0 million of capital expenditures.
Net cash provided by financing activities of approximately $5.9 million includes
borrowings under our bank line of credit of approximately $8.0 million for
working capital needs, primarily related to the settlement of certain employment
agreements and litigation. Partially offsetting these borrowings were payments
of approximately $1.0 million against our outstanding line of credit,
15
approximately $.6 million of long-term debt, including payments of approximately
$.25 million on the term loan in Israel, and approximately $.4 million from the
repurchase and retirement of common stock under our stock buyback program.
Financing activities in the prior-year period were primarily related to
borrowings to fund the acquisition of Eyal.
Bank Line of Credit
At November 1, 2009, we have net borrowings under our bank line of credit of
$7.0 million which were drawn in the first quarter of fiscal 2010 primarily to
satisfy certain employment settlements, litigation and related matters.
Subsequent to November 1, 2009, we have repaid $2.0 million of such borrowings.
Stand-by letters of credit in the amount of approximately $11.3 million were
outstanding at November 1, 2009. We have approximately $23.8 million available
under our line at November 1, 2009. There were no borrowings under the line of
credit at August 2, 2009.
The agreement contains various financial covenants, including, among other
matters, minimum tangible net worth, total liabilities to tangible net worth,
debt service coverage and restrictions on other borrowings. In October 2009, we
amended our agreement with the bank. We are in compliance with all of our
financial covenants at November 1, 2009 and expect to be in compliance with all
financial covenants through fiscal 2010 based on our current business outlook.
However, we could become non-compliant with one or more of the financial
covenants in the future if there is an unfavorable resolution of our outstanding
litigation. The covenants under the line of credit may affect our ability to
undertake additional debt in the future.
Employment Settlements, Litigation and Related Matters
In July 2009, we entered into a settlement agreement with Myron Levy, our former
Chairman and Chief Executive Officer, terminating his employment agreement. The
settlement agreement provides that in full satisfaction of all prior, current
and future obligations to Mr. Levy under the employment agreement, Mr. Levy is
to receive a lump sum payment of approximately $4.7 million, which was paid in
August 2009, and thereafter monthly payments of $100,000 commencing on September
1, 2009 for thirty-five consecutive months through July 1, 2012. Payments are
through a non-interest bearing promissory note. Mr. Levy also shall continue as
a consultant to us for three years at an annual compensation of $50,000 and is
to receive certain other benefits as provided in the employment agreement,
including medical reimbursement and insurance.
In August 2009, we entered into an agreement with Jeffrey L. Markel terminating
his employment agreement, effective as of August 1, 2009. The agreement provides
that in full satisfaction of all prior, current and future obligations to Mr.
Markel under the employment agreement, Mr. Markel is to receive an immediate
lump sum payment of approximately $1.4 million, which was paid in August 2009.
Mr. Markel also shall continue as a consultant to us for three years at an
annual compensation of $67,667 and is to receive certain other benefits as
provided in the employment agreement, including medical care reimbursement.
In fiscal 2009, we had approximately $4.3 million due from a customer related to
claims and unpriced change orders in connection with changes in scope issues
under a contract that were in dispute. In September 2009, we settled an amount
due from a customer (related to claims and unpriced change orders in connection
with changes in scope issues under a contract that were in dispute) for
approximately $2.3 million, less $0.8 million previously advanced by this
customer. As a result, we recorded certain charges in the fourth quarter of
fiscal 2009 and received a partial payment of approximately $1.0 million from
this customer in the first quarter of fiscal 2010.
In October 2009, we settled a lawsuit with a customer in its entirety,
exchanging mutual equivalent releases, to avoid the delays, expense and
uncertainty of litigation. Under the terms of the settlement, we paid $2.0
million to our customer and mutually agreed to a termination of the purchase
order for convenience without further liability to either party.
In 2006, we were served with several class-action complaints against us and
certain of our current and former officers and directors and certain of our
current and former officers and directors were also served with two separate
derivative complaints for breach of fiduciary duty. At this stage of the
proceedings, it is not possible to predict what, if any, liability we may have
from the Securities Class Actions or the related Derivative Actions.
Stock Buyback Program
In October 2007, our Board of Directors approved an expansion of our existing
stock buyback program to make additional purchases of up to 1,000,000 shares of
our common stock in the open market or in private transactions, in accordance
with applicable SEC rules, to an aggregate of 3,000,000 shares. As of August 2,
2009, we had repurchased and retired approximately 2,386,000 shares. During the
thirteen weeks ended November 1, 2009, we repurchased and retired 35,902 shares
of our common stock pursuant to this program at an aggregate cost of
approximately $441,000, including transaction costs. There were no stock
repurchases in fiscal 2009. Funds to acquire the shares came from excess cash
reserves. The timing, actual number and value of any additional shares that may
be repurchased under this program will depend on a number of factors, including
our future financial performance, our available cash resources and competing
uses for the cash, prevailing market prices of our common stock and the number
of shares that become available for sale at prices that we believe are
attractive. As of November 1, 2009, approximately 578,000 shares are eligible
for future purchase under the buyback program.
16
Contractual Financial Obligations, Commitments and Off-Balance Sheet Arrange-
ments
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
Condensed Consolidated Balance Sheet, while others are required to be disclosed
in the Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
Company's contractual financial obligations and other contingent commitments are
disclosed in our Annual Report on Form 10-K/A for the fiscal year ended August
2, 2009 under Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issues, from time to time, new
accounting standards updates. See Notes to Condensed Consolidated Financial
Statements in Item 1 for a discussion of these updates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposures to market risk have not changed significantly since
August 2, 2009.
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 1, 2009.
(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 1, 2009 that have materially affected,
or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to Condensed Consolidated Financial Statements (Unaudited) in
Part I - Item 1 for a discussion of Legal Proceedings.
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/A for the year ended August 2, 2009,
which could materially adversely affect our business, financial condition,
operating results and cash flows. The risks and uncertainties described in our
Form 10-K/A for the year ended August 2, 2009 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
(a) None
(b) None
(c) Issuer Purchases of Equity Securities
The following table provides information about our purchases of our
Common Stock during each month of the quarter ended November 1, 2009:
(c)
Total Number of (d)
Shares Maximum Number
(a) (b) Purchased as Part of Shares
Total Number of Average Price of Publicly that may yet be
Shares Paid Announced Purchased under the
Period Purchased (1)(2) per Share Plans or Programs Plans or Programs
- ------ ---------------- --------- ----------------- -----------------
August 2009 14,600 $12.58 2,400,869 599,131
September 2009 4,000 $12.66 2,404,869 595,131
November 2009 17,302 $11.95 2,422,171 577,829
----------------- ------------------
Total for quarter ended November 1, 2009 35,902 $12.29
================= ==================
<FN>
(1) We have a stock repurchase program that was initially instituted in
October 2002, as further modified, for the purchase of up to 3 million shares of
our common stock. As of November 1, 2009, we acquired an aggregate of
approximately 2.4 million shares in the open market, all of which have been
previously retired. The timing and amount of share repurchases, if any, will
depend on business and market conditions, as well as legal and regulatory
considerations, among other things.
</FN>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
18
SIGNATURE
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.
BY: /s/ Anello C. Garefino
-----------------------------------------
Anello C. Garefino, Chief Financial Officer
(Principal Financial Officer)
Date: December 10, 2009