LANCASTER, Pa., July 28 /PRNewswire-FirstCall/ -- Herley Industries, Inc. (Nasdaq: HRLY) hosted a conference call for investors today at 10:00 a.m. Eastern Time. Mr. Myron Levy, the Company's Chairman and CEO made the following statement and answered questions from shareholders. Replay of the conference call is scheduled to begin on July 28, 2006 at 11:00 a.m. and end on August 4, 2006 at 11:59 p.m. Eastern Time. To listen to the replay dial: 1 (800) 642-1687 (U.S.) or 1 (706) 645-9291 (International), and Conference ID 3597413. The conference was also broadcast live over the Internet and can be accessed by interested parties for 30 days through the following URL: http://www.videonewswire.com/event.asp?id=34959 .
"Good morning. My name is Myron Levy, Chairman of Herley Industries. With me today is John Kelley, President of our Company. During our third quarter Investor's Conference Call on June 19, we promised to have more frequent communications with our investors. That is the purpose of today's call -- an update for shareholders and friends of the Company.
"Before we go further, I must make the following Safe Harbor Statement: Except for the historical information contained herein, this conference may contain forward-looking statements. Such statements are inherently subject to risks and uncertainties. When used in this report, words such as 'anticipated,' 'believes,' 'could,' 'estimates,' 'expects,' 'may,' 'plans,' 'potential' and 'intends' and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward- looking statements are based on the belief of the Company's management, as well as assumptions made by and information currently available to the Company's management. The Company's results could differ materially based on various factors, including, but not limited to, cancellation or deferral of customer orders, difficulties in the timely development of new products, difficulties in manufacturing, increased competitive pressures, the effects of the recently announced indictment of the Company and general economic conditions. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments.
"As previously announced, the Justice Department has indicted the Company and our former Chairman, alleging over-charging of the Government on three contracts. We maintain our position that the allegations are unfounded. Mindful of the possibility of negotiations with the Justice Department, separate and distinct from any possible accommodations which could be reached with the Navy Department, I do not want to comment further and jeopardize these efforts.
"Management's immediate objective is to guide the company through this period and strive to limit the damage to the Company that could result from these allegations.
"For those of you who know me personally, you know that I am an ardent NFL football fan, with a distinct leaning toward the New York Giants. In that sense, I feel like a broken field runner. I'm not as shifty as Tiki Barber; I'm not as strong as Jim Brown, but I am carrying the ball for Herley and we intend to emerge from this process as a stronger company, more tightly focused financially than ever before.
"Given the current constraints, I want to let you know where we stand and the efforts we are making to maintain and expand upon our strengths.
"As a result of this indictment, the Department of the Navy, our largest customer, has suspended three of our nine operating facilities, which makes it difficult for those three divisions to receive new contract awards. It is important to note, however, that they maintain a substantial backlog which is unaffected by the indictment. The good news, relatively speaking, is that Herley started this process with the highest backlog in the Company's history. We are optimistic that our damage control plan can work for us.
"There are two primary forces in motion at this time for our Company. One is the indictment of the company and the suspension of three of our nine operating facilities affecting their ability to get new contracts. Where we have competition, we are not likely to get new contracts at the three affected plants, unless we reach an accommodation with the Navy. Where we are the sole supplier, we hope to receive new contracts, with the approval of the Navy Department, but they may be delayed. Our customers, prime contractors to the Navy, may advise the Navy that there are compelling reasons to deal with one of our three affected plants. Where waivers can be arranged, the affected plants can continue to provide critically important defense products.
"Herley also has six divisions which are unaffected by the suspension, where we can conduct business as usual and possibly expand capacity for both defense-related and commercial work. For example, when we acquired Micro Systems, Inc. we purchased one facility and leased another. The second facility, now relatively vacant, is available to expand the capabilities of this unaffected subsidiary. These actions are being considered as part of our damage control plan. We may take some body blows, but intend to manage the damage.
"The second factor in play is our concern with the outlook for defense business in the future. We have a great deal of defense business experience within our top management team. We believe that the present level of over $500 billion in expenditures may not be sustainable by this administration or its successor. We see too much money going to fight the last war and uncertainty in new program starts. This is a major problem in the industry because it is more difficult to select winning programs from those that may become dead-ends. Those of you who follow our Company are familiar with our frequent references to our batting average. By this we mean the ability to make engineering investments in programs that will have long production lives. That is not so easy today, with the downturn in U.S. defense business that we forecast. It is for this reason that we intend to focus even more strongly on our international business as well as our non-defense business.
"We will select carefully in U.S. defense programs and shift our emphasis even more on defense programs outside of the U.S., especially those in Europe, the Middle East and Asia. We will balance our approach and hedge our bets. In the commercial arena, we are pleased with the growth of our high-power amplifier business for medical applications. This non-defense business is expected to almost double in the coming year with a revenue goal of $14 million. Our innovative solutions to customer requirements for MRI and oncology applications have been very well received in the marketplace, domestically and internationally.
"The upcoming period, even if more difficult to predict, is not much different from problems we have successfully managed in the past. Herley is beginning its 42nd year in business. For very long-term holders of our stock, you may remember that in the 1980's the nuclear submarine programs made up a large percentage of our business. Back then there were eighteen SSN 688 Los Angeles Class nuclear submarines under construction at one time. We were a Sub-Safe Level I-approved supplier of hull fittings. Newport News shipyard and the Electric Boat division of General Dynamics were our largest customers. Submarines were a big part of the defense budget. 'The Hunt for Red October' was a smash hit movie at the time. Russian and American submarines roamed the oceans. No more. We sold off that business when we realized that submarine building was heading towards its present level of one submarine being built every two or three years. There may be only 50 submarines left in the U.S. Navy. The Russian sub fleet is a thing of the past.
"That's one of the more dramatic changes that took place in the past. More recently it has been the change from massed tank attacks and large air- to-air combat forces to urban, irregular warfare, detection of IEDs and suicide bombers, and increased use of UAVs and real-time data links. At Herley we are changing with these times. Our technologies are changing, our markets are changing, and we are managing these changes. Herley is a large company within our tightly focused microwave industry and we continue to shift our business to meet today's and tomorrow's needs. Despite our present problems, we know where we are going and what we have to do.
"In the past few years we have made major engineering investments in defense programs, where we have become the sole supplier, and where we believed there would be many years of production following successful completion of the engineering phase of the program. Among these are the Trident; AMRAAM; F-18; IDM304; Subsonic and Supersonic Targets; ICAP, MMA, Phased Array TDUs; EA-18; ARA-63; and SNC245. We currently foresee at least five years of steady, profitable production for all of these programs. We have probably absorbed and expensed over $10 million in engineering costs to get Herley into this position. This base should carry us through our present problems, and through the more difficult selection process of new engineering investments.
"A strange paradox is developing. With the suspension of three of our nine facilities, new engineering programs, which are not sole source to Herley, will be more difficult for us to obtain for as long as our suspension lasts. However, due to the uncertainties we see in the declining U.S. defense budget, we are more cautious in making major engineering investments. While we seek a negotiation with the Defense Department to make the suspension as brief as possible, we will be very selective in the new engineering investments we make.
"Our fiscal year is rapidly drawing to a close. In a few days we begin our '07 fiscal year. We hope to end the '06 fiscal year on target for revenues, with fourth quarter profits improving over the third quarter.
"I am very heartened by the communications I receive from many of our managers and employees. Herley is a sound company, financially and technically, and our present situation is bringing our employees closer together. They believe in the Company and so do I. We will resolve these problems and move forward. It is also very important that the using commands of the Defense Department have reached out to us and expressed their need for Herley and our products. We will respond and serve them in the future, as we have in the past."
Herley Industries, Inc. is a leader in the design, development and manufacture of microwave technology solutions for the defense, aerospace and medical industries worldwide. Based in Lancaster, PA, Herley has eight manufacturing locations and more than 1000 employees. Additional information about the company can be found on the Internet at http://www.herley.com .
For information at Herley contact: Tel: (717) 735-8117
Peg Guzzetti, Investor Relations http://www.herley.com
