Herley Industries F4Q07 (Qtr End 7/29/07) Earnings Call Transcript

| About: Herley Industries, (HRLY)
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Herley Industries, Inc. (NASDAQ:HRLY) F4Q07 Earnings Call October 12, 0000 3:00 AM ET

Executives

Myron Levy - Chairman of the Board, Chief Executive Officer

Kevin J. Purcell - Chief Financial Officer, Vice President

Jeffrey L. Markel - Chief Operating Officer

Analysts

Steve Binder - Bear Stearns

Eric Hugel - Stephens, Inc.

Ryan Rackley - Raymond James

Marcia Ewen - Dolphin Management

Operator

Good morning. My name is Laurie and I will be yourconference operator. At this time, I would like to welcome everyone to theHerley Industries fourth quarter and year-end financial results conferencecall. (Operator Instructions) Thank you. I will now turn the call over to MyronLevy, Chairman and CEO. Please go ahead, sir.

Myron Levy

Thank you very much. Good morning. I would like to thank allof you for taking the time for Herley's conference call for the fourth quarterand year-end. The format for this morning, I would like to read the Safe Harborstatement, if you will, then turn the speaker over to Kevin Purcell, who willgo through the numbers. I will then pick up on that with some statements andthen open it for questions from the people on the call.

I would like to read our Safe Harbor statement into therecord: except for the historical information contained herein, this conferencecall may contain forward-looking statements. Such statements are inherentlysubject to risks and uncertainties. When used in this call, words such as"anticipated," "believes," "could,""estimates," "expects," "may," "plans,""potential" and "intends" and similar expressions as theyrelate to the company or its management, identify forward-looking statements.Such forward-looking statements are based on the belief of the company'smanagement as well as assumptions made by and information currently availableto the company's management.

The company's results could differ materially based onvarious factors, including but not limited to, cancellation or deferral ofcustomer orders, difficulties in the timely development of new products,difficulties in manufacturing, increased competitive pressures, the effects ofthe previously announced indictment of the company and general economic conditions.The company undertakes no obligation to update forward-looking statements as aresult of future events or developments.

I now would like to introduce Kevin Purcell, who will reviewthe fourth quarter and fiscal year-end results. Kevin.

Kevin J. Purcell

Thank you very much, Myron. I would like to refer ourlisteners to our recently published 10-K for a detailed discussion of thefinancial results of the company. Also, please refer to the previously filed10-Qs in fiscal 2007 for more information on each quarter.

Regarding the full year results, as discussed in ourprevious quarterly conference calls and also in our SEC filings, the suspensionfrom receiving new contract awards from the U.S. government in June of 2006disrupted our business in several respects which cannot be easily measured, butcertainly had an impact on our results of operations during 2007, both in termsof sales and profitability. While the effects of the suspension were mostevident during the first quarter, they continued during Q2 and to a lesserdegree in Q3, as the delays in bookings affected the timing of certainshipments.

We believe the effects of that suspension are behind us now.

Net sales for the 52 weeks ended July 29, 2007 wereapproximately $163.1 million, compared to $176.3 million for fiscal 2006, a decrease of $13.2 million, or7.5%.

The decrease in net sales is partly related to the recordingof a $2.2 million claim receivable on a major program during the first quarterof the prior year. In addition, there was a net decline of $11.7 million inmicrowave systems and assemblies in our domestic operations, primarily due tothe completion of certain contracts and the timing of shipments, some of whichwas due to the delays in bookings during the suspension period.

Sales of simulation systems at EWST declined $2.3 milliondue to the completion of certain contracts and the cyclical nature of itsbusiness. Commercial sales of medical products were slightly higher, while commercialsales at Herley CTI decreased $1.8 million, as certain commercial programsended and the transition towards military business progressed.

Offsetting these decreases were $4.7 million of increasedsales at Herley Israel of both microwave systems and microwave products.

Domestic and international sales were 73% and 27%respectively of net sales in fiscal 2007 versus 76% and 24% respectively infiscal 2006. Consistent with the goals of the company to increase ourproportion of international sales, we’ve seen an increase year to year from 24%up to 27%.

Bookings in fiscal 2007 were approximately $175 million andthe bookings-to-sales ratio was 1.07 to 1.0. This is a significant improvementover the 0.89 to 1 bookings-to-sales ratio in the prior year.

Backlog at July 29, 2007 was $137 million and was 61%domestic and 39% international.

The gross profit margin of fiscal 2007 was 27.2%, nearlyflat compared to 27.4% in fiscal 2006, a decrease of 0.2%. Contributing to the reduction ingross profit were the booking of the $2.2 million claim receivable in fiscal2006, disruption caused by the suspension, start-up production costs of certainprograms, and product mix within certain businesses. These were offset by arevision in the accrual for contract losses based on current estimates.

Selling and administrative expenses for the 52 weeks endedJuly 29, 2007 were 21% of net sales as compared to 19.8% in fiscal 2006. Theincrease in costs as a percentage of sales is due to the lower net sales infiscal 2007. Selling and administrative costs actually declined year to year by$776,000.

A couple of notable increases and decreases are as follows:stock compensation costs reported in fiscal 2007 per FAS-123R of $1 million, anincrease of $0.5 million versus fiscal 2006. This was offset by legal costs netof estimated insurance recoveries, which were $1.8 million in fiscal 2007, a decrease of $0.5 millionversus fiscal 2006. The majority of the legal costs relate to the defense ofthe company associated with the indictment. A net decrease of approximately $0.8million in commission costs.

We had operating income for fiscal 2007 of $1.2 millioncompared to operating income of $13.4 million in fiscal 2006. Excluding theemployment contract settlement costs of $8.9 million reported in the firstquarter of fiscal 2007, operating income for fiscal 2007 would have been $10.1million, or 6.2% of net sales as compared to $13.4 million, or 7.6% of netsales in fiscal 2006.

The decrease in operating income as a percentage of netsales is primarily attributable to the increase in selling and administrativeexpenses as a percentage of net sales due to the lower sales volume.

Our foreign operations contributed approximately $3.3million in operating income in fiscal 2007, as compared to $2.7 million infiscal 2006.

Regarding the effective tax rate, benefit for income taxesin fiscal 2007 was $1,019,000, reflecting a negative effective tax rate of48.5%, as compared to an effective tax rate of 27.8% in fiscal 2006.

The decrease in the effective rate in fiscal 2007 is principallydue to: A, the effect of the employment contract settlement agreement, whichreduces domestic profitability; B, improved profitability in Israel, which istaxed at lower rates than the U.S. businesses; C, the extension of the R&Dtax credit; and D, the elimination of certain tax provisions that are no longerdeemed necessary.

Basic and diluted earnings per common share in fiscal 2007was $0.22, as compared to basic and diluted earnings per common share of $0.72and $0.69 respectively in 2006. But excluding the impact of the employmentcontract settling costs, basic and diluted earnings per common share in 2007would have been $0.65 and $0.63 respectively.

The company defines free cash flow as net cash fromoperations less capital expenditures. Accordingly, free cash flow in fiscal2007, excluding the cash payments associated with the employment settlementagreement, was a positive $14.5 million.

Now, a couple of comments on the fourth quarter results; netsales for Q4 were approximately $40.6 million as compared to $42.8 million inthe prior year quarter, a decrease of $2.2 million or 5.1%. Domestic andinternational sales were 73% and 27% respectively of net sales in Q4, versus74% and 26% respectively in Q4 of the prior year.

We recorded Q4 bookings $28 million compared to $25 millionin Q4 of fiscal 2006.

The gross profit margin in Q4 was 27.9% compared to 22.9% inthe fourth quarter of fiscal 2006, an increase of 5%. Contributing to theimprovement in gross profit for the quarter were the non-recurrence of start-upproduction costs from the prior year on certain programs, the product mix ofcontracts, and revisions in the accrual for contract losses based on currentestimates.

Operating income was $2.4 million, or 6% of net sales, ascompared to $600,000, or 1.4% in the prior year, and the free cash flow, as Ipreviously defined it, in Q4 was approximately $3.8 million.

Some balance sheet highlights: inventories closed at $51.8million, with inventory turns of about 2.3 turns. Regarding accounts receivablebalances, the balance at Q4 was $2.8 million lower than at Q3 close, and ourDSO in Q4 was about 65 days.

Capital expenditures in fiscal 2007 were $5 million, with acapitalization of ERP software implementation costs being a principal expenditure.

And now I will turn it back to Myron.

Myron Levy

Thank you, Kevin. Just a few comments; I have been withHerley for almost 20 years, so it is easy for me to look back and see how farthis company has come. Twenty years ago, we were one of many componentcompanies in the microwave business. Our revenues were between $10 million and$15 million per year. We made small profits and satisfied a small customerbase.

Today, Herley is internationally recognized as one of thepremium microwave companies in the world. Serving the defense industryprimarily, we are one of the largest sources of microwave technology for bothcomponents and systems in radar, ECM, communications, and IFF systems. Ourtraining and testing equipment is installed worldwide and serviced from oureight manufacturing locations.

It has been mostly a very gratifying experience. The pastyear-and-a-half has not been easy, with both the indictment and the twosuspensions. Our trial date is now set for May 5, 2008 and we look forward tothe opportunity to put all of this behind us. Then we will be able to devoteour entire effort to enhancing shareholder value and increasing theprofitability and cash flow of the company.

This morning, I wanted to draw your attention to ourinternational business. Most defense companies of Herley’s size have a 5% to15% component of their business devoted to the international marketplace. Bydesign, we have been targeting our business to the international marketplace.Our long-term goal has been 50% international and 50% domestic, exactly thebalance of defense business worldwide.

We have hedged our bets to protect Herley from a downturn inthe U.S. defense business while taking advantage of the opportunities that areavailable in long-term programs in the United States.

We ended the fiscal year 2007 with a $52 millioninternational backlog, possibly the highest in the history of the company. OurIsraeli operation has grown five-fold since our acquisition of GeneralMicrowave in 1999. Their percentage of profitability is the highest of any ofour operating divisions.

Our U.K. subsidiary, EWST, has had a more volatile revenuestream. Multi-million ECM testing systems come along in a rather lumpy fashion.At this time, however, we are looking at the largest group of businessopportunities we have since owning the company. We hope to land a good portionof this business in 2008.

In anticipation of this, Jeff Markel, our new COO, and Iwill be heading to the United Kingdom to meet the management team to reviewwhat we hope will be a breakthrough year for EWST.

I would like to make one other announcement; there will bean announcement going out today that Herley's Board of Directors has authorizedthe purchase of up to an aggregate of 1 million shares of common stock fromtime to time at prices deemed appropriate by management in the open market orin private transactions. This release will go out this morning.

I now would like to open the call to questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from theline of Steve Binder of Bear Stearns.

Steve Binder - BearStearns

Good morning. Could you maybe just touch on, I think in theQ you said the impact of the suspension was insignificant on sales or at leaston performance in Q4, but how much did it affect your sales in the quarter?

Myron Levy

In the quarter, not significantly, Steve, because in thequarter, effectively everything was coming out of backlog as opposed to newbookings. It did affect the bookings though in the quarter but not at reallythe sales volume.

Steve Binder - BearStearns

Could you maybe touch on -- when you look at the decline ona year-over-year basis, is that mainly domestic in the quarter?

Myron Levy

Yes.

Steve Binder - BearStearns

So you are saying that that decline was not impacted by thesuspension essentially at all?

Myron Levy

No, not in the fourth quarter because all of that would havecome out of, if you will, a backlog. There were some difficulties on some ofour programs, if you will, in terms of we were not able to ship certain thingsthat were in our backlog that otherwise would have gone out. But I guess fromthat perspective, there was some effect.

Steve Binder - BearStearns

Could you maybe touch on the legal costs for the upcomingyear in fiscal year ‘08? Is it going to be more than it was in ’07?

Myron Levy

Now we’re approaching it with the trial in May, it isanticipated that the trial will take somewhere between five and six weeks. Solet’s assume that the trial will be over, and I make this assumption, the trialshould be over by the middle of June at the latest, which is approximately sixweeks. With the preparation and everything that’s going on, I would say thatthe legal expense should continue at the same rate it was in ’07, if not alittle higher. Because now you’re at the trial and fees go up.

Steve Binder - BearStearns

And then also, you had a good year with respect to workingcapital performance, especially with respect to receivables inventories, butyou also had a -- it makes some sense because you had lower sales for the yeartoo. I’m just wondering, as you look out to fiscal year ’08, where do youexpect working capital -- do you expect it to increase?

Myron Levy

Yes, I would expect working capitals to increase based uponthe programs that we are in and under, as well as where the backlog sits today.

Steve Binder - BearStearns

What’s your general sense on book to bill for the upcomingyear?

Myron Levy

What I see, if things progress as they should, I believe ourbook to bill will be greater than one to one.

Steve Binder - BearStearns

Thank you.

Operator

Your next question comes from the line of Eric Hugel ofStephens, Inc.

Eric Hugel -Stephens, Inc.

Good morning, guys. Could we just follow up on Steve’searlier question with regard to -- I guess one of your responses was that youhad some problems shipping some equipment in the quarter. Can you quantify thatand will that ship in Q1?

Myron Levy

Some of it will ship in Q1. What happened, and I am notgoing to get into the infinite detail of it, but as you all know, there was aparticular customer on a particular program. As a result of that, that programstopped shipping completely and effectively, all work stopped on the program,even in the production cycle. So as a result of that, there is product thatwould have shipped in the fourth quarter that did not ship.

We then had to go back and retest items that already hadbeen shipped, so obviously you can’t re-bill an item you’ve already shipped. Itwas brought back, we retested, the product was retested okay and then weresumed shipping in the first quarter of the current year.

I would hope that answers the question.

Eric Hugel -Stephens, Inc.

I understand. Can you discuss your growth strategy here? Youtalk about it in the press release and obviously you have some of these newprograms that we’ve been talking about for a long time starting to move intoproduction. Can you talk about how we should be thinking about, as we go through’08, those really hitting into revenues? Should we expect sequential increasesin revenue as we go through the year?

Two, with regard to the impact of the second suspension, yousaid that the first one was over but you really didn’t talk about any impact,how long or how deep should the second suspension impact -- is that sort of amainly a Q1 issue and then it sort of rolls off because it wasn’t as long?

Myron Levy

Yes, the second suspension really, that suspension waslifted in August, which is really -- let me call it 30 days into the firstquarter, and that is really -- the effects of that suspension in terms ofshipping are completely gone at this point in time.

Eric Hugel -Stephens, Inc.

In the revenue?

Myron Levy

In other words, you will not see any effect in the Q2 at allfrom that suspension.

Eric Hugel -Stephens, Inc.

Let me ask you; what are the things, if we rewind a little,when we had talked about I guess earlier last year, your outlook was as we wentthrough Q2, Q3, and Q4 was for sequential increases on the top line. Nowobviously you had some impact in Q4 from these programs that didn’t ship, butif you did 44 and change in Q3, that would imply -- that was a substantialnumber that didn’t ship, or you weren’t able to continually increase the topline. Was that -- the products that didn’t ship, was it that significant or didthe thing shift?

Myron Levy

It shifted. It wasn’t significant, if you will, but when youlook to the quarter, it may have been significant. It could have been a coupleof percentage points but on a go-forward basis, looking to the future, weshouldn’t see any affect on any of that at all.

What I am hoping we are going to see is certain productsthat we’ve invested in in development work will now yield into bookings andultimately from bookings into revenue during the current fiscal year.

Eric Hugel -Stephens, Inc.

Thinking about a baseline, given sort of it looks like Q4revenue was a bit depressed and it looks like Q1, it’s kind of hard to sort ofeyeball. Would you expect Q1 to be around the same level as Q4 and then buildfrom there? Is that sort of a good assumption?

Myron Levy

I would assume that Q1 will be higher than Q4 and it willbuild from there.

Eric Hugel -Stephens, Inc.

I guess my final one and I’ll get back into queue would befor Jeff; Jeff, you’ve been at Herley now for -- since what, June? Can you talkabout what you see as sort of the operations guy walking in there? What are themajor challenges here that really need to be addressed going forward?

Jeffrey L. Markel

I think the -- what we look at is an opportunity for sharingof best practices that we have between businesses that we haven’t been able tofully capitalize on, so there is a great opportunity to take some really goodprocesses and some really good thoughts that are going on in one business anddeploy them in another business.

I think that we also see the opportunity for even greatercooperation between the businesses on specific business opportunities, and Ithink those are the two areas where I see the operations can be improved, whichtakes advantage of some of the businesses that we might look at as eightindividual businesses and start to make the whole enterprise stronger bybecoming more of one business.

Eric Hugel -Stephens, Inc.

Okay. Thanks a lot, guys.

Operator

Your next question comes from the line of Ryan Rackley of RaymondJames.

Ryan Rackley -Raymond James

Good morning, gentlemen. I believe historically in the past,you’ve said that about 80% to 85% of backlog should ship over 12 months or so.In the K it says that you are looking at about 74% over the next 12 months.Could you give some color on that and maybe provide an indication of why thatis?

Myron Levy

It is only based upon the nature of the business. If youtake a look at our various businesses and you take a look at the nature of thecontracts, we have a number -- we are on a number of these long-term programswhere you receive contracts on a yearly basis. Although they are long-term,there are options inherent in some of these contracts and what they do isexercise them each year.

As a result of that, you ship that that following year andwithin that next 12 months, you get another order. Historically, that’s whatwe’ve seen in this business and normally, we ship as we have said in the past,somewhere around 80% of our backlog and that is replenished in the followingyear.

Of course, there’s a lot of smaller orders that come induring the year that go out in four and five months, or six months. So it’sjust the nature of the business and how you book them.

As you book larger orders, they may extend beyond that andif you take a look at some of the major programs, whether it be Trident,whether it be the carrier landing system or these others, they book each year,because that’s the way their programs, if you will, are funded.

Ryan Rackley -Raymond James

Okay, so there is nothing different about the next 12 monthsas far as your confidence in the contract --

Myron Levy

No, the only thing that’s lumpy, and I’ve said in the past,is our EWST. That is the only really lumpy business. The other ones should havenormal bookings as we do as the programs progress.

Ryan Rackley -Raymond James

Okay, great. And this question may be for Jeff; I believe itwas last quarter you said that you were looking for gross margins to get backinto the mid-30s. Could you kind of refresh your view on that and maybe put atimeframe on it?

Myron Levy

Let me respond to that a minute because Jeff was not herelast quarter on the conference call, so that was my comment and I am stilllooking at some point for the margins to get back. Jeff and I have discussedthat, to move our margins up more than what they are.

Ryan Rackley -Raymond James

All right, great. Thank you.

Operator

Your next question comes from the line of Marcia Ewen ofDolphin Management.

Marcia Ewen - DolphinManagement

Good morning. Kevin, can you just refresh me on what thelitigation costs were for the quarter?

Kevin J. Purcell

Yes, the legal costs in the fourth quarter, net of theinsurance recoveries that we booked, was $500,000, and for the full year it was$1.8 million.

Marcia Ewen - DolphinManagement

And what is it gross?

Kevin J. Purcell

What’s that?

Marcia Ewen - DolphinManagement

What was it gross?

Kevin J. Purcell

Gross, I don’t have that number off the top of my head.

Myron Levy

I believe that number is close to approximately $4.5 millionfor the year. You asked for the year, I thought?

Marcia Ewen - DolphinManagement

All right, that’s helpful. It looks like the gross marginswere up in Q4. Are there any specific programs that are attributing to that?

Kevin J. Purcell

No, not any one that was a key driver.

Marcia Ewen - DolphinManagement

And then, I think in the past you guys have mentioned aboutimplementing some IT to help reduce your inventory going forward. Could youtalk about the progress on that front and also I guess what the company’s goalsare in terms of inventory going forward?

Myron Levy

I will ask Jeff to report on that. That’s part of hisresponsibility and he’s been working that program for us.

Jeffrey L. Markel

The first task that we are tackling is to put in anenterprise resource planning system and we are going to roll that out into ourlargest manufacturing facility, which is in the Lancaster, Pennsylvanialocation. When we get that done, which should be during calendar year 2008, wewill then by that time have developed specific plans for its deployment to theother portions of the business.

As we get that done, we should have efficiencies that aregenerated just by the implementation of the ERP system itself and then, as webring all of the eight businesses on to a common footing, we start to get theopportunity for efficiencies by sharing activities, such as can we procureparts based on an estimated requirement for all of the businesses and get theadvantages in buying power and things like that.

So the ERP system starts to provide an underlying structurewhich can allow us to build on our efficiency.

Marcia Ewen - DolphinManagement

So it sounds like the implementation will take place incalendar ’08 and maybe we’ll see the effects of that in the second half?

Myron Levy

I think that’s probably a little optimistic to think that itkicks in that quickly. The first part of it is to get the system in, keep thepace of the programs running, don’t lose a step, don’t lose control of yourbusiness, and so we have plans for parallel operations to assure we have thoseissues under control before we flip the switch and go live on the system.

Then, it takes the opportunity to start planning with thenew system to bring in efficiency. I think expecting it in the first or secondquarter after implementation is probably a little optimistic, but it should beshortly after that that we start see efficiencies.

Marcia Ewen - DolphinManagement

Okay, great. Thank you, guys.

Operator

(Operator Instructions) You have a follow-up question fromthe line of Eric Hugel of Stephens, Inc.

Eric Hugel - Stephens,Inc.

A question on the tax -- what would you expect the tax rateto be in ’08?

Kevin J. Purcell

I would expect it to be much more normal than it’s been. Iwould say 26% to 28%.

Eric Hugel -Stephens, Inc.

One of the things you talk about -- I guess in this year, Iwasn’t quite sure if it was this quarter or not, you talked about anelimination of a tax reserve. Was that part of the big part of this year or wasit all just sort of catch-up in this quarter?

Kevin J. Purcell

That was part of it, as is noted in the 10-K. That was partof it. We looked at certain tax provisions that were no longer considereddeemed necessary, and that was a contributor. The bigger contributor, actually,was the domestic versus foreign profitability where the foreign profitabilitywas significant higher, mainly due to the employment contract settlementagreement, and that is really what drove the rate very low. And then inaddition to that, we had the R&D tax credit that still had an impact.

Eric Hugel -Stephens, Inc.

But all that reserve reversal happened in the fourthquarter, correct?

Kevin J. Purcell

Yes.

Eric Hugel -Stephens, Inc.

Okay. That wasn’t clear in the Q. Are there any incrementalcosts that are going to be running through SG&A from I guess any agreementsthat you made from getting the second suspension lifted? Do you have to doanything incremental versus what you were doing before -- training or whatever?

Myron Levy

No, really everything we were doing before, we are stilldoing. We did have outside help, if you will, in our investigation in thefourth quarter, which will not continue, obviously, as a result of thatsuspension. But in terms of our training and everything, I am happy to reportJeff met with the Navy recently, as recently as this week, I believe it was,and everything is going extremely well with the Navy. They are satisfied witheverything we are doing.

Eric Hugel -Stephens, Inc.

Mark, could you give us maybe a little more background aboutreally what really transpired? I guess from what I’ve read, it seems likeyou’ve had some two technicians. It seemed like they -- I guess they -- I don’tknow exactly what the term is, but it seems like they played around with sometest data on the equipment that was shipped to one of your customers. Can youtalk about your forward-looking relationship with that customer, what theoutcome of the investigation was?

And I guess really the underlying issue here from anoutsider, given the suspensions and all that -- do you guys have an issue interms of corporate culture? Can you address that?

Myron Levy

Sure I can. We are dealing with two technicians out of 1,100employees. The corporate culture is one that I don’t believe is in questionhere at all. From the top down, this is a very ethical company. What you haveis, I am going to use my term, two rogue individuals that we had a hard timeeven understanding why they did what they did, but they did it.

In terms of the relationship with the customer, the customerworked with us, we worked with the customer and we worked with their customer,more importantly. The issue was resolved satisfactorily to their concerns, aswell as their customer’s concern. And the relationship during that period oftime, they gave us a letter of intent, which they wanted to get because theycouldn’t give us an order, if you will, because we were under suspension. Afterthe suspension was lifted, that letter of intent became an order for a coupleof million dollars because we do make very good hardware, it works and not onlyfor that program, for many other programs.

Unfortunately, as one of my customers said to me, it tookthem 40-some odd years to get to Herley, but you know, in the nature of thedefense business but it is extremely difficult, with all the training that weare doing, that someone still does this.

I can tell you that the people at that facility, and weemploy over 300, were outraged that one person can affect 300 people at thatfacility. In terms of the culture, I mean, the people were absolutely shocked andI would tell you they were calling for heads.

Eric Hugel -Stephens, Inc.

So there was no supervisor involved, it was just these twotechnicians?

Myron Levy

It was just really those two technicians, okay? And by theway, they were terminated. They were put, just for your edification, when thishappened they were put on leave with pay until we finished our investigation.After the investigation was over, they were both terminated and are no longerwith the company. And quite candidly, have been debarred.

Eric Hugel -Stephens, Inc.

Good to hear. I guess my final question, a follow-up on yourtargeting of you’d like to be able to get back into sort of the mid 30s. Wouldyou think that given the volumes creeping up, is that kind of target, is thatlate ‘08/’09, or is that longer term? Would you sort of broadly think that isachievable?

Myron Levy

I would like to get there sooner than later but I would saytowards the end of ’08 and beginning of ’09 to get back there. With all of thecost saving things that hopefully we will put in.

I think the one biggest thing is that to get this trail overwith and put behind us this whole indictment. Unfortunately, it not only takesin terms of money paying attorneys and all sorts of fees, but it is also thetime and effort of the management of this corporation being able to have thetime to do the things that we should be doing to enhance stockholder value,increase productivity, increase our marketing efforts, and spending more timemaybe with our customers instead of spending them with attorneys, which Iconsider non-productive.

So all of that is all part of it. One of the analysts saidthat this is a year to forget. I will tell you this is, from my perspective,this has been an absolute nightmare for me and the company and the otherofficers of this corporation. In light of all of the adversities, and therehave been quite a few of them, as everyone knows, this corporation hasgenerated cash, as Kevin said in his definition, forgetting the payment to theformer Chairman, of $14 million. We’ve stayed profitable with all of theseadditional costs through the entire year and we’ve gotten on some new programs.We’re developing new product, some of which I hope will turn into orders veryshortly and they’ll be announced, in light of all of those adversities.

And we still have excellent, excellent relationships withall of the major defense contractors, both here in the United States and in theforeign market. And we are pushing a lot more in the foreign market. A numberof the orders recently announced are all foreign and we are working on a lot ofother things that could have a great impact.

I think we’ll see the results of those things later in ’08,early ’09 and moving forward.

Eric Hugel -Stephens, Inc.

Are all the programs that I guess that we’ve been talkingabout for many years now in terms of those programs that were in development,moving to production, like ICAP, are all of those progressing on track?

Myron Levy

Yes. ICAP is in total production. We are expecting a lot ofthings from the program. The Trident is in -- we are into the, into production,if you will. The ARA63 or the carrier landing system is in production andnearing releases, if you will.

So all of these things will continue and we’ve devoted timeand effort to other things which, as I said, hopefully are going to lead toother programs and other bookings which will lead to revenue in other areas.

Eric Hugel -Stephens, Inc.

Great. Thank you, guys.

Operator

(Operator Instructions) At this time, there are no furtherquestions. Mr. Levy, do you have any closing remarks?

Myron Levy

No, I would just like to thank everyone for participating inour conference call this morning and that’s it. I would like to thank everyoneand thank Jeff and Kevin.

Operator

Thank you. That does conclude today’s Herley Industriesfourth quarter and year-end financial results conference call. You may nowdisconnect.

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