Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010
 
OR

¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For the transition period from __________to__________
Commission File No. 1-16779

Henry Bros. Electronics, Inc.
(Exact name of Registrant as specified in its charter)

Delaware
22-3690168
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

17-01 Pollitt Drive
Fair Lawn, New Jersey 07410
(address of principal executive offices) (Zip Code)
Registrant’s Telephone number, including area code:                   (201) 794-6500
 
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.   Yes   x     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 o      No ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of  “large accelerated filer”, “accelerated filer and” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o No   x

Indicate the number of shares outstanding of each of the Registrant’s Common Stock, as of the latest practicable date: 6,045,366 shares of common stock, $.01 par value per share, as of May 3, 2010.
 
 
INDEX
 
   
Page
PART I
FINANCIAL INFORMATION
3
     
Item 1.
Financial Statements
3
     
   
Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009 (Audited)
  3
     
   
Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)
4
     
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)
5
     
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2010 (Unaudited)
6
     
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
7-11
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12-15
     
Quantitative and Qualitative Disclosures About Market Risk
15
     
Controls and Procedures
15
     
OTHER INFORMATION
  
     
Legal Proceedings
15
     
Exhibits
15
   
SIGNATURES
16
     
 
 
 
 
- 2 -
 
 
Part I     Financial Information
         
Item 1.    Financial Statements
      
         
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
March 31,
    
December 31,
  
   
2010
    
2009
  
ASSETS
  
(unaudited)
    
(audited)
  
CURRENT ASSETS
            
Cash and cash equivalents
   $ 1,685,698     $ 2,917,046  
Accounts receivable-net of allowance for doubtful accounts of
     9,690,667       12,053,139  
$728,840 at March 31, 2010 and $712,206 at December 31, 2009
                
Inventory
     1,525,991       1,245,306  
Costs in excess of billings and estimated profits
     6,374,316       6,003,533  
Deferred tax asset
     1,250,900       1,251,443  
Retainage receivable
     370,144       295,928  
Prepaid expenses and income tax receivable
     1,357,304       1,423,541  
Other assets
     133,540       161,479  
Total current assets
     22,388,560       25,351,415  
                 
Property and equipment - net of accumulated depreciation of
     2,114,803       2,254,054  
$3,755,594 at March 31, 2010 and $3,564,650 at December 31, 2009
                
Goodwill
     3,818,330       3,785,480  
Intangible assets - net of accumulated amortization of $1,230,008 at
     845,757       888,752  
March 31, 2010 and $1,187,013 at December 31, 2009
                
Other assets
     411,025       412,594  
TOTAL ASSETS
   $ 29,578,475     $ 32,692,295  
                 
LIABILITIES & STOCKHOLDERS' EQUITY
                
CURRENT LIABILITIES
                
Accounts payable
   $ 4,411,814     $ 5,360,471  
Accrued expenses
     3,758,638       3,507,060  
Billings in excess of costs and estimated profits
     810,506       1,567,874  
Deferred income
     202,652       136,574  
Current portion of long-term debt
     455,441       536,552  
Other current liabilities
     431,032       494,017  
Total current liabilities
     10,070,083       11,602,548  
                 
Long-term debt, less current portion
     3,070,359       4,830,517  
Deferred tax liability
     358,716       318,850  
TOTAL LIABILITIES
     13,499,158       16,751,915  
                 
STOCKHOLDERS' EQUITY
                
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued
     —       —  
Common stock, $.01 par value; 20,000,000 shares authorized
                
6,040,366 shares issued and outstanding in 2010 and 6,035,366 in 2009
     60,404       60,354  
Additional paid in capital
     18,518,788       18,437,288  
Accumulated deficit
     (2,499,875 )     (2,557,262 )
TOTAL EQUITY
     16,079,317       15,940,380  
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
   $ 29,578,475     $ 32,692,295  
                 
                 
See accompanying notes to the condensed consolidated financial statements.
 
- 3 -
 
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
   
Three months ended March 31,
  
   
2010
    
2009
  
   
(unaudited)
    
(unaudited)
  
Revenue
   $ 12,441,292     $ 15,308,212  
Cost of revenue
     8,864,290       11,086,198  
Gross profit
     3,577,002       4,222,014  
Operating expenses:
                
Selling, general & administrative expenses
     3,457,058       3,870,860  
Operating  profit
     119,944       351,154  
                 
Interest income
     41,994       6,970  
Other income
     4,465       13,186  
Interest expense
     (58,977 )     (65,701 )
Income before income tax expense
     107,426       305,609  
Income tax expense
     50,039       139,487  
Net income
   $ 57,387     $ 166,122  
                 
BASIC EARNINGS PER COMMON SHARE:
                
Basic earnings per common share
   $ 0.01     $ 0.03  
Weighted average common shares
     5,887,698       5,829,581  
                 
DILUTED EARNINGS PER COMMON SHARE:
                
Diluted earnings per common share
   $ 0.01     $ 0.03  
Weighted average diluted common shares
     6,059,458       6,143,851  
                 
                 
See accompanying notes to the condensed consolidated financial statements.
 
- 4 -
 
 
HENRY BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
For the three months ended
  
   
March 31,
  
   
2010
    
2009
  
   
(unaudited)
    
(unaudited)
  
Cash flows from operating activities:
            
Net income
   $ 57,387     $ 166,122  
Adjustments to reconcile net income from operations
                
to net cash provided by (used in) operating activities:
                
Depreciation and amortization
     250,859       222,691  
Bad debt expense
     33,910       67,658  
Provision for obsolete inventory
     368       —  
Stock option expense
     60,000       60,000  
Deferred income taxes
     40,409       232,177  
Changes in operating assets and liabilities:
                
Accounts receivable
     2,329,204       (96,643 )
Inventory
     (280,684 )     (21,502 )
Costs in excess of billings and estimated profits
     (370,783 )     1,359,708  
Retainage receivable
     (74,216 )     398,165  
Other assets
     29,508       (171,006 )
Prepaid expenses and income tax receivable
     66,237       (573,852 )
Accounts payable
     (948,656 )     (699,118 )
Accrued expenses
     251,578       (274,905 )
Billings in excess of costs and estimated profits
     (757,368 )     953,657  
Deferred income
     66,078       126,773  
Other liabilities
     (62,986 )     10,808  
Net cash provided by operating activities
     690,845       1,760,733  
Cash flows from investing activities:
                
Purchase of businesses, net of cash acquired
     (12,500 )     (25,000 )
Purchase of property and equipment
     (46,212 )     (112,813 )
Net cash used in investing activities
     (58,712 )     (137,813 )
Cash flows from financing activities:
                
Proceeds from exercising of stock options - net of fees
     —       169,686  
Borrowings under revolving loan agreement
     200,000       1,500,000  
Repayments under revolving agreement
     (1,900,000 )     —  
Payments of bank loans
     —       (57,757 )
Net repayments of other debt
     (86,518 )     (90,253 )
Payments of equipment financing
     (76,963 )     (67,894 )
Net cash (used in) provided by financing activities
     (1,863,481 )     1,453,782  
                 
(Decrease) increase in cash and cash equivalents
     (1,231,348 )     3,076,702  
Cash and cash equivalents - beginning of period
     2,917,046       27,704  
Cash and cash equivalents - end of period
   $ 1,685,698     $ 3,104,406  
Supplemental disclosure of cash flow information:
                
Amount paid for the period for:
                
Interest
   $ 59,578     $ 64,701  
Taxes
     —       710,152  
Non-cash investing and financing activities:
                
Equipment financed
     22,400       217,464  
Issuance of stock to acquire businesses
     20,350       79,250  
                 
                 
See accompanying notes to the condensed consolidated financial statements.
 
- 5 -
 
 
HENRY BROS. ELECTRONCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                               
   
Common Stock
    
Additional
              
   
par value $0.01
    
Paid-in
    
Accumulated
        
   
Shares
    
Amount
    
Capital
    
Deficit
    
Total
  
Balance at December  31, 2009 (audited)
     6,035,366     $ 60,354     $ 18,437,288     $ (2,557,262 )   $ 15,940,380  
                                         
Shares issued in connection with
                                        
   the acquisition of CIS Security Systems
     5,000       50       21,500       —       21,550  
                                         
Amortization of value assigned to
                                        
  stock option grants
     —       —       60,000       —       60,000  
                                         
Net income
     —       —       —       57,387       57,387  
                                         
Balance at March  31, 2010 (unaudited)
     6,040,366     $ 60,404     $ 18,518,788     $ (2,499,875 )   $ 16,079,317  
                                         
                                         
See accompanying notes to the condensed consolidated financial statements.
 
- 6 -
 
HENRY BROS. ELECTRONICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
1.   Description of Business and Basis of Presentation

Interim Financial Statements:

The information presented as of March 31, 2010 and for the three  month periods ended March 31, 2010 and 2009 are unaudited, and reflect all adjustments (consisting only of normal recurring adjustments) which Henry Bros. Electronics, Inc. and its Subsidiaries (the “Company” or “HBE”) considers necessary for the fair presentation of the Company’s financial position as of March 31, 2010, the results of its operations and cash flows for the three month periods ended March 31, 2010 and 2009, and changes in stockholders’ equity for the three month period ended March 31, 2010. The Company’s December 31, 2009 balance sheet information was derived from the audited consolidated financial statements for the year ended December 31, 2009, which are included as part of the Company’s Annual Report on Form 10-K.

The condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s latest shareholders’ annual report.

As of March 31, 2010, there have been no material changes to any of the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Description of Business:

Henry Bros. Electronics, Inc., is an established player in the electronic physical security industry, specializing in integrated security systems, and emergency preparedness.

HBE provides products and services to customers in the public and private sectors. Customers include transit authorities, seaports, airports, universities, office-buildings, hospitals and airlines. Each of the Company’s segments markets its products and services nationwide with an emphasis in Arizona, California, Colorado, Maryland, New Jersey, New York, Texas and Virginia.

The company operates through two primary operating segments:
 
1.
Security Systems Integration
 
2.
Specialty Product and Services

The Security Systems Integration business operates under the name Henry Bros. Electronics, Inc. and its approach to client service is core to all of its businesses. At the beginning of each new client relationship, HBE designates one member of its professional staff as the client service contact. This individual is the point person for communications between the client and HBE and often acts as the client's project manager for all of its security needs, which ensures that clients receive the best possible security solution to meet its needs. The Company derives a majority of its revenues from project installations and to a smaller extent, maintenance service revenue.

The Specialty Products and Services segment includes three separate businesses:
1.
Evacuation planning
2.
Mobile digital recording
3.
Airorlite Communications

The Evacuation Planning business operates under the Diversified Security Solutions, Inc. name and works with managers of high-rise office buildings to analyze their specific facilities’ needs with emergency preparedness plans. This division provides demonstrations, training and recommendations to clients; develops emergency plans and procedures; and communicates building strategy to the tenants to increase building community unity, awareness and confidence.

The Mobile Digital Recording business operates under the name Viscom Products, Inc. and has developed an integrated standard solution for the deployment of mobile digital recorders on municipal buses and trains.

The Airorlite Communications business provides specialized communications product design, development and engineering related to RF transmission.
 
 
- 7 -
 
HENRY BROS. ELECTRONICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) – (continued)
 
 
The table below shows the sales percentages by geographic location for the following periods:
 
   
Three months ended
  
   
March 31,
  
   
2010
    
2009
  
New Jersey/New York
     54 %     48 %
California
     16 %     16 %
Texas
     7 %     4 %
Arizona
     5 %     8 %
Colorado
     5 %     12 %
Virginia / Maryland
     7 %     10 %
   Integration segment
     94 %     98 %
   Specialty segment
     6 %     2 %
Inter-segment
     0 %     0 %
    Total revenue
     100 %     100 %
                 
2.  Summary of Significant Accounting Policies:

Principles of Consolidation:

The condensed consolidated financial statements include the accounts of the Company.  Acquisitions are recorded as of the purchase date, and are included in the consolidated financial statements from the date of acquisition.  All material intercompany transactions have been eliminated in consolidation.

Use of Estimates:

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue and costs relating to security integration systems projects and service agreements are particularly affected by management’s estimates. The contract sale price and estimated costs are based upon the facts and circumstances known at the time of the proposal. Estimates for the costs to complete the contract are periodically updated during the performance of the contract. Unpredictable events can occur during the performance of the contract that can increase the costs and reduce the estimated gross profit. Change orders to record additional costs may not be approved or can become subject to long negotiations with the customer and can result in concessions by the Company. Considerable judgments are made during the performance of the contract that affects the Company’s revenue recognition and cost accruals that may have a significant impact on the results of operations reported by the Company.
 
Fair Value of Financial Instruments:
 
The carrying amounts of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable, accrued expenses, short and long-term debt, approximate their fair values as of March 31, 2010.
 
Recently Issued Accounting Pronouncements:

In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued. This pronouncement is effective for interim or fiscal periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows. However, the provisions of FASB ASC Topic 855 resulted in additional disclosures with respect to subsequent events. In February 2010, an update to accounting guidance was issued which eliminates the disclosure of the date through which subsequent events have been evaluated.  This update was effective immediately.  The adoption of this amendment did not have a significant effect on our financial statements.
 
- 8 -
 
HENRY BROS. ELECTRONICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) – (continued)
  
 
3.  Earnings Per Share
 
The computation of basic earnings per share is based upon the weighted average number of shares of common stock outstanding during the period. When applicable, the computation of diluted earnings per share includes the dilutive effects of common stock equivalents, less the shares that may be repurchased with the funds received from their exercise and the effect of adding back unrecognized future stock compensation expense. Potentially dilutive common stock equivalents include shares issuable upon exercise of options. Contingent shares are excluded from basic earnings per share.
 
4.  Stock Based Compensation
 
For the three months ended March 31, 2010 and 2009, the Company charged $60,000 to operations in each period for stock based compensation expense.    

A summary of stock option activity for the three months ended March 31, 2010 under the Company’s various Stock Option Plans’ follows:
 
   
Number of Shares
    
Weighted Average Exercise Price
  
   
Outstanding
    
Exercisable
    
Outstanding
    
Exercisable
  
December 31, 2009 (audited)
     997,799       628,866     $ 4.96     $ 5.17  
Granted at market
     —               —          
Exercised
     —               —          
Forfeited or expired
     (10,300 )             6.09          
March 31, 2010 (unaudited)
     987,499       641,866       4.95       5.17  
                                 
There were no stock option grants during the three months ended March 31, 2010.
 
5.  Costs and Billings on Uncompleted Contracts
 
Costs and billing on uncompleted contracts consisted of the following:
 
   
March 31,
    
December 31,
  
   
2010
    
2009
  
Cost incurred on uncompleted contracts
   $ 59,897,785     $ 46,259,927  
Billings on uncompleted contracts
     54,333,975       41,824,268  
    $ 5,563,810     $ 4,435,659  
                 
Included in accompanying Balance Sheets under the following captions:
 
   
March 31,
    
December 31,
  
   
2010
    
2009
  
Costs in excess of billings and estimated profits
   $ 6,374,316     $ 6,003,533  
Billing in excess of costs and estimated profits
     810,506       1,567,874  
    $ 5,563,810     $ 4,435,659  

- 9 -
 
HENRY BROS. ELECTRONICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) – (continued)
 
 
6.  Long-Term Debt

On June 30, 2005, the Company entered into a loan agreement (the “Loan Agreement”) with TD Bank, N.A. pursuant to which TD Bank extended a $4 million two-year credit facility (the “Revolving Loan”), to the Company and refinanced $1 million of existing indebtedness to TD Bank into a five year term loan (the “Term Loan”).
 
On October 6, 2008, the Company executed its fourth amendment to the Revolving Loan with TD Bank, increasing its line of credit from $4 million to $8 million. The Revolving Loan is subject to certain borrowing base limitations.  On November 11, 2009 the term of the Revolving Loan was extended to June 30, 2011.  Advances under the Revolving Loan may be used to finance working capital and acquisitions. Interest is paid monthly in arrears at TD Bank’s prime rate, subject to a minimum floor rate of 4.0% effective November 11, 2009 as part of the extension of the Revolving Loan .  TD Bank has a first priority security interest on the Company’s accounts receivable and inventory.

The Company is required to maintain certain financial and reporting covenants and is restricted from paying dividends under the terms of the Loan Agreement.
 
Long-term debt included the following balances:
 
             
   
March 31,
    
December 31,
  
   
2010
    
2009
  
Revolving line at the prime rate of interest, subject to a minimum floor
            
rate of 4.0% effective November 11, 2009.  Expires June 30, 2011
   $ 2,635,898     $ 4,335,898  
                 
Corporate insurance financed at 5.99% payable in monthly
                
installments thru September 01, 2010
     108,147       194,665  
                 
Capitalized lease obligations due in monthly installments,
                
with interest ranging from 6.4% to 12.7%
     781,755       836,506  
      3,525,800       5,367,069  
Less: Current Portion
     (455,441 )     (536,552 )
    $ 3,070,359     $ 4,830,517  
                 
The weighted average interest rate on the Revolving Loan was 4.0% and 3.35% for the three months ended March 31, 2010 and the year ended December 31, 2009, respectively.
 
7.  Income Taxes
 
The effective income tax rate for the three months ended March 31, 2010 was 46.6%, compared to an effective income tax rate of 45.6% for the three months ended March 31, 2009.  Income tax expense for interim reporting is based on an annual effective income tax rate forecast, which includes estimates and assumptions that could change during the year.  The differences between the effective income tax rate and the U.S. federal statutory rate of 34% principally result from state and local taxes, and differences between the book and tax treatment of certain items that are permanent in nature.

The effective income tax rate for the three months ended March 31, 2010 has not been impacted by any material discrete items.  As of March 31, 2010 the Company has $49,893 of unrecognized liabilities from uncertain tax positions, all of which would impact the Company’s effective tax rate if recognized.  There have been no significant changes during the three months ended March 31, 2010.
 
 
- 10 -
 
HENRY BROS. ELECTRONICS, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) – (continued)
 
 
8.   STOCKHOLDERS’ EQUITY
 
In connection with the acquisition of all the capital stock of CIS Security Systems Corp. (“CIS”) on October 2, 2006, the Company issued an aggregate of 20,000 shares of its common stock, valued at $67,200.  The Company issued an additional 30,000 shares during 2009, 2008 and 2007, and 5,000 shares during the first three months of 2010 of its restricted common stock to CIS’s selling shareholder after CIS met certain performance targets. The issuance of the shares of restricted stock in connection with the aforementioned acquisition was made in reliance upon the exemption provided in section 4(2) of the Securities Act of 1933, as amended.  In addition, the selling shareholder may earn an additional 35,000 shares of the Company’s common stock if CIS achieves certain performance targets through December 2011.
 
9.  Segment Data

Selected information by business segment is presented in the following tables:
 
   
For the three months ended March 31,
  
   
2010
    
2009
  
Revenue
            
Integration
   $ 11,668,478     $ 14,989,646  
Specialty
     772,814       318,566  
Inter-segment
     —       —  
Total revenue
   $ 12,441,292     $ 15,308,212  
                 
Operating Profit
                
Integration
   $ 767,591     $ 1,191,876  
Specialty
     267,121       63,896  
Corporate
     (914,768 )     (904,618 )
Total operating profit
   $ 119,944     $ 351,154  
                 
Selected balance sheet information by business segment is presented in the following table as of:
                 
   
March 31,
    
December 31,
  
   
2010
    
2009
  
Total Assets:
                
Integration
   $ 25,684,025     $ 27,309,364  
Specialty
     1,240,112       1,454,812  
Corporate
     2,654,338       3,928,119  
   Total assets
   $ 29,578,475     $ 32,692,295  
                 
10.  Contingent Liabilities

From time to time, the Company is subject to various claims with respect to matters arising out of the normal course of business. In management’s opinion, none of these claims is likely to have a material effect on the Company’s consolidated financial statements.
 
11.  Related Party Transactions
Richard D. Rockwell, a member of the Board of Directors since November 2007, has been Owner and Chairman of Professional Security Technologies LLC, a full service security systems integrator since 1996.  The Company had revenues from PST of $15,590 and $7,733 for the three months ended March 31, 2010 and 2009, respectively.  These revenues were principally related to the sale of equipment.  There was a balance of $39,425 and $39,192 in accounts receivable as of March 31, 2010 and December 31, 2009, respectively.
 
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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

 Henry Bros. Electronics, Inc., is an established player in the electronic physical security industry, specializing in integrated security systems, and emergency preparedness.

HBE provides products and services to customers in the public and private sectors. Customers include transit authorities, seaports, airports, universities, office-buildings, hospitals and airlines. Each of the Company’s segments markets its products and services nationwide with an emphasis in Arizona, California, Colorado, Maryland, New Jersey, New York, Texas and Virginia.

The company operates through two primary operating segments:
 
1.
Security Systems Integration
 
2.
Specialty Product and Services

The Security Systems Integration business operates under the name Henry Bros. Electronics, Inc. and its approach to client service is core to all of its businesses. At the beginning of each new client relationship, HBE designates one member of its professional staff as the client service contact. This individual is the point person for communications between the client and HBE and often acts as the client's project manager for all of its security needs, which ensures that clients receive the best possible security solution to meet its needs. The Company derives a majority of its revenues from project installations and to a smaller extent, maintenance service revenue.

The Specialty Products and Services segment includes three separate businesses:
1.
Evacuation planning
2.
Mobile digital recording
3.
Airorlite Communications

The Evacuation Planning business operates under the Diversified Security Solutions, Inc. name and works with managers of high-rise office buildings to analyze their specific facilities’ needs with emergency preparedness plans. This division provides demonstrations, training and recommendations to clients; develops emergency plans and procedures; and communicates building strategy to the tenants to increase building community unity, awareness and confidence.

The Mobile Digital Recording business operates under the name Viscom Products, Inc. and has developed an integrated standard solution for the deployment of mobile digital recorders on municipal buses and trains.

The Airorlite Communications business provides specialized communications product design, development and engineering related to RF transmission.
 
OUR VISION AND STRATEGY

Our vision is to maintain our leadership position in security technology. We intend to do this in part by:

 
·
Providing advice on product selection and system design;
 
·
Examining and thoroughly testing each security product as it would be set up for use in our customers’ facilities; and,
 
·
Using only systems and components that are reliable and efficient to use.

In addition to growing the business organically, we are opportunistically open to the possibility of pursuing the strategic acquisition of synergistic integrators and specialty products and service companies.  To finance our acquisitions, we have used a combination of internally generated cash, the sale of Company common stock and bank debt. We currently have an $8 million revolving credit facility, subject to certain borrowing base limitations, with TD Bank.  Borrowings under the revolving credit facility were $2,635,898 at March 31, 2010. It is our expectation and intent to use cash and to incur additional debt as appropriate to finance future working capital and acquisitions.  Additionally, to fund future acquisitions we would consider the issuance of subordinated debt, the sale of equity securities, or the sale of existing Company assets.
 
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TRENDS

Our revenue forecast for 2010 is expected to fall within a range of $60 million to $65 million.  We anticipate our overall average operating margins for our business to be in the range of 4.0% to 5.0% for the year ended December 31, 2010, as compared to an operating loss of 1.3% in 2009 and an operating profit of 5.0% in 2008.  
 
There are several factors impacting operating margins, including levels of competition for a particular project and the size of the project.  As a significant amount of our costs are relatively fixed, such as  labor costs, increases or decreases in revenues can have a significant impact on operating margins.  The Company continually monitors costs and pursues various cost control measures and sales initiatives to improve operating margins. 

In February 2008, the Company entered into a subcontractor agreement with Global Security & Engineering Solutions, a division of L-3 Services, Inc. (the “L-3 Contract”) pursuant to which L-3 would issue task orders under its Indefinite Quantity Firm Fixed Price Contract with the U.S. Marine Corp Systems Command to deliver a Tactical Video Capture System (“TVCS”).  TVCS is used for real-time visualization and situational awareness while Marine units are conducting military operations in urban terrain training exercises.  The performance period of the contract is three years.  In the first quarter of 2010, the revenue recognized under this contract represented $0.7 million, compared to $1.5 million in the first quarter of 2009. There were outstanding task orders included in our backlog of approximately $2.9 million at March 31, 2010.  

Three Months Ended March 31, 2010 compared to March 31, 2009
 
   
Three months ended March 31,
        
   
2010
    
2009
    
% change
  
Revenue
   $ 12,441,292     $ 15,308,212       -18.7 %
Cost of revenue
     8,864,290       11,086,198       -20.0 %
Gross profit
     3,577,002       4,222,014       -15.3 %
Operating expenses:
                        
Selling, general & administrative expenses
     3,457,058       3,870,860       -10.7 %
Operating profit
     119,944       351,154       -65.8 %
                         
Interest income
     41,994       6,970       502.5 %
Other income
     4,465       13,186       -66.1 %
Interest expense
     (58,977 )     (65,701 )     -10.2 %
Income before income tax expense
     107,426       305,609       -64.8 %
Income tax expense
     50,039       139,487       -64.1 %
Net income
   $ 57,387     $ 166,122       -65.5 %
                         
Revenue - Revenue for the three months ended March 31, 2010 was $12,441,292, representing a decrease of $2,866,920 or 18.7%, as compared to revenue of $15,308,212 for the three months ended March 31, 2009.   Our integration segment revenues were negatively impacted in the first quarter of 2010, compared to the same period in 2009, principally due to the protracted credit freeze and economic downturn,  the wind down of a large project in our Colorado operation in 2009 that did not repeat in 2010, and a number of larger projects included in the company’s December 31, 2009 backlog that had scheduled start dates beginning with the Company’s second quarter. Lower revenues under the L-3 Contract also contributed to this period-over-period decline. The L-3 Contract generated $0.8 million lower revenue in 2010 compared to 2009.  Partially offsetting these declines were increased revenue in the first quarter of 2010 over the prior year from our Texas and Airorlite operations.  Revenue in the first quarter of 2010 includes a 59% increase in the Texas market from the revenue recorded in the first quarter of 2009.
 
Cost of Revenue - Cost of revenue for the three months ended March 31, 2010 was $8,864,290 as compared to $11,086,198 for the three months ended March 31, 2009. The gross profit margin for the three months ended March 31, 2010 was 28.8 % as compared to 27.6% for the three months ended March 31, 2009.   The decline in gross profit dollars was directly related to the decline in revenue discussed above. Although California’s gross profit as a percent of revenue (“gross margin”) declined in the first quarter of 2010 compared to the first quarter of 2009, the gross margin in our Colorado, Arizona and Mid-Atlantic operations each increased in this same comparable period, reflecting management’s increased cost containments and efficiency improvements efforts in order to the lessen the negative impact of the protracted credit freeze and economic downturn.  Partially offsetting the declines was increased gross profit dollars and margin from our Airorlite operations.
 
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Selling, General and Administrative Expenses - Selling, general and administrative expense was $3,457,058 ­­for the three months ended March 31, 2010 as compared to $3,870,860 for the three months ended March 31, 2009. This decrease of $413,802 or 10.7% was mainly attributable to lower personnel costs and overall cost containment reflecting management’s efforts to lessen the negative impact of the protracted credit freeze and economic downturn.
 
Interest Income – Interest income for the three months ended March 31, 2010 was $41,944 as compared to $6,970 for the three months ended March 31, 2009.  This increase was attributable to  interest earned on an income tax refund and higher average cash balances during the three month period ended March 31, 2010 versus the same period in the prior year.
 
Interest Expense - Interest expense for the three months ended March 31, 2010 was $58,977 as compared to $65,701 for the three months ended March 31, 2009.  The decrease is due to the average outstanding revolving debt balance being $1,254,444 lower in the three month period ended March 31, 2010 versus that in the three months ended March 31, 2009.  The lower outstanding revolving debt balance was offset in part by a 75 basis point higher average  rate of interest charged in 2010 compared to the same period in 2009.  This higher rate of interest was the result of interest now being paid at TD Bank’s prime rate, subject to a minimum floor rate of 4.0% as part of the extension of the Revolving Loan, which was effective as of  November 11, 2009.
 
Tax  Expense – The Company recognized income tax expense for the three months ended March 31, 2010 of $50,039, based upon  income  before income taxes of $107,426, compared with income tax expense of $139,487 for the three months ended March 31, 2009, based upon income before income taxes of $305,609.   Income tax expense for interim reporting is based on an annual effective income tax rate forecast, which includes estimates and assumptions that could change during the year.  The differences between the effective income tax rate and the U.S. federal statutory rate of 34% principally result from state and local taxes, and differences between the book and tax treatment of certain items that are permanent in nature.  The effective income tax rate for the three months ended March 31, 2010 was 46.6%, compared to an effective income tax rate of 45.6% for the three months ended March 31, 2009.
 
Net Income - As a result of the above noted factors our net income was $57,387 for the three months ended March 31, 2010, compared to net income of $166,122 for the three months ended March 31, 2009. This resulted in diluted income per share of $0.01 on weighted average diluted common shares outstanding of 6,059,458 for the three months ended March 31, 2010, as compared to diluted earnings per share of $0.03 on weighted average diluted common shares outstanding of 6,143,851 for the three month period ended March 31, 2009.
 
Liquidity and Capital Resources
 
As of March 31, 2010, we had cash and cash equivalents of $1,685,698.  Our net current assets were $12,318,477 at March 31, 2010 versus $13,748,867 at December 31, 2009.  Total debt at March 31, 2010 was $3,525,800 compared to the December 31, 2009 balance of $5,367,070.
 
Cash provided by operating activities was $690,845 during the three months ended March 31, 2010.  The most significant provider of cash resulted from a net decrease in accounts receivable of $2,329,204.  Partially offsetting this was a use of cash resulting from a decrease in accounts payable and billings in excess of costs and estimated profits of $948,656 and $757,368, respectively, combined with an increase in costs in excess of billings and estimated profits of $370,783.
 
Cash used in investing activities was $58,712, comprised of $46,212 for the purchase of property and equipment and $12,500 of earn-out payments associated with the CIS acquisition.
 
Cash used in financing activities was $1,863,481, all of which represents the net repayments of bank loans and other debt.
 
Borrowings under the revolving credit facility were $2,635,898 at March 31, 2010 and were $4,335,898 at December 31, 2009.  On October 6, 2008, the Company executed an amendment to its revolving credit agreement with TD Bank, increasing its line of credit from $4 million to $8 million. On November 11, 2009 the term of the revolving credit agreement  was extended to June 30, 2011. As part of this extension, interest will continue be paid monthly in arrears at TD Bank’s prime rate, however, interest will now be subject to a minimum floor rate of 4.0%. The Company is required to maintain certain financial and reporting covenants and restrictions on dividend payments under the terms of the Loan Agreement with TB Bank, N.A. (See Note 6 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q).
 
Backlog and Bookings
 
Booked orders increased $3,044,260 to $14,785,023 in the first quarter of 2010, as compared to $11,740,763 same quarter of 2009.

The Company’s backlog of $30,365,525 at March 31, 2010 increased $10,231,731 from the March 31, 2009 backlog of 20,133,794.  The principal drivers of this increase were increase bookings in our New Jersey / New York, Texas and California operations.
 
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Critical Accounting Policies and Estimates
 
Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for year ended December 31, 2009.  Some of these policies require management to make estimates and assumptions that may affect the reported amounts in the Company’s financial statements.
 
Forward Looking Statements
 
When used in this discussion, the words "believes", "anticipates", "contemplated", "expects", or similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses, significant variations in recognized revenue due to customer caused delays in installations, cancellations of contracts by our customers, and general economic conditions which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company undertakes no obligation to publicly release the results of any revisions to those forward looking statements that may be made to reflect events or circumstances after this date or to reflect the occurrence of unanticipated events.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
We have one revolving credit facility for which the interest rate on outstanding borrowings is variable and is based upon the prime rate of interest, subject to a minimum floor rate of 4.0%.  At March 31, 2010, there was $2,635,898 outstanding under this credit facility.

Our business is impacted by the health of the U.S economy.  Current economic conditions have caused a decline in business spending which has adversely affected our business and financial performance and our operating results.  Accordingly, our business and financial performance has been adversely affected by current economic conditions, and any future deterioration of economic conditions, could cause a further reduction in the availability of credit in the capital markets to our customers.
 
Item 4.  Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
 
The Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2010.   Based on such evaluation, such officers have concluded that, as of March 31, 2010, the Company’s disclosure controls and procedures are effective.
 
(b) Changes in Internal Control Over Financial Reporting
 
During the three months ended March 31, 2010, management did not identify any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Part II - Other Information
 
Item 1.  Legal Proceedings
 
We know of no material litigation or proceeding, pending or threatened, to which we are or may become a party.
 
Item 6.  Exhibits
 
Number
  
Description
     
31.1
  
Rule 13a-14(a) 15d-14(a) Certification of Chief Executive Officer
31.2
  
Rule 13a-14(a) 15d-14(a) Certification of Chief Operating Officer
31.3
  
Rule 13a-14(a) 15d-14(a) Certification of Chief Financial Officer
32
  
Section 1350 Certification

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  Henry Bros. Electronics, Inc.  
  (Registrant)  
       
Date: May 12, 2010
 By:
/s/ JAMES E. HENRY
  
   
James E. Henry
  
   
Vice Chairman, Chief Executive Officer, Treasurer and Director
  
       
Date: May 12, 2010
 By:
/s/ BRIAN REACH
  
   
Brian Reach
  
   
President, Chief Operating Officer, Secretary and Director
  
       
Date: May 12, 2010
 By: 
/s/ JOHN P. HOPKINS
  
   
John P. Hopkins
  
   
Chief Financial Officer
  
       
       
       
       
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