Article Excerpt:
TWST: What is Herley Industries?Mr. Kelley: Herley Industries was started in 1965 on Long Island and has been grounded since day one in the microwave part of engineering and production. Early on from its origination, Herley was a manufacturer of microwave components and quickly elevated into microwave integrated assemblies. Then, the natural progression was microwave subsystems and integrated subsystems, and, although we are not primarily a systems manufacturer, we have elevated into subsystems and systems. 95% of Herley's business is done either directly or indirectly through prime contractors with the Defense Department or defense services of the United States. We do approximately 23% to 30% of that military business with allies in 23 to 27 countries, depending upon the year. We have elevated our capabilities. We now have eight facilities in addition to our corporate headquarters and manufacturing location in Lancaster, Pennsylvania. We moved from Long Island, where we originated when we started in 1965, to Lancaster, Pennsylvania in the early 1970s and have grown from zero in 1965 to approximately $180 million, which is the approximate number of revenues that Herley will have when we complete our fiscal 2006, which ended at the end of July of this year.
TWST: Give us an idea about what the various marketplaces look like and
what's happening with respect to the customer and client base in
general.
Mr. Kelley: As one might expect for US companies driven by the US
government, we do a fair amount of our business directly with the
government, even though we are a mid-tier and not a prime contractor.
The business over the last five to eight years has been on an uptick;
defense spending has increased. We look at niches within the defense
industry, but we do not do all things. We select where we have specific
expertise and select markets and programs that we think are going to
have long legs that will be in production five, 10 or more years. For
example, the F-16 is a product that we started on in the early 1970s. We
still are on it and still are generating income and there are
approximately 4,000 plus F-16 aircraft worldwide that are now in need of
continuing spares, repairs, and upgrades. That is an example of the type
of platform that Herley likes to achieve a position in. The business of
defense is not a spiked business, either up or down ' it's rather a
moderate growth platform to be on. So we are looking at organic growth
somewhere in the 5% to 10% area with any additional growth coming from
acquisition. So in any company within the Defense Department, as a
customer, you are not going to see significant increases year over year
unless it's caused by an acquisition. But on the other side, you are not
going to see anything crash to an unexpected level because for US
defense companies, the market has been extremely good and is always very
consistent. With a total budget of roughly $450 billion that grows at
approximately 5% a year, you have a significant amount of dollars being
funneled into a very limited number of defense contractors. As has been
seen over the years, there has been significant consolidation within the
defense industry, driven by the government itself, which no longer
objects to companies that are the sole qualified supplier of hardware.
So you have a significant reduction in the number of companies that make
aircraft, and that trickles down to companies to Herley where there are
fewer microwave companies that supply the prime contractors and that '
at least in the eyes of the government ' has been good for business. It
has been able to reap the benefits of continual production. So that is
one of the major changes to the defense industry: consolidation. The
other key component of the defense industry and those who are involved
in it is the significant barriers to entry. There is a level of quality
control of qualification procedures that, once a company gets a contract
to produce a product ' whether it's a plane or a ship or even when you
get to Herley's various integrated microwave components or subsystems or
carrier landing systems ' it is significantly difficult for someone to
come in and offer a product where we could lose the business or anyone
who has the contract could lose the business. It is due in large part to
the aversion to risk that is with the military, in as much as these
products have to work the first time every time, some in significant
temperatures both high and low, and have all sorts of environmental
actions taken against it. So it is a very familiar industry because the
players are not changing and the people within the companies typically
don't change either. You have a discrete group of companies looking to
grow and Herley's growth has been to leverage what we are currently
doing today into new opportunities tomorrow. So we are working with the
Army, Navy and the Air Force, where we have a foothold in a program and
try to work our way up with the prime contractor to take on more and
more business with the F-16 or with the F-18 and pursue it and market
it. That allows our customers, which are the Boeings, Lockheeds,
Raytheons and General Dynamics of the world, to allocate their
resources, i.e., engineering expertise, to larger programs that they are
actively pursuing. We communicate with our customers, which are the
prime contractors, usually on occasion with the US government, and
within that, we look to leverage our current expertise and our current
position in a program into more and more of that program or platform.
That's how we get our growth, in addition to competing with companies on
new programs and platforms that come in.
Tickers included in this excerpt: HRLY
TWST Newsletter
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.