QUOTE AND NEWS
Benzinga  Oct 9  Comment 
Kratos Defense & Security Solutions, Inc. (Nasdaq: KTOS), a leading National Security Solutions provider, announced today that its Electronic Products Division has received an option award valued at $2.2 million to supply AN/ARA-63 Tactical...
Benzinga  Jul 1  Comment 
Kratos Defense & Security Solutions. (NSDAQ: KTOS), a leading National Security Solutions provider, announced today that its Electronic Products Division has received an option award valued at $3.3 million to supply AN/ARA-63 Tactical Instrument...
Benzinga  Jul 30  Comment 
Kratos Defense and Security Solutions (Nasdaq: KTOS) announced today that its Herley Industries, Inc. subsidiary has received a contract valued at $11.45 million from a major prime contractor for the continuing production of electronic hardware...
Globe Newswire  Jul 2  Comment 
SAN DIEGO, July 2, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc.(Nasdaq:KTOS), a leading National Security Solutions provider, announced today that Richard Poirier has been promoted to President of its newly formed Electronic
Globe Newswire  May 24  Comment 
SAN DIEGO, May 24, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, announced today that its Herley Industries, Inc. subsidiary has received an initial $4.1 million
Globe Newswire  Apr 30  Comment 
SAN DIEGO, April 30, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, announced today that its Herley Industries, Inc. subsidiary has received a $1.4 million release
Globe Newswire  Apr 24  Comment 
SAN DIEGO, April 24, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, announced today that its Herley Industries, Inc. subsidiary has been awarded a contract valued at
Globe Newswire  Apr 18  Comment 
SAN DIEGO, April 18, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, announced today that its Herley Industries, Inc. subsidiary has received a $24 million purchase
Globe Newswire  Mar 22  Comment 
SAN DIEGO, March 22, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, announced today that its Herley Industries, Inc. subsidiary has received an award valued at $5.7
Globe Newswire  Mar 2  Comment 
SAN DIEGO, March 2, 2012 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, announced today that its Herley EW Simulation Technology Ltd. (EWST) subsidiary has received a




 
TOP CONTRIBUTORS

Herley Industries (HRLY) makes microwave communication devices used in radar systems, flight instruments and missile guidance systems for military and civilian aircraft. The company also makes MRI systems used in universities and research centers. Although HRLY does maintain a product catalog, many of the products it produces are custom made to the needs of a particular government or corporation.

The U.S. government is the company's biggest client, as over half of HRLY's annual sales are tied either directly or indirectly to government contracts. Any increase or cut in reassessed defense appropriations significantly impact the company's sales. Moreover, HRLY's contracts are highly concentrated with the company's top 5 customers accounting for 32% of the company's sales in fiscal year 2007. [1]

Company Overview

Herley Industries (HRLY) is a high tech manufacturer that supplies customers in the defense, health care, and research industries. Its products range from MRI systems for use in research centers to telemetry systems used in missile and target testing.[2] HRLY is reliant on a handful of large customers, including the United States and foreign governments and militaries for a substantial portion of its net sales.[3]

Business Financials

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HRLY 2008 Net Property by Geographic Location[4]
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HRLY 2008 Geographic Net Sales by Place of Contract Performance[5]

In fiscal year 2007, Herley Industries had net sales of $163MM and a net income of $3.1MM.[6] HRLY achieves the majority of its revenue through the sales of microwave devices for the Department of Defense as well as foreign militaries. The devices developed by HRLY are not often stand-alone systems, but are incorporated into over 120 platforms produced by third party defense contractors.[7] These devices include:

  • Telemetry Systems: are most often used for communication with air platforms such as unmanned aerial vehicles (UAV) or missiles. Telemetry systems are particularly useful in testing scenarios, in which platforms communicate position information with ground stations in real time.
  • Airborne Data Link Systems: can include telemetry systems to communicate, but also implement components to digitally encode data before it is transmitted.
  • Pulse Code Modulation Systems: are telemetry systems specifically designed to operate in extreme conditions. They are often used in automobile crash testing, as well as the testing of space and amphibious vehicles.
  • Command and Control Systems: enable humans to operate vehicles such as UAVs in real time in both test and battle conditions.
  • Transponders: encompass a broader range of communication devices including command and control systems, range safety devices, and Identification Friend or Foe (IFF) systems. Transponders are often used in modern aircraft to aid air traffic control in monitoring nearby aircraft. The transponder transmits specific information to a receiver including aircraft altitude, heading, and designation, making it easier for air traffic controllers to track flights than with radar alone. An IFF system includes the ability to securely transmit identification codes to differentiate itself from enemy transponders.
  • Flight Termination Receivers: decode termination signals sent from a ground operator to detonate explosives within a platform being tested. If a missile or UAV does not adhere to its flight path, the FTR ensures that it may be destroyed safely.
  • Microwave Integrated Circuits: are tiny components of larger microwave systems often used to modify the frequency of microwaves. Microwave integrated circuits are used in cellular phones to send and receive signals.
  • Radar Threat and Countermeasure Simulation Systems: are used to train air and ground personnel to operate equipment used in electronic warfare.[8]
HRLY actively maintains a small inventory only of medical products such as MRI systems for research centers and universities. Products for defense contractors are generally produced after they are ordered.[9]
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HRLY Net Sales/Net Income[10]

HRLY typically supplies a small number of customers responsible for over half of HRLY's annual net sales. In fiscal year 2007, about 32% of net sales came from prime defense contractors: Northrop Grumman (NOC), Lockheed Martin (LMT), Raytheon Company (RTN), Boeing Company (BA), BAE Systems (BAESY), and Harris (HRS). [11] Another 20% of net sales are attributable to US government contracts and 27% come from international customers.[12] Although net sales fell by $13.2MM in 2007 from the previous year, HRLY maintains that the majority of this decrease was the result of the timing of cyclical contracts and the completion of several contracts for microwave devices. However, an indictment against the company and resulting four month suspension against receiving government contracts in 2006 also contributed to the decline.[13] The U.S. Government claimed that HRLY had made excessive profits on the sale of voltage control oscillators and power heads to the order of $2.8MM. On May 5, 2008, a court approved settlement was reached in which HRLY was to pay $3.5MM in fines and $6MM in return for a release from civil liability.[14]

Trends and Forces

Termination of Government Contracts Reduces Future Revenue

HRLY estimates that between 64% and 67% of its net sales go to the U.S. Government each year either directly, or through a contractor or subcontractor. Most contracts it receives are renewed annually pending the approval of the congressional appropriations committees each year, and can be terminated without prior notice. Although HRLY receives payment for all work done on completed contracts, revenue projections for future years that incorporated those contracts will fall short of their goals if those contracts are terminated.[15]

Small Number of Customers Increase Negative Effects of Project Failures

In 2006, certain HRLY employees purposefully recorded false data while testing a component of a microwave system in a facility in Lancaster, Pennsylvania. The defense contractor that later received the defective devices found that they did not perform to specifications and notified HRLY. Although HRLY initiated an investigation of the discrepancy through a third party, HRLY was suspended from receiving new contracts from the Department of the Navy. The suspension was in place for over a year and was lifted on August 15, 2007.[16] HRLY also faced an indictment from the US Government in 2006 for excessive profits on several products and received a suspension on new government contracts for several months. Because approximately 20% of HRLY's net sales are attributable to direct government contracts, future suspensions have the potential to decrease revenue significantly.

Fixed cost contracts exacerbate the effect of rising costs on HRLY's profitability

Because of HRLY's heavy use of fixed cost contracts, effects of miscalculated costs within projects are amplified. If HRLY agrees to a fixed cost contract and the price of raw materials for a project increases, margins on that project decrease. If the costs of a project are so severely underestimated that Herley is losing money on the project it can either cancel the project or absorb the cost overrun and accept the loss in earnings.[17]

Competition

The lines between customer and competitor are blurred for HRLY. As the defense contractors HRLY supplies achieve greater in house capabilities to manufacture microwave components for their own systems, HRLY loses sales.

Contractors using HRLY systems as components of larger platforms

Boeing Company (BA)

Boeing produces both civilian and military aircraft as well as other systems relating to human space flight, missile defense, satellites, and their launch systems. Boeing often incorporates HRLY electronics into its platforms.[18]

Lockheed Martin (LMT)

Lockheed Martin also produces aerospace systems as well as logistical mission support systems and electronic systems. In fiscal 2007, 84% of Lockheed Martin's net sales were associated directly or indirectly with U.S. Government contracts. 13% resulted from sales to foreign governments and the remaining 3% resulted from sales to commercial customers.[19]

Northrop Grumman (NOC)

Northrop Grumman produces aerospace and electronic systems for the U.S. Government in addition to several classes of warships including aircraft carriers, amphibious assault ships, and Aegis guided missile cruisers.[20]

Direct Competitors

Anaren (ANEN)

Anaren produces the majority of the microwave devices it manufactures for the defense industry. They are most commonly used in radar, jamming, beamforming, and receiver applications. The commercial systems it designs and manufactures include components of satellite TV receivers and Bluetooth communication systems..[21]

Cobham Defense Electronic Systems

Cobham Defense Electronic Systems is one of four divisions of the company, Cobham PLC, a British defense contractor. CDES produces microwave communications systems for air, sea, and ground vehicles, and operates subdivisions in the United States including REMEC Defense and Space Inc. in San Diego.[22]





References

  1. "HRLY 2007 10K, pg. 3,17"
  2. "HRLY 2007 10K, pg. 6,9"
  3. "HRLY 2007 10K, pg. 3"
  4. HRLY 2007 10-K pg. F-25  
  5. HRLY 2007 10-K pg. F-25  
  6. HRLY 2007 10-K pg. 23  
  7. HRLY 2007 10-K pg. 6  
  8. HRLY 2007 10-K pg. 6-8  
  9. HRLY 2007 10-K pg. 10  
  10. HRLY 2007 10-K pg. 23  
  11. "HRLY 2007 10K, pg. 3,17"
  12. "HRLY 2007 10K, pg. 10,17"
  13. HRLY 2007 10-K pg. 27  
  14. Herley Industries, Inc. Announces Settlement Agreement With U.S. Government.
  15. HRLY 2007 10-K pg. 27  
  16. HRLY 2007 10-K pg. F-7  
  17. HRLY 2007 10-K pg. 16  
  18. "Herley Industries, Inc. Receives a $2 Million Award for Boeing CALCM Test Kit Components, PR Newswire, 11-08-07"
  19. "Lockheed Martin Corp (New York Stock Exchange), Reuters"
  20. "Northrop Grumman Corp (New York Stock Exchange), Reuters"
  21. "Anaren Inc (Nasdaq), Reuters"
  22. "Cobham PLC"
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