Herley Industries, Inc.

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Herley Industries, Inc.

10 Industry Drive
Lancaster, Pennsylvania 17603
U.S.A.
Telephone: (717) 397-2777
Fax: (717) 397-9503
Web site: http://www.herley.com

Public Company
Incorporated: 1965
Employees: 511
Sales: $61 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: HRLY
NAIC: 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing; 334419 Other Electronic Component Manufacturing

Herley Industries, Inc. is a small but innovative firm that designs, develops, and manufactures flight instrumentation systems and their related components, as well as microwave products that are marketed to the U.S. government, many foreign governments, and a long list of aerospace companies around the world. Included in the company’s list of flight instrumentation systems are command and control systems, transponders, flight termination receivers, telemetry transmitters and receivers, pulse code modulator encoders, and scoring systems. Herley’s microwave products are sold primarily for application in the defense electronics industry and include systems and components for radar and defense electronic systems on tactical fighter aircraft, airborne and shipboard navigation and communications, missile guidance systems, satellite communications, and automatic test equipment. Organized into two product groups, the Space and Communications Product Group located in Lancaster, Pennsylvania, and the Microwave Products Group in Woburn, Massachusetts, the company has launched an aggressive acquisitions strategy that includes the purchase of firms to expand its market base, especially overseas. In fact, Herley has increased its revenues coming from overseas customers significantly during the past five years, with nearly 29 percent of its total revenues in fiscal 1999 originating outside the United States. Early in the year 2000, Herley entered the wireless telecommunications market, establishing subsidiary Herley Wireless Technology Inc.

1960s Origins

Herley was founded by Lee N. Blatt and his partner Herman Kagan. Blatt, the driving force behind the company during the early years, was born and raised on the Eastern Seaboard of the United States, spending much of his youth in the state of New York. He attended Syracuse University in upstate New York, where he devoted himself to the study of engineering, and graduated with a Bachelors Degree in Electrical Engineering. He immediately sought a job in the burgeoning field of the electronics industry.

After working in a variety of jobs within the industry, Blatt began to work towards establishing his own business. With his background and contacts developed over the years, Blatt decided that he would design and manufacture products for military applications, specifically having to do with microwave devices. Yet the young man’s ambition was mitigated by his realization that he had no formal training for starting a business venture of his own. As a result, Blatt decided to attend City College of New York in order to provide for himself the necessary skills to successfully launch his own firm. In a short span of time, with diligence and intense concentration, Blatt graduated with a Masters Degree in Business Administration. Now prepared with a suitable background, Lee Blatt founded an engineering firm with partner Herman Keegan, calling the company Herley (formed by a contraction of the partners’ first names) and setting up headquarters in 1965 in Long Island, New York.

At the beginning, Blatt and his small team of electrical engineers focused on the design and manufacture of solid state microwave devices for use in tactical military programs. Specifically, the company produced lower power, broad band microwave integrated assemblies for the U.S. electronic defense business. The time was right for this business, as the United States was involved in the Vietnam War, and the company soon found that solid state microwave devices were highly lucrative products.

After the war, however, the demand for Herley microwave products declined. Seeking to diversify, the company began producing a sideline of decorative giftware. An odd departure for the electronics firm, the pewter giftware was manufactured by a central Pennsylvania foundry, and Herley eventually moved its headquarters to Lancaster, Pennsylvania, to be closer to its supplier.

Fortunately for the company, in the late 1970s when the market for its giftware sideline dried up, Herley found itself in a position to return to its defense work. During the Reagan administration, as U.S. defense spending increased dramatically, Herley focused again on designing and manufacturing high-tech electrical components for tactical U.S. military applications.

Growth and Expansion

For most of the 1980s, the company grew at a conservative pace. This, however, changed in the late 1980s, when a new presidential administration came into office, and defense spending was cut dramatically. Moreover, with larger corporations using strategies of vertical integration to achieve economies of scale, manufacturing themselves the same solid state microwave devices as Herley offered, the company’s financial viability was threatened.

In response, Herley management decided to pursue a more aggressive expansion policy, looking to broaden its market share via acquisitions. Blatt, still very well informed about developments within the electronics industry, decided to make one of the most important strategic acquisitions ever made for the welfare of his company. With the acquisition of a relatively small and unknown firm that designed and manufactured range safety transponders for military aircraft, Herley immediately placed itself in a favorable position to take advantage of a burgeoning niche market.

Transponders are used for a variety of purposes having to do with aircraft, including range safety, the identification of friend or foe, scoring systems, and command and control. The transponder itself is a small self-contained electronic system which is made up of a transmitter, sensitive receiver, and internal signal processing equipment. The transponder is used in aircraft to receive signals from radar, change the amplification and frequency of those signals, and send back a reply on a different frequency and signal level if necessary. In this way, the tracking radar locks onto the signal, a far superior method than tracking aircraft by employing the method of skin reflection, especially when adverse weather conditions are present.

Herley began to apply its recently acquired transponder business to the specific area of unmanned aerial vehicles. The company’s transponders enabled the U.S. military and the National Aeronautical and Space Administration (NASA) to track space launches and unmanned aerial vehicles, missiles and target drones so that these objects wouldn’t interfere with the flight path of any military or commercial manned aircraft. In addition, the company used the technology and engineering skills of its recent acquisition to design and develop a flight termination receiver, or FTR, that is installed in an unmanned missile, target drone, or space launch as a safety device. With a built-in decoder that enables it to receiver a series of highly complex audio tones, the FTR was then able to trigger an explosive charge that destroyed the unmanned vehicle.

Strategic Acquisitions During the 1990s

With the success of its first acquisition, management at the company began look seriously at the prospect of a growth through acquisition strategy. Blatt and his management team were convinced that, by using this as a method of operation, each carefully considered subsequent acquisition could place them in an more advantageous market position, and thereby increase revenues. Accordingly, Herley purchased all of the assets of Micro-Dynamics, Inc., a microwave subsystem designer and manufacturer located in Woburn, Massachusetts. Soon afterwards, management decided to consolidate all of its solid state microwave device design and manufacturing facilities at the Woburn site. In June 1993, the company purchased Vega Precision Laboratories, Inc., situated in Vienna, Virginia, and in October of the same year moved that company’s operations to Lancaster, line. In March 1994, Herley entered into a strategic licensing agreement for the exclusive manufacture and sale of the Multiple Aircraft GPS Integrated Command & Control systems. In July 1995, management decided to make another purchase. This time it was the government systems business of Stewart Warner Electronics Corporation of Chicago, Illinois, a well-known and highly respected manufacturer of “IFF” (Identification Friend or Foe) interrogator systems and of high frequency radio.

The two most important acquisitions, however, included the purchase of Metraplex Corporation in August 1997 and the purchase of General Microwave Corporation in 1999. Since its inception in 1972, Metraplex Corporation had been providing a wide range of services and products to the commercial aerospace, defense, automotive, construction and mining industries. The company was the leading designer and manufacturer of pulse code modulation and frequency modulation systems used in the testing of space launch vehicle instrumentation, aircraft flight testing, and other types of vehicle testing, including industrial, amphibian, and automotive. Herley’s acquisition of Metraplex enabled the company to develop a fully-integrated, and complete airborne data link system.

Key Dates:

1965:: Lee Blatt and Herman Kagan found Herley, Inc. and begin to design and manufacture solid state microwave devices for the U.S. military.
1971:: Company begins winning larger contracts from U.S. government.
1986:: Herley makes first acquisition, a firm that designs range safety transponders for military aircraft.
1993:: Micro-Dynamics, Inc. and Vega Precision Laboratories, Inc. are acquired.
1999:: Company acquires General Microwave Corporation.

The acquisition of General Microwave Corporation was just as important. General Microwave Corporation was involved for years in the design, manufacture, and marketing of a wide variety of microwave components and subsystems, as well as electronic testing and measurement equipment. Although the firm’s headquarters was located in Farmingdale, New York, General Microwave Corporation also operated facilities in Massachusetts and Israel. The acquisition was motivated by Herley’s strategy to expand its product line in the field of microwave components and electronic systems, as well as expanding its client list in the commercial telecommunications industries. After its purchase, management at Herley quick incorporated the company’s product line into its own operating facilities where appropriate, and relocated some of its other operations to smaller, more efficient and less expensive sites.

The 1990s and Beyond

In order to remain a viable firm in an extremely competitive industry, management was convinced that Herley’s future growth depended largely on it ability to expand its technology, product line, and manufacturing processes in the most cost-effective manner. One area in which Herley’s strategy was undoubtedly successful was in the high frequency communications equipment that it designed, manufactured and sold to the U.S. Navy. Products that the company developed, such as high frequency radio and IFF interrogators, were used by the U.S. Navy and foreign navies when they conducted joint military exercises. IFF interrogators were not only used as shipboard equipment by the U.S. Navy and its allies, but were also used along long stretches of isolated coastlines as a type of silent sentry. For years, Herley has provided this type of equipment to the Republic of Korea, and new contracts from that nation were imminent. In 1999, the company was listed by Aviation Week & Space Technology as one of the Top 20 Best Performing Suppliers in the industry.

During the late 1990s, company management made a concerted effort to expand its product line so that its reliance upon government contracts would diminish as its market for the commercial market expanded. Herley’s strategic acquisitions were part of this effort and provided both the opportunity for growth and for expanding into the international marketplace. Toward that end, in early 2000, Herley formed a new subsidiary, Herley Wireless Technology Inc., which would be staffed largely by engineers who came to Herley via the General Microwave acquisition as well as the acquisition of Robinson Laboratories, completed in January 2000. The new concern would seek to compete in the rapidly expanding commercial wireless industry. As the company prepared to enter a new century, Herley was fortunate to have an astute and far-sighted management team, still headed by Lee Blatt, with enough experience and prudence to forge its own way through a highly competitive industry.

Principal Subsidiaries

Herley Wireless Technology Inc.

Principal Divisions

Herley-MDI; Herley-Metraplex; Herley-Vega; Global Security Systems.

Principal Operating Units

Space and Communications Product Group; Microwave Product Group.

Principal Competitors

Signal Technology; L-3 Communications Corporation; Microsystems, Inc.; AMP, Inc.; Remec, Inc.; BAE Systems, Inc.; Racal Electronics, Inc.; Raytheon Corporation.