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Biometric Research Notes: FLIR Systems


The stock price of FLIR Systems is projected to rise over 25 percent over the next year. The firm which focuses on the defense, security and law enforcement segments however will be affected by economic instability and by lowered rates of U.S. military expenditures. S&P has placed a hold recommendation on the stock.

FLIR Systems (NASDAQ: FLIR) designs, manufactures and markets thermal imaging and broadcast camera systems for use in commercial and government markets.

Founded in 1978, the company makes thermal imagers, thermal imager components, as well as larger systems containing thermal imagers along with other sensors, for both commercial and military applications.

FLIR is a component of the S&P 500 index with annual revenues in excess of USD 1 billion annually as of 2009. The company has had several accounting scandals concerning backdating of stock options and claims of fraudulent accounting. As of 2009, Earl R. Lewis is the chief executive officer, chairman of the board, and president of the company that employs 1,900 people worldwide.

FLIR took its name from the acronym for forward-looking infrared imaging systems. The company began in 1978 with airborne IR systems, and developed from 1978 to 2004 through product development and acquisitions of related companies. Originally based in Tigard, Oregon, the company relocated to Portland in the mid-1990s. FLIR teamed up with Hughes Aircraft Company in 1990, with Hughes taking part ownership of FLIR.

The company became publicly traded in a June 1993 IPO. The IPO raised $11.5 million for the company with shares offered at $12.50. In 1994, the company had grown to sales of $47 million annually. The next year J. Kenneth Stringer III was named as president of the company. The company bought Sweden’s Agema Infrared System in 1997, which doubled the size of the company. Acquisitions continued the following year when they purchased Inframetrics Inc. of Massachusetts for $48 million.

President and chief executive officer Kenneth Stringer III was fired by the board of directors in May 2000 due to errors in the company’s accounting practices. In September 2002, the Securities and Exchange Commission (SEC) sued FLIR over accounting irregularities. The next year three executives at the company were charged with fraudulent accounting in related to the SEC case that included claims of inflated sales. Sales at FLIR grew to $311 million in fiscal year 2003. In 2004, the company bought a building in Wilsonville, Oregon from Mentor Graphics for $10.3 million to serve as a new headquarters.

Beginning in 2005 the company began supplying BMW with imaging technology for use on the luxury automaker’s vehicles. Also in 2005, FLIR was named the 55th fastest-growing company on CNNMoney‘s list of the 100 fastest-growing tech companies. In 2006 FLIR was listed as the 83rd best small business by Forbes. The previous year they were ranked 39th. That July they announced a seven-year contract worth up to $250 million with the United States Army for cameras to be installed on helicopters.

In March 2007, the company reported that they would restate its financial statements for the period from 1995 through 2005, primarily to record non-cash charges for compensation expense relating to past stock option grants. FLIR was also sued by investors over these same allegations.

The company purchased Extech Instruments Corp. in October 2007 for $40 million. The next month FLIR executed their first stock split. FLIR made another acquisition in April 2008 when it purchased Ifara Tecnologias of Spain for about $11 million. For the 2008 fiscal year, the company recorded $1.1 billion in sales, a record for the company. On January 1, 2009, FLIR was added to the S&P 500 stock index, replacing National City Corporation. FLIR was named as the Northwest’s top company by the Seattle Times in 2009, marking the third time the company was at the top (2002 and 2003). They sold off Extech Data Systems, a division of Extech which made portable printers, in December 2009, and bought security hardware maker Directed Perception that month for $20 million. FLIR continued to grow via acquisitions when they purchased bankrupt Raymarine in May 2010 for $180 million.

Raymarine is a world leader in marine electronics develops and manufactures the most comprehensive range of electronic equipment for the recreational boating and light commercial marine markets. FLIR operates Raymarine as a separate operation.

Headquartered in Wilsonville, Oregon, the company also has manufacturing facilities in Portland, Massachusetts, Sweden and France. Worldwide, FLIR employs in excess of 1,900 people, with more than 1,200 located in the United States. As of the fiscal year ending December 31, 2008, FLIR had net profits of $203.7 million on revenues of $1.077 billion. Earl R. Lewis has been the president, CEO, and chairman of the company since 2000. The company operates three divisions; one for government business (government systems), one for commercial vision customers (commercial vision systems, or CVS), and one for thermography.

With $569 million in annual revenue, government systems is the largest of the three.

The thermography division focuses more on analytical equipment that has uses in both the industrial and commercial fields. Example products include hand-held cameras used for home energy audits and veterinary thermal imaging. The commercial vision portion of the company manufactures products from infrared sensors to infrared news cameras for use on aircraft. Markets include private security and the automotive industry. FLIR’s largest division, Government Systems, sells products to a variety of government entities with products ranging through weapon sights to perimeter surveillance systems to low light cameras to laser illuminators. Products developed not merely for military applications are also sold to commercial customers, sometimes through CVS.

S&P has projected revenue growth of just 1.5% for FLIR in 2012. Their major concern centers around FLIR’s government systems division, which is being affected by reduced military spending and budget uncertainty in the U.S. S&P thinks there will be pockets of strength within the commercial systems division, as there is solid demand for FLIR’s lower-priced non-cooled thermography products and higher-end cooled security and surveillance products. S&P sees softness for Raymarine in the EMEA and Asia/Pacific regions, where boat sales are likely to be weak, but new products should help drive sales in the Americas.

Operating margins contracted in 2010 and 2011, partially reflecting lower average selling prices and acquisitions of lower-margin business, but S&P expects an improvement in 2012. S&P sees margins being aided by higher unit volumes, cost cutting, and lower investments in the business. There are still some headwinds, including an expanding sales operation and costs related to product introductions.

In 2011, operating EPS was $1.59, excluding litigation and severance costs. S&P estimates EPS of $1.59 again in 2012 and $1.85 in 2013.

S&P has placed a hold recommendation on FLIR Systems based on valuation. S&P believes that the difficulties in the firm’s government systems division and general economics softness, particularly in the Europe, the Middle East and Africa (EMEA) region, will adversely affect the company in the near term. Longer term, S&P thinks FLIR is well positioned to benefit from increasing demand for various detection devices, both for commercial and government use. Furthermore, S&P is positive on the company’s balance sheet, despite the recent addition of nearly $250 million in debt. The company had over $445 million in cash at the end of the March 2012 quarter.

Risks to S&P’s recommendation and target price include a sharper-than-anticipated decrease in military spending on infrared related technology, formidable competition, economic headwinds, and financial and integration risks.

S&P’s 12-month target price is $26 and is based on its relative valuation analysis. S&P arrived at its target price using a peer-premium P/E ratio of 16.4X its 2012 EPS estimate, which is toward the low-end of FLIR’s range of 14.3X-22.6X over the past two years. The stock closed at $19.50 on June 28, 2011

Biometric Research Notes provides forward-looking and systematic data about the global biometric market, allowing industry stakeholders to calculate political, economic and investment risk.

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