FLIR Corp. [FLIR], a leader in imaging systems for surveillance and targeting for government and commercial customers has agreed to acquire ICx Technologies [ICXT] for $274 million in cash in a deal that will bolster its surveillance solutions with radar, add a suite of detection products in the chemical, biological, nuclear and explosives space, and give it additional systems integration capabilities.
The agreement assumes a $7.55 purchase price for each share of ICx common stock, less than half the price the company’s shares garnered at its initial public offering in Nov. 2007. Following the initial offering ICx’ stock price quickly tumbled due to uncertainties in the security market.
In late July ICx’ stock price was over $8.00 and at least eight law firms this week say they will investigate whether the company’s board of directors breached their fiduciary duty by agreeing to sell the company before adequately shopping it around. Benchmark Capital security analyst Josephine Millward says in a note to clients that her sources suggest that there could still be another bidder among the large defense contractors for ICx. She has a $10 price target and a buy recommendation on ICx.
At the end of trading on Monday, the day the deal was announced, ICx’ stock price closed at $7.71, up 96 cents or more than 14 percent from Friday’s close, higher than FLIR’s offering price, indicating that investors believe a larger bid may be in store. The company’s 52-week high was $10.49 and its highest close during that period was in late December when it finished at $9.52.
The transaction is expected to close in the fourth quarter of 2010 subject to regulatory approvals and the tendering of a majority of majority of the shares of outstanding ICx common stock. The private equity firm Wexford Capital, which owns 62 percent of ICx’ common stock, has agreed to tender all of its shares.
FLIR expects the acquisition to be neutral to earnings in 2010, excluding transaction costs and one-time charges, which it expects may top $8 million. Beginning next year it expects ICx to be accretive to earnings although it offered no specifics in terms of guidance.
FLIR says the main reason for acquiring ICx is the strategic aspects offered by the company’s product suite and capabilities. FLIR plans to retain ICx CEO Colin Cumming to continue to run the business, which will be integrated into FLIR’s Government Systems Division.
Surveillance Synergies
Earl Lewis, FLIR’s president and CEO, highlights a number of areas where ICx offers FLIR growth opportunities. One is ICx’ radar capabilities, which he believes can ultimately be integrated with FLIR’s imaging and laser systems.
“Laser, radar and infrared go hand in hand in many applications,” Lewis said during a conference call with analysts to discuss the transaction.
FLIR makes a range of electro-optic, infrared and thermal imaging systems for vehicle, airborne, maritime, unmanned and handheld applications. In the surveillance fold, ICx makes several ground-based radars for perimeter and border security applications, the Cerberus mobile sensor tower that integrates imaging systems, radar and command and control software, and several imaging systems including thermal cameras.
Lewis says that FLIR hasn’t bumped up against ICx in any competitions
Benchmark analyst Millward believes that ICx is poised to win a contract from Customs and Border Protection in the coming weeks for its mobile sensor towers to provide border security. She expects the synergies between the two companies’ surveillance products will position it well for other competitions, including security for Army and Marine Corps forward operating bases and international programs.
In addition to the surveillance capabilities, ICx brings a healthy detection product portfolio that includes well regarded handheld systems for detecting chemical, radiological, nuclear and explosive threats, indoor and outdoor monitoring equipment for biological events, and mobile tower platforms that integrate cameras and radars for border, base and critical infrastructure protection.
Lewis says that he eventually sees the security market demanding the integration of chemical, nuclear and other detection systems onto single platforms such as vehicles and towers for various applications including border security.
“And to have that complete suite of technologies and not to try and develop it ourselves is very worth the price we paid,” Lewis says.
William Sundermeier, president of FLIR’s Government Services Division, says ICx’ radar technology is good at finding very slow moving targets such as people crawling on the ground and providing high resolution, enabling a camera that is integrated with it to be slewed onto the target. He sees this kind of integration, including chemical, biological, radiological, nuclear and explosives sensors, having “a big future” whether it’s on the battlefield or at forward operating bases.
ICx’ suite of products coupled with their existing integration capabilities will allow FLIR to move up the systems integration chain, Lewis says.
“Customers want more and more technology in smaller packages and they want to do more and more things and they want it all integrated and they want it to give them an answer and this allows us to do a lot more of that,” Lewis says.
International Potential
FLIR expects to be able to grow ICx’ international sales, which account for around 5 percent of its sales. ICx previously said it expects a total of around $220 million in sales this year. FLIR’s government business, which accounted for $655 million of the company’s $1.1 billion in sales last year, generates 41 percent of its revenue overseas and growing.
Sundermeier says that as FLIR’s international business grows the company is finding more interest in homeland security products.
Lewis also says that FLIR can learn from ICx’ ability to leverage federal research and develop (R&D) funding, something his company hasn’t done. He adds that ICx is good at leveraging that R&D into commercial products.
FLIR expects that at least initially, ICx will bring down its operating margins because of ICx’ reliance and low-margin government R&D work for some of its revenues. Lewis says that FLIR would probably work to expand ICx’ balance to favor its product portfolio in order to improve margins.
Morgan Keegan defense and security analyst Brian Ruttenbur says in a research note that he likes ICx’ product suite and that he expects FLIR will be able to fix ICx’ execution problems. ICx has “historically had significant operational issues” but with FLIR’s “strong track record with integrating and improving acquisitions” that should improve, he says.
Ruttenbur doesn’t think that another bidder will emerge for ICx given its poor performance financially since going public.
Stone Key Partners served as ICx’ financial advisor on the deal.
FLIR says it is unsure what it will do with ICx’ transportation business, which consists of traffic management and surveillance systems.
ICx Posts Second Quarter Results
Separately, ICx also reported its second quarter financial results, with losses tripling on a 20 percent decline in sales. The net loss was $4.5 million, 11 cents earnings per share (EPS), compared to $1.4 million (4 cents EPS) a year ago. Sales were $36 million versus $45 million a year ago.
ICx’ Surveillance segment posted the largest sales declines as both product and service revenues were well off last year’s numbers. The Detection and Solutions segments also saw their revenues decline.
The company’s sales through the first half of the year are also well below last year’s pace while net losses remain about level. ICx canceled its earnings call due to the pending acquisition by FLIR.