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Michael McGillen

AXYS AT A GLANCE

P/E ► 24.7 AVG EV/EBITDA ► 14.5 AVG ROA ► 10.5% HIGH ROE ► 13.5% AVG Debt to Equity ► 0.272 AVG Current Ratio ► 3.02 AVG Interest Coverage Ratio ► 747 VERY HIGH

 

 

 

 

 

 

Axsys Technologies, Inc. makes surveillance cameras and optical lenses for defense and security systems. Axsys Technologies’ cameras are found in land, marine, and airborne surveillance systems. Their infrared lenses, laser positioners, long-range telescopes, and sensor positioning systems are primarily designed for military weapons and vehicles.

Located in Connecticut, Axsys’ net sales have grown by 119% from 2004 to 2007. ^[1]A majority of Axsys Technologies’ sales come from contracts with Government institutions and subcontracts with defense contractors.^[2]While Axsys’ growth in sales primarily comes from U.S. government institutions, sales to European contractors and other foreign governments have increased by 60% in the past three years.^[3]

Axsys has devoted more resources to developing its optical sensors and thermal imaging equipment in response to the budget growth in the Surveillance and Targeting sector of The U.S. Department of Defense. ^[4] In addition to the U.S. Military, Axsys has received more orders for optical surveillance equipment from law enforcement agencies as well as commercial companies like Intel, Samsung, and Kodak . Axsys has expanded its operating facilities in order to reduce production costs without sacrificing product quality.^[5]

Company Overview

Axsys received new orders of $193.5 million in 2007. Net sales increased 32% to $171.6 Million in 2007. Growth of 2007 net sales was in part due to the 102% growth in sales of its surveillance systems products.^[6]This increase came from higher sales growth of infrared lenses and in gyrostabilized cameras. Because Axsys does not recognize sales until they are shipped or received by the customer, the company’s backlog plays an important role in its future revenue. In 2007, backlog increased 21% to $140.2 million. 88.8% of its 2007 backlogged orders are expected to ship within 12 months of its order date. ^[7]

Net Sales, Gross Profit, and Operating Income^[8], and Backlog^[9]for 2005, 2006, and 2007(Measured in thousands of U.S. dollars)

Although sales growth in its Imaging Systems Segment was 16.7%, the infrared lens business is still a growing operation requiring additional investments in research and development. Gross profit declined because manufacturing these infrared and thermal lenses requires advanced engineers and expensive materials. Numerous companies compete for government contracts such as the U.S. Army’s Thermal Weapons Sight program. In these contracts, Axsys sells their optical lenses at lower-profit prices because of the size of the orders and the amount of competition for these contracts.^[10] In response to lower profit margins, Axsys has invested $5 million in 2007 into creating larger, more efficient facilities for the production of infrared lenses and other expensive optical equipment.^[11] In addition, Axsys purchased Cineflex, a manufacturer of gyrostabilized camera systems, in 2007 for $26.7 million.^[12] By investing in acquisitions and larger facilities, Axsys has expanded the number of optical lenses it can manufacture and reduced the overall cost of making them. For technology-driven companies, the gross margin ratio and the operating margin ratio are good indicators of production efficiency and profitability.^[13][14] Axsys Technologies’ gross margin has increased from 24.0% in 2003 to 33.6% in the first half of 2008. ^[15]Operating margins have increased from 5.9% in 2003 to 14.5% in the first half of 2008.^[16]For the industry, gross margin is 43.28% and operating margin is 3.84%. ^[17]Increases in gross margin and operating margin reflect Axsys Technologies' continued efforts to expand its manufacturing facilities in order to reduce the cost of producing its more expensive products like its infrared lenses and thermal cameras. Investments in its research and development were $6.3 million in 2007, $4.5 million in 2006, and $3.8 million in 2005. Its research and development sector focuses on developing new optical technologies as well as finding ways to integrate its current products into new systems.^[18] A portion from the sale of its Distributed products business went to pay all of Axsys Technologies’ outstanding debt in 2007. ^[19] In addition, Axsys Technologies generated $17.70 million in net cash flow, a 40% increased from 2006. ^[20] However, Axsys has negative free cash flow of nearly $9 million for the first half of 2008 whereas in the first half of 2007 Axsys had positive cash flow of $2.6 million.^[21]

Customers

Percentage of 2007 Sales by Geographic Region^[22]

Government defense contractors, OEMs, and companies that produce consumer goods make up a majority of Axsys Technologies’ customers.^[23] Orders from BAE systems, a British defense and aerospace company, represent 15.8% of Axsys Technologies’ 2007 net sales. Axsys supplies BAE with optical lenses for two armored vehicle programs, thermal weapons sight products, and night vision systems. ^[24]10.6% of 2007 sales came from Raytheon Company, an American defense contractor that manufacturers defense electronics.^[25] The continuation and renewal of current contracts with BAE systems and Raytheon depend on U.S. Department of Defense spending and are subject to cancellation. Close to 66.4% of sales came from subcontracts with U.S. government contractors. 30% of 2007 sales came from law enforcement agencies, commercial companies requiring advance security systems or optical technology, and graphic art companies. ^[26] Sales to these non-U.S. military customers have increased in 2006 and 2007 as a result of more orders for long–range, high definition cameras for law enforcement agencies as well as increased demand for thermal imaging cameras used in commercial surveillance, roof inspection, and energy conservation. ^[27]

Business Segments

Net Sales for 2005, 2006, and 2007 represented by sales of each business segment^[28]

Operating Income for 2005, 2006, and 2007 represented by sales of each business segment^[29]

Surveillance Systems Group(28% of 2007 Revenues): This segment manufactures camera systems for use on ground, marine, and aerial vehicles. Fixed, non-stabilized camera systems are designed for border patrol and perimeter security. Gyrostabilized cameras are multi-axis, rotating, high-definition cameras. Sales of products from this segment grew by 102% in 2007 when compared to sales from 2006. 73% of this growth came from the acquisition of Cineflex’s gyrostabilized camera systems as well as increased sales of Axsys’s infrared cameras. ^[30]

Imaging System Group(72% of 2007 Revenues): This segment manufactures specialized optical cameras for use in larger surveillance and defense systems. Products include infrared lenses, laser positioners, long-range telescopes, and precision motion control optics.These products are used in larger systems including targeting system found in the Abrams Tank, the Apache Helicopter, and Sidewinder missiles as well as space-based surveillance satellites. This segment increased by 16.7% in 2007 primarily as a result of Axsys Technologies’ participation in the U.S. Army’s thermal weapons sight program. ^[31] However, gross profit declined 1.2% in 2007 when compared to 2006. While their infrared lens have become a larger percentage of their 2007 sales, their infrared lens business, acquired in 2004, continues to operate as a small scale, specialty design shop.^[32] In 2006, Axsys purchased a 78,000 square foot building in order to transform its smaller scale productions, like its infrared lens business, into large scale operations that can supply large military programs.^[33]

Sale of Distributed Products Segment: In November 2007, Axsys technologies sold its distributed products business for $15.3 million in cash, a net gain of $1.7 million. This segment of Axsys distributed ball bearings and other bearings designed to repair and replace those of broken machinery. With sale of this segment, Axsys only develops and manufactures optical technology. ^[34]

Trends and Forces

U.S. Government Prepares for World after Iraq^[35]

The U.S. Military wants to increase their budget by 13.5%, or $57 billion, in fiscal 2010. This budget increase is about 6% higher than average budget increase over the past eight years. Although some of the budget increase will pay for rising health care costs and military pensions, the 10% budget increase, adjusted for inflation, will help the U.S. military prepare for a world after the War in Iraq. ^[36] The U.S. military plans on reinvesting in new equipment and supplies to replace the equipment damaged from the wars in Iraq and Afghanistan.^[37] Investments in military technology have benefited Axsys Technologies. In August of 2008, Axsys received $9.7 million order for thermal weapon sight lenses from the U.S. Army’s Thermal Weapon Sight Bridge program as well as $10.3 million order for Thermal Camera systems from the U.S. Air Force.^[38] Axsys Technologies’ sales could be significantly impacted by the U.S. presidential election in 2008. A McCain administration is likely to continue allocating military financial resources in the same way as President Bush’s administration. According to Analysts, military spending under Senator Obama’s administration is difficult to predict. ^[39]

Homeland Security Becomes an Important Issue for non-Military Agencies and Companies

Homeland Security is no longer the priority of just the U.S. Military. For example, law enforcement agencies, airports, and foreign governments have increased spending on counter-terrorism security products. Its surveillance system group manufactures surveillance cameras systems that can be used in stationary, airborne, and marine surveillance. Since their acquisition of Cineflex's gyrostabilized camera system, sales of these rotatable, long-range cameras have increased by 102%.^[40] In addition, Axsys has supplied the U.S. Border Patrol and the Kuwaiti Government with its long-range thermal vision cameras designed for border protection.^[41] For Axsys, these spending increases will mean more sales primarily of their gyrostablized cameras, thermal imaging cameras, and infrared cameras. ^[42]

Broadened Uses for Thermal and Infrared Lenses

Technological advancement in Infrared sensor technology has made infrared cameras more affordable to commercial businesses and individuals. As a result, the number of commercial applications for thermal cameras and infrared cameras has increased. Axsys Technologies’ thermal cameras are used to visually quantify heat and energy usage in addition to providing surveillance. ^[43] A wider range of applications for Axsys Technologies’ cameras could benefit future sales from non-military customers and make the company less dependent of government contractors as a source of revenue. However, due to the global economic slowdown, many companies are likely to cut spending for new technology. Axsys would lose potential sales to such cuts in spending and to companies that can produce thermal imaging cameras at lower prices.^[44]

Axsys Technologies’ gyrostabilized cameras have be been used in applications beyond law enforcement and military defense including aerial motion picture filming. The BBC series “Planet Earth” featured extensive aerial filming of animals using Axsys’ High-Definition gyrostabilized cameras.^[45]

Competition

FLIR Systems: FLIR manufactures thermal imaging and infrared camera systems. The Thermography division of FLIR manufactures hand-held thermal imaging systems used by commercial companies, industrial companies, and universities for facility maintenance and scientific analysis. FLIR also produces infrared and night vision camera components designed for installation in larger surveillance camera systems. FLIR also supplies the U.S. Military and U.S. law enforcement agencies with hand-held devices that can be used to detect perimeter disturbances as well as navigation. ^[46]

Excel Technologies (Privately Held): Acquired by GSI Group in 2008, Excel Technologies generates revenue through subsidiaries. Excel makes electro-optical components and laser systems for scientific, industrial, and medical markets. Their Baublys-Control Laser unit is used for marking and engraving industrial materials. Its Cambridge Technology subsidiary sells optical scanners to biomedical research companies and hospitals.^[47]

Mikron Infrared, Inc.(Privately Held): Purchased by LumaSense Technologies in 2007, Mikron produces hand-held infrared thermometers and fiber optic infrared sensors. Its infrared products are used to measure the temperatures of objects such as melted glass, ceramics, industrial boilers and compressors. ^[48]

References

1. ↑ AOL finance: Axys Technologies Income Statement
2. ↑ Google Finance: AXYS
3. ↑ AXYS 10-K for 2007, Item 1:Domestic and Foreign Sales, page 9
4. ↑ AXYS 10-K for 2007, Item1: Market Overview, page 3
5. ↑ AXYS 10-K for 2007, Item 7: Facilities, page 28
6. ↑ AXYS 10-K for 2007, Item 7: Results of Segment Operations, pages 29-31
7. ↑ AXYS 10-K for 2007, Item 7: Surveillance Systems Group, page 30
8. ↑ AXYS 10-K for 2007, Item 7: Management's Discussion and Analysis of Financial Condition, pages 29-30
9. ↑ AXYS 10-K for 2007, Item 1: Business, page 7
10. ↑ AXYS 10-K for 2007, item 7: Imaging systems Group, page 29
11. ↑ AXYS 10-K for 2007, Item 7: Facilities, page 28
12. ↑ AXYS 10-K for 2007, Item 7: Acquisitions, page 27
13. ↑ Investopedia: Gross Margin
14. ↑ Investopedia: Operating Margin
15. ↑ Morningstar.com: AXYS, key ratios
16. ↑ Morningstar.com: AXYS, key ratios
17. ↑ Yahoo Finance: AXYS, Competitors
18. ↑ AXYS 10-K for 2007, item 7: Operating Expenses, page 31
19. ↑ AXYS 10-K for 2007, Item 7: Disposition of Business, page 27
20. ↑ AOL finance: AXYS cash flow statement
21. ↑ Fool.com "The Axsys of Good" July 2008
22. ↑ AXYS 10-K for 2007, Item 1: Domestic and Foreign Sales, page 9
23. ↑ Customers
24. ↑ AXYS 10-K for 2007,Item 1: Customers page 8
25. ↑ AXYS 10-K for 2007, Item 1: Customers, page 8
26. ↑ AXYS 10-K for 2007, Item 1: Customers, page 9
27. ↑ AXYS 10-K for 2007, Item 1: Commercial Thermal Imaging, page 5
28. ↑ AXYS 10-K for 2007, Item 7: Management's Discussion and Analysis of Financial Condition, pages 29-30
29. ↑ AXYS 10-K for 2007, Item 7: Management's Discussion and Analysis of Financial Condition, pages 29-30
30. ↑ AXYS 10-K for 2007, Item 1: Surveillance Systems Group, page 2
31. ↑ AXYS 10-K for 2007, Item 1:Imaging Systems Group, pages 2-3
32. ↑ Axsys Technology Announces Acquisition of Telic Optics
33. ↑ AXYS 10-K for 2007, Item 7: Fiscal 2007 results versus fiscal 2006 results for Imaging Systems Group, page 29
34. ↑ AXYS 10-K for 2007, Item 7: Disposition of Business, page 27
35. ↑ Wikinvest.com "Iraq War"
36. ↑ Bloomberg.com "Pentagon Seeks $57 Billion More in 2010, Jonas Say" October 2008
37. ↑ seekingalpha.com "DoD's FY-08 Budget: The Largest in US History" March 2007
38. ↑ Reuters.com Key Developments for Axsys Technologies
39. ↑ seekingalpha.com "Defense Investors in Today's Volatile Markets" October 2008
40. ↑ AXYS 10-K for 2007, Item 7:Surveillance Systems Group, page 30
41. ↑ Axsys Technologies 2006 Annual report
42. ↑ AXYS 10-K for 2007, Item7: Surveillance Systems Group
43. ↑ AXYS 10-K for 2007, Item 1: Commercial Thermal Imaging, page 5
44. ↑ AXYS 10-K for 2007, Item 1A: Risk Factors
45. ↑ Axsys Acquires Cineflex
46. ↑ Google Finance: FLIR Systems
47. ↑ Yahoo! Finace: Excel Technologies
48. ↑ Yahoo! Finance: Mikron Infrared, Inc.