FLIR Systems Acquires Aeryon Labs For UAS Platform Tech

Summary

• FLIR Systems has acquired Aeryon Labs for $200 million.
• Aeryon makes Group 1 unmanned aerial drones for government and commercial use.
• For FLIR, the deal is similar to its Prox Dynamics acquisition, in that it is acquiring the platform on which to integrate its imaging and sensor products.
• The UAS market is growing rapidly and FLIR is acquiring vertical integration to better differentiate its systems and compete more effectively.
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Quick Take

FLIR Systems (NASDAQ:FLIR) announced it has acquired Aeryon Labs for $200 million.

Aeryon Labs develops high-performance unmanned aerial systems for government and commercial applications.

FLIR is continuing to acquire platforms to integrate its sensor and imaging technologies as it seeks to better compete in a fast-growing market.

Target Company

Waterloo, Canada-based Aeryon was founded in 2007 to develop drones and software capable of providing high-resolution intelligence, surveillance, and reconnaissance data for the global public safety, military, and critical infrastructure markets.

Management is headed by CEO William McHale, who has been with the firm since 2017 and was previously chairman of the board of directors at Masternaut.

Below is an overview video of the Aeryon Vector & SR-EO/IR Mk II:

Source: Aeryon Labs

Aeryon’s primary offerings include:

• SkyRanger UAS
• HDZoom30
• EO/IR Mk-II
• Payloads & Sensors
• Flight Operations Software

Investors invested $60 million in the company and include Summit Partners and the MaRS Investment Accelerator Fund.

Source: VentureDeal Venture Capital Database

Market & Competition

According to a market research report by Markets and Markets, the global unmanned aerial vehicles [UAV] market was valued at $20.7 billion in 2018 and is projected to reach $52.3 billion by 2025.

This represents a strong CAGR of 14.5% between 2018 and 2025.

The main drivers for this expected growth are the growing use of UAVs for commercial, government, and military applications.

The Asia-Pacific region is projected to grow at the fastest pace due to high UAV demand.

Major competitive vendors that are developing or providing UAVs include:

• General Atomics Aeronautical Systems
• Northrop Grumman (NOC)
• Boeing (BA)
• SZ DJI Technology
• Parrot (PARRO.PA)
• Lockheed Martin (LMT)
• Textron (TXT)

Source: Sentieo

Acquisition Terms and Rationale

FLIR disclosed the acquisition price as $200 million but did not disclose terms or other details of the transaction. Management said it will do so when it conducts its next earnings call on February 13.

The firm did state that the deal ‘is expected to be $0.02 dilutive to FLIR Systems’ 2019 earnings due to anticipated product development investments, and accretive thereafter.’

A review of the firm’s most recent 10-Q filing indicates that as of September 30, 2018, it had $593.3 million in cash & equivalents and $915.7 million in total liabilities, of which $421.6 was long-term debt.

Free cash flow during the nine months ended September 30, 2018, was $255.2 million.

FLIR has acquired Aeryon for its low altitude military drone technologies

As FLIR’s President and CEO Jim Cannon stated in the deal announcement,

The acquisition of Aeryon Labs reinforces our long-term strategy to move beyond providing sensors to the development of complete solutions that save lives and livelihoods. This acquisition, coupled with our acquisition of Prox Dynamics in 2016, greatly increases our unmanned systems solutions capabilities, expanding beyond nano-UAS into Group 1 UAS solutions for military. We intend to continue to invest and build this area of our business and broaden our capabilities as we view unmanned and autonomous solutions to be a significant opportunity for organic growth in the coming years.

Group 1 UAS systems weight no more than 20 pounds, fly up to altitudes of 1,200 feet and at speeds of up to 100 knots. The “Group” system has five levels, of which Group 1 is the lowest, slowest and lightest.

In the past 12 months, FLIR’s stock price has risen 3.4% vs. direct competitor L3 (LLL) drop of 4.2%, as the chart below indicates:

Source: Sentieo

Earnings surprises over the past 10 quarters by FLIR have uneven, as the chart shows below:

Source: Seeking Alpha

Analyst ratings remain positive with no ‘Underperform’ or ‘Sell’ ratings. The consensus price target of $56.63 is 16.3% above its current stock price as of press time:

Source: Seeking Alpha

Analyst sentiment in recent earnings calls has dropped from mid-2017 despite positive earnings surprises since then, as the graphic indicates below:

Source: Sentieo

Management has identified unmanned systems as a strategic priority, so it’s no surprise that it has made another acquisition that helps the firm provide a more complete solution along the lines of its Prox Dynamics acquisition.

By owning more parts of the technology stack, FLIR can avoid or minimize sensor and imaging technology commoditization by more tightly integrating with the UAS platform itself, which in turn drives differentiation.

In that respect, the transaction should provide FLIR with an important building block as it seeks to tap opportunities within the ISR (Intelligence, Surveillance, Reconnaissance) space and compete with larger firms such as L3 for government and commercial customers.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.