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CYALUME TECHNOLOGIES (CYLU) - The Compelling Growth Prospects

Cyalume Technologies (OTC BB: CYLU) is a unique company that in recent years has positioned itself to capitalize on its market leading position in chemical light technology:

  • ­Exclusive supplier of high-margin disposable recurring use military-grade products
  • Leader in a new category of training and tactical ammunition that is displacing traditional “live” ammunition
  • Adding innovative new advanced chemiluminescent products to expand addressable markets
  • History of financial strength with gross profit margins of ~50% and EBITDA margins of ~25%

Cyalume Technologies is the global leader in chemiluminescent (chemical-light) technology, supplying militaries and safety markets around the world with innovative disposable light products.  With manufacturing facilities in Springfield, MA and Aix-en-Provence, France, Cyalume was involved in the original development of military chemical light over forty-years ago as a former subsidiary of American Cyanamid. Today, the Company is the exclusive supplier to the U.S. and NATO militaries for all of their chemical-light products. Breakthrough advancements in the underlying technology allow Cyalume to bring to market innovative new products including chemiluminescent ammunition.

Chemical-light is ubiquitous today with many novelty “light-stick” products commonly found at parties and concerts. Those products however are a much lower quality version of chemiluminescence than what is used in military and safety applications. Cyalume does not compete in this space. Instead, the Company focuses on its leading military and commercial safety businesses. Cyalume has the world’s largest research and development team focused on developing chemiluminescent products. With 24 active patents and approximately 25 pending patent applications, the Company focuses on protecting its technology. Recent advancements made by the R&D team including new chemical formulations and form factors allow Cyalume to generate light throughout the light spectrum including covert infrared and thermal as well as incorporate the technology into a vast array of new product applications.

Core Military Business

Over the last twenty-five years Cyalume has developed a suite of military products that are standard issue for soldier safety and operations.  The beauty of the Company’s military business is that its products are literally written directly into military operations doctrine. There are therefore dozens of military training and live theater operations that mandate the use of specific Cyalume products. Sample applications of these products include combat service support for night operations, perimeter control and landing zone marking to name just a few. Cyalume works directly with military agencies to create ongoing demand for these chemical-light products. New products are developed in conjunction with the military to meet specific requirements. 

Sample Cyalume military product applications:

In addition to the products being written directly into military doctrine, this business is protected from competition through long-term contracts. Cyalume has contracts in place with the Defense Logistics Agency to be the sole provider of all chemical-light products to the U.S. military. In addition, Cyalume is the only chemical-light manufacturer with a valid national stocking number. As the only U.S. manufacturer of chemical-light the Company is confident that this business is protected from foreign competition.

Innovative New Military Products

With over sixty products in the market today, Cyalume continues to develop new applications and products with their core chemiluminescent technology. Working directly with the Military, Cyalume brings to market new products that expand warfighter capabilities primarily in night operations. Sample new products include: thermal markers that identify friends vs. foes, gel that allows covert communication, covert reflective material that can be used for IED detection and covert border security “dirt” that enhances perimeter security capabilities.

Ammunition Business 

One of the principal growth engines for Cyalume is its chemiluminescent ammunition business. Chemiluminscent ammunition is a new category of training and tactical ammunition that is displacing conventional live rounds. The impetus to develop the technology came directly from the U.S. Military’s requirement to address the unexploded ordnance “dud” problems associated with live training rounds. Chemiluminescent ammunition works by replacing the explosive pay-load found in conventional ammunition with a chemical-light insert that provides a realistic hit signature upon impact.  However, since the round is inert, it does not generate potentially deadly unexploded ordnance “duds”. The value proposition of this technology vs. conventional ammunition does not stop there.

Cyalume’s chemiluminescent ammunition is also non-pyrotechnic which means that it does not pose a risk of starting deadly and costly range fires. Each year thousands of precious acres near training grounds throughout the U.S. are destroyed as a result of fires started by conventional ammunition during training exercises. To limit this risk, the military will often suspend training during dry conditions. Chemiluminescent ammunition does not present a fire risk and therefore can be used in all weather conditions. In addition, Cyalume’s chemiluminescent ammunition is environmentally-friendly as the chemistry involved is 100% Green. The Wall Street Journal estimates the clean-up costs of removing toxins found in conventional ammunition from leaching into water systems at over $20B. Chemiluminescent ammunition eliminates this hazard.

In summary, the value proposition of Cyalume’s chemiluminescent ammunition technology vs. conventional ammunition is profound. Not surprisingly, decision makers and end-users within the military are recognizing these benefits.  In fact, the U.S. Marines who starting using Cyalume’s first round brought to market, the 40mm, in 2006 have now adopted this caliber for 100% of their training.

To take advantage of their leading position in chemiluminescent ammunition, Cyalume formed strategic partnerships with some of the world’s leading ammunition companies including: General Dynamics (NYSE: GD), a $32 billion US defense contractor, Rheinmetall (DB: RHM), a $2 billion German defense company and Fiocchi Ammunition, a Nevada-based industry-leading manufacturer of shotgun ammunition. Through these relationships Cyalume is developing a whole host of small, medium and large caliber ammunition projects with both training and tactical applications.  In 2010 Cyalume estimates that it will generate over $7M in ammunition revenues. This business has tremendous potential to grow as the current development rounds come to market and the military continues to shift to new chemiluminescent solutions.

The ammunition business represents a transformational opportunity for Cyalume as the addressable market is in the hundreds of millions of dollars. The Company is confident that it can continue to execute on this opportunity and reinforce its fist mover advantage in this business; Cyalume is the sole company with the technological capability and associated intellectual property to incorporate chemical-light into ammunition.

Financial Data and Equity Profile

Although Q4 2010 financials have yet to be released by the Company, Cyalume TTM revenues and EBITDA through the end of Q3 2010 were approximately $36 million and $10 million, respectively.

Cyalume Facts 

  • Headquarters: West Springfield, MA
  • Facilities: Aix-en-Provence, France
  • Stock Ticker: CYLU
  • Public Filing: 2008 (through reverse merger)
  • Employees: 175
  • Intellectual Property: 24 patents / 25+ pending
  • 2010E Revenues: $40 million
  • 2010E EBITDA: $10 million

Equity Profile

  • Stock Ticker: CYLU
  • Stock Price (as of 1/17/11): $4.02
  • Market Capitalization: $63 million
  • Shares Outstanding: 15.7 million
  • Float: 5.8 million
  • Debt: $25.2 million
  • Cash: $2.5 million
  • Enterprise Value: $86 million

In summary, Cyalume has proven itself to be a highly unique and innovative company. The Company’s strong and stable core military business and high-growth ammunition business make for a bright future. With improving financial performance and liquidity and a management team that has demonstrated its ability to execute, Cyalume is perfectly positioned to take advantage of all of the opportunities that the Military’s growing emphasis on cost control and environmentally-friendly products presents.