OCTOBER 2008: FEATURE, HIGH TECH
The comeback
How Flir came back from the brink of bankruptcy to become a
$4.3 billion company that has left its competition in the dust.
BY ABRAHAM HYATT
Jim Faraudo, operations vice president of Flir, with
a infrared imaging system.
PHOTOS BY LEAH NASH
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March 1, 2000, was a cold, windy, overcast day in Portland. It
had rained the day before and more rain was forecast for the
weekend. Around the country — in Oregon and Massachusetts
and Minnesota and New York — Flir corporate board members
were picking up their phones and dialing into an emergency
conference call.
Over the previous year, news about the then-Portland-based
maker of infrared camera systems had not been good: The stock
price was down; big cuts were being made. Flir president and
CEO Ken Stringer blamed the situation on complications from a
recent acquisition and a decrease in government contracts for
the company’s flagship optical systems.
Now Stringer had called the board together to tell them news
that was horrifically worse: There had been accounting
problems. Big problems. Revenue and earnings had been
overstated by $7.9 million over several previous quarters. The
next week the company was slated to release its fourth-quarter
and annual report for 1999. And it was filled with numbers that
were false.
The fallout was swift and brutal. Stringer, the company CFO,
controller, treasurer and independent accounting firm
PricewaterhouseCoopers were either fired or resigned.
Shareholders filed class-action lawsuits. The Securities and
Exchange Commission started an investigation. The
company’s stock
dropped 70% to 45 cents. NASDAQ threatened to de-list them.
Flir came very close to bankruptcy.
But instead of flaming out, company executives performed a
dramatic rescue. And eight years later, Flir, now based in
Wilsonville, has become one of the largest and most successful
public companies in Oregon. Last year its market value of $4.3
billion ranked third behind Nike and Precision Castparts among
Oregon companies with the highest market value. This year it
expects to post at least $1.1 billion in revenue, a 41%
increase from last year. It has about 1,800 employees (1,200 in
the U.S.) at nine facilities around the globe.
The story of its resurrection is, according to current CEO Earl
Lewis, simple: Flir aggressively focused on fixing basic
problems like debt, cash flow and too much inventory.
“The balance sheet was in very bad shape. Inventory was
high. The receivables were unbelievably high. But I felt like I
had the chance to get some cash out of that,” Lewis says.
“With some hard work, the first quarter I was CEO we were
able to get to a positive cash flow. That was the real issue
because the company would have gone bankrupt if we hadn’t
have done that fairly soon.”
The story of the company’s success, however, is more
complicated. One factor is its diversification and vertical
integration. Most of Flir’s competitors, such as L-3
Communications, BAE Systems and Lockheed Martin, fit into one
of three market categories: commercial, industrial or
government/military. Flir is different. It bridges all those
markets, which has given it a research and development edge.
For instance, it can bring fully tested commercial infrared
technology into the military market rather than have to wait
for government funding to develop a new design. The company
isn’t bulletproof; its reliance on government contracts,
which make up 49% of its business, is an obvious weak point.
But the company appears to be ready to grow from one of
Oregon’s relatively unknown tech companies to a major
player in the state.
Rick Withington, a defense industry analyst with Rhode
Island-based JSA Research, started covering Flir in 2002 and
says the company has grown “brilliantly.”
“They’ve come a long way in a short time.
They’re garnering very sophisticated contracts and have
done quite admirably on the industrial side,” he
says.
“I don’t see anyone catching up to them.”
Tony Trunzo of Flir with the Voyager, which is used
for maritime thermal imaging.
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To say that infrared cameras “see” heat is an
oversimplification. They actually detect energy in the
electromagnetic field that atoms give off. In other words,
infrared technology can show the difference between minus 20
degrees and minus 30 degrees as well as it can spot a person on
a battlefield in the blackest night. Or a body in a
smoke-filled room during a house fire. Or a bad electrical
connection in a wall. Or even, according to some studies,
breast cancer.
Flir was founded by a Portland State University professor in
1978 and spent the first few decades of its life in the Oregon
Business Park in Southwest Portland. The name is pronounced
“fleer” and stands for “forward looking
infrared.” Its first infrared camera system was a black
box about the size of a lunch pail. The stabilizing element of
the optical system was cooled with liquid nitrogen that had to
be poured in through a hole in the top of the box.
The company quickly began advancing its technology during the
1980s. Stringer, a U of O grad who would become CEO in 1998,
was hired in 1984. In 1988 Flir became profitable and was
selling systems to law enforcement, firefighters and customers
around the world.
The early 1990s saw more growth. Revenue in 1992, the year
before Flir went public, was $32.5 million; four years later it
had grown to $66 million. Then came 1997 and the
company’s first major acquisition: Agema Infrared Systems
of Sweden. Flir took a major financial hit that year because of
the purchase. Two years later it bought another company:
Inframetrics of North Billerica, Mass. That was a bad move.
Flir executives were quickly overwhelmed by the complexity and
scope of integrating the acquisitions.
The following March Stringer dropped his bombshell and all hell
broke loose. Newspaper headlines were filled with news of
lawsuits, investigations and resignations.
At a meeting with shareholders in August, Flir’s interim
CEO, John C. Hart, sounded shocked as well as worried about the
future, according to newspaper reports. He didn’t mince
words. “Where we have been is completely
unacceptable,” he told shareholders.
Another piece of news came out of that meeting. The company was
naming a new CEO: Earl Lewis, the CEO of a Massachusetts
company called Thermo Instrument Systems who had joined
Flir’s board of directors in late 1999. And he was, in
his characteristically understated way, slightly more upbeat.
Flir, he was reported saying, “has a good probability of
doing better.”
He was right — very right. Eight years later Lewis, 64,
says he knew the odds of survival were good if the company was
able to address its basic weaknesses.
“Underneath this very difficult series of events, there
was a good company. I’ve seen companies come out of that
before with the right kind of guidance,” he says.
“I was naive in thinking we could do it quicker, but I
did feel the business was a good solid business underneath some
bad decisions. And so we went to work on it.”
Flir had a laundry list of problems that needed solving. In mid
2000, it cut 90 engineering and manufacturing jobs in its
Portland facility. It settled the class-action shareholder
lawsuit in 2001 for $6 million. It hired the accounting firm
Arthur Andersen (which would collapse under its own accounting
scandals several years later). It went after the source of its
biggest woes: the problems that former auditor
PricewaterhouseCoopers described to the SEC as “material
weaknesses in internal controls.” It breathed a sigh of
relief as the SEC investigation culminated in a lawsuit
directed only at the former executives. And finally the
company, led by Lewis, rebuilt its executive team.
“That change in management was probably the biggest
deal,” says senior VP for corporate strategy Tony Trunzo
of the changes the company went through.
While the company was reorganizing itself internally, things on
the outside couldn’t have been better. Despite the
crisis, fourth-quarter sales in 2000 were at a historic high.
Annual revenue was up from 1999. And business was just
beginning to grow.
Sept. 11 and Iraq war expanded Flir markets, though Lewis
downplays the effect of 9/11. There wasn’t as much
business from homeland security efforts as the company thought
there would be, he says. They envisioned infrared systems at
every dam, border crossing and security-sensitive location and
began developing products to meet that demand. It never
materialized. But people and agencies were still buying Flir
products. Rescuers at Ground Zero and the Pentagon used its
devices. And as the armed forces geared up for Iraq, they
bought even more from Flir. Annual revenue grew 22% to $214
million in 2001 and by double-digit percentage points every
year since.
Alongside government and consumer systems, Flir
supplies BMW with night-vision cameras (shown here)
that are used in many of its cars.
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Government contracts have always been Flir’s bread and
butter, making up between 40% and 50% of the company’s
business each year. As the years have gone by, those numbers
have grown dramatically: the Office of National Drug Control
Policy, Department of Defense, Army, Navy, Coast Guard,
Marines, U.S. Special Operations Command, United Arab Emirates,
Colombian Ministry of Defense, Mexican Navy, Royal Danish Air
Force, Greece’s Hellenic Port Police, Canadian Department
of National Defense, Japanese National Police Agency, Republic
of Korea.
Back in 2001, the contract price tags were in single-digit
million-dollar range. Year after year that’s changed.
This year, between January and August, Flir announced $429
million in new contracts and another $358 million in contract
extensions.
It’s those kinds of numbers that make analysts giddy and
executives bullish. But what happens if the national political
landscape changes and suddenly the Department of Defense is
spending less in Iraq and Afghanistan?
“There are a lot of people in the aerospace industry
waiting with bated breath to see how the election is going to
turn out,” says Nisbet of JSA Research.
“[Flir is] well positioned, but when you talk about wars
and presidential elections it does give some concern,”
says Michael Ciarmoli, a defense industry analyst with
Pennsylvania’s Boenning and Scattergood.
Flir plays a very quiet role in state and national politics.
Its executives and the company’s political action
committee give modestly to federal senators and representatives
on both sides of the aisle, most of who sit on defense-related
committees. A change in the White House in January will mean
some kind of change — no matter which party wins —
in defense spending.
Trunzo knows that: “We’re going to keep growing.
Not by 20% or 30%. But we’ll still grow.”
Lewis and Trunzo say the company’s strength lies in its
ability to reach more than just one market. What it makes can
be divided into the three categories: thermography systems,
which are used in commercial and industrial products that
combine imaging and temperature measurement; night-vision
systems for the commercial market; and high-performance
night-vision and surveillance systems for foreign and domestic
government agencies. It’s a consumer base that spans
helicopters, soldiers, general contractors, boats and BMW,
which uses night vision in some cars.
Those multiple markets equate to strength, says Lewis.
“If someone comes and attacks us in the boating market,
OK, we’ll fight them. But if they’re going to fight
us in all 15 markets, we think we’d give them an awful
hard time,” he says.
While there is strength to that diversity, Ciarmoli says it
could someday become a weakness. Ciarmoli thinks Flir has done
a good job of “conquering the low hanging fruit” of
the low-cost markets, but to grow significantly it needs to
focus on the really big government contracts. “They need
to displace the prime players. They need to win orders of
magnitude,” he says.
Trunzo disagrees with that theory. He says diversity gives Flir
two advantages: lower costs and improved research and
development. Every year, Flir has been able to drop the price
of some its key systems by thousands of dollars, thanks in part
to small acquisitions that have allowed it to vertically
integrate. But lower costs, particularly in the government
market, have also come from what Trunzo describes as a unique
research and development process that turns successful,
well-tested consumer products into Department of Defense-worthy
systems. Consumers fund the development process; the relatively
tiny Flir uses that technology to compete with world’s
largest defense contractors, like Lockheed Martin and L-3
Communications.
How cheap can Flir go? “Our competitors would love to
know how low we think we can get. Let’s just say we have
a lot of room to grow and still sustain a healthy profit
margin,” Trunzo says with a smile.
On a recent summer day, there were no storm clouds over
Flir’s 154,000-square-foot corporate and manufacturing
headquarters in Wilsonville. Bright sun streamed into modest
offices. On the manufacturing floor blue-jacketed men and women
worked quietly over the innards of domed machines that would
someday grace the undersides of helicopters. Later that month
and thousands of miles away in the bustling financial centers
of Chicago and New York, defense industry analysts would look
at Flir’s $35 stock price and would type — as they
had for many months — words such as
“outperform” and “aggressive growth”
into research reports about Flir.
Flir’s calendar in the coming months is marked with
significant steps: Nov. 5, Election Day; Jan. 1, when the
company joins a handful of other Oregon companies in the
billion-dollar-plus-revenue club; March 1, the nine-year
anniversary of that fateful call to board members. Or perhaps
it’s time to take that final date off the calendar. The
company has long since proven itself. As Ciarmoli says after
reviewing the future weaknesses and strengths of Flir,
“They’re going to continue to be sitting in a very
sweet spot.”
Have an opinion? E-mail feedback@oregonbusiness.com
