Ball bearings, though useful and necessary, are boring and cheap. Super high-tech cameras are exciting and expensive. For the moment, Axsys Technologies sells both, but it’s banking its future on the latter.
The Rocky Hill-based company said it plans to sell its distributed products unit, which sells bearings to manufacturers and repair companies both domestically and abroad. The unit, called AST Bearings, also designs and sells bearing subassemblies from its Montville, N.J., headquarters and a distribution center in Irvine, Calif.
It’s a substantial piece of the company’s business, adding $26 million in sales last year to Axsys — about 17 percent of 2006 revenue — and contributed over $8 million to the company’s bottom line. Axsys said it’s in discussions with potential buyers for AST, but that it plans to eliminate AST’s financials from the company’s 2007 operating results.
AST had been on pace to earn $1.3 million on sales of $28.7 million in 2007.
“This is an important step forward for our company,” said Stephen W. Bershad, chairman and CEO.
Although based in Rocky Hill, Axsys does all of its manufacturing at plants in New Hampshire, Alabama, Michigan and California. Its Connecticut headquarters is little more than a home base for roughly a dozen employees who handle the operations of the business from a 5,000 square foot office in the Corporate Ridge business park.
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The sale of its distributed products business is just the latest in a series of broad steps that has turned Axsys from a supplier of specialty pieces for optical products, to a cutting-edge developer of optical and thermal systems sold by larger corporations such as BAE Systems, Axys’s largest commercial customer.
Terrorism, the Iraq war and crackdowns on immigration have all helped boost demand for high-end optical systems used by the government.
Several days before the planned sale of AST was announced, the Army released a five-year, $2.2 billion contract with BAE Systems, Raytheon and DRS to build thermal weapons sights.
It was a good indicator of potential growth to come — the Army ran through its original five-year contract is less than two and half years. Axsys is one of the main suppliers for the systems built by BAE and Raytheon.
“More people wanted them to than they [the Army] originally thought,” said Stephen E. Levenson, an analyst who covers Axsys for Stifel, Nicolaus & Co. in New York. And that’s good for business over the next several years.
Leveraged by the high growth potential of high-end optics and thermal system, the sale of the distributed products business marks a significant step in the transformation of the company, Levenson said.
But until now, that transformation had been fueled by acquisitions, not sales. The first was Telic Optics Inc. of North Billerica, Mass., an infrared camera manufacturer for which Axsys paid $18 million in 2004.
Next came Diversified Optical Products Inc. of Salem, N.H., a thermal camera and lens-manufacturer. Axys shelled out $57 million for that company in 2005.
Then, earlier this year, Axsys paid $27 million for Grass Valley, Calif.-based Cineflex, a privately held manufacturer of aerial camera systems. The acquisition brought to Axsys a technology that can stabilize military-grade cameras, many of which Cineflex had been buying from Axsys. Such helicopter-mounted systems could be used by federal and local governments, for instance, to identify license plates or observe suspected criminals from long range. They are also used to make movies and gather news.
Those acquisitions, Levenson said, “gave the company enough critical size that it could make plans to dispose the distributed products business.” The acquisitions left the company with a set of products that were in high military demand, from surveillance products to targeting systems like those found on Sidewinder missiles.
The Cineflex acquisition in particular give Axsys a real niche: an airborne camera system that could reliably survey people or places from significant distances, without interference from heat — a common problem for optic systems mounted to walls or building in desert areas.
Axsys said the higher growth, higher margins from its optical systems business should more than offset any losses from the sale of AST.
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In announcing the sale, Axsys actually increased its earnings guidance, raising its predicted 2007 bottom line to between $12.5 and $12.8 million, up from between $11.8 million to $12.1 million.
With the pieces of its optical business in place, CEO Bershard said, “Axsys will emerge from this sale as a well-positioned, focused company with a strong growth history and a very promising future.”
Levenson said that although the company is well bolstered by its acquisitions, it still faces challenges in integrating those acquisitions, and competing against larger more established companies.
“Fortunately,” Levenson said, “they are now dealing with them as customers, and should continue to see good growth.”
“Management has done a good job so far, and it’s been showing up in the stock price,” which is trading near its all-time high, he added.
