With new office and acquisitions in hand, FLIR Systems seeks growth in government business

By Marjorie Censer  / March 21, 2019

FLIR Systems is refocusing its attention on its government and defense business, making significant acquisitions to bolster its unmanned work and opening a new headquarters in Arlington, VA, to be closer to the Pentagon.

In an interview with Inside Defense this week, James Cannon, FLIR's chief executive, said the company in recent years focused on diversifying into commercial applications. But when he was named chief executive in mid-2017, he opted for a change.

“As I looked at all of our efforts to focus on more of commercial and consumer applications, they just weren't working well,” he said. “So I knew that we wanted to shift back.”

FLIR's focus on commercial inadvertently laid the groundwork for one of its new focus areas, Cannon acknowledged. The company had developed a micro thermal camera it was seeking to sell to smartphone makers. While it never landed a deal with the largest manufacturers, FLIR did successfully sell the camera to a small company in Norway making a nanodrone for military applications.

In late 2016, FLIR acquired that company, Prox Dynamics, which first developed the Black Hornet personal reconnaissance system.

Earlier this year, FLIR added bulk to its unmanned systems work, picking up both Aeryon Labs, a developer of unmanned aerial systems, as well as Endeavor Robotics, which produces ground robots.

All three acquisitions are now part of the company's unmanned systems and integrated solutions business, which is part of FLIR's government and defense division and based in Elkridge, MD.

In recent years, Cannon said, FLIR's government work had been primarily through smaller communities, including Special Operations Command. Sales, he said, had flatlined.

Last year, the government and defense business recorded $663 million in sales, about 37 percent of FLIR's total revenue.

Now, Cannon said, he sees increased opportunity through the company's acquisitions and attention.

“The best way we can grow our overall business in the near term is grow our government business the fastest because that gives us a cornerstone of business that can be in programs of records that have a longer-term aspect to them and can be more predictable,” he said. “It gives us then more certainty on our industrial side or commercial side to make investments.”

The addition of Endeavor, he said, helps the company refocus on programmatic government work.

“FLIR really has not done a lot of programmatic work in the past,” he said. “We have absolutely focused on the non-programmatic side more. That's what led us to do, for example, a lot of work with the special operations community or with allied foreign militaries directly.”

“We want to keep doing that because sometimes that business can come at a higher margin or be quicker. There's aspects of it that are favorable,” Cannon continued. “But for us to be the company we want to be, we want to now focus on longer-term programs of record . . . that give us more multiyear stability.”

Endeavor, for instance, in 2017 won an Army program to develop a medium-sized robotic system.

Cannon said a more predictable revenue stream will help the company also be more strategic in its investments. FLIR, he said, prides itself on using a commercial model and investing 10 percent of sales each year in independent research and development.

Meanwhile, Cannon said the company is also changing the way it manages its internal investments. Research and development funding used to “be allocated as a percent of revenue, so bigger businesses would get bigger pieces of the pie,” he said.

“The problem with that is some of those bigger businesses are growing at a slower rate,” Cannon continued. “What we've done this year is certainly there's a base amount of R&D that all of our businesses get to invest . . . but, at the corporate level, we've focused on three technologies in particular -- unmanned, [Advanced Driver Assist Systems] applications and intelligent transportation systems -- and we have carved monies out of the overall spend.”

FLIR is also making minority investments in companies that “rapidly advance our technology roadmap,” according to Cannon.

“We don't want to buy them,” he said. “We try to get [a] 20 percent stake, but, in return, get exclusivity for our needs.”

Cannon said the company has made six of these investments, but typically doesn't publicize them. However, last year, FLIR announced its investment in CVEDIA, which develops machine learning applications.

“The strategic investment by FLIR in CVEDIA will create opportunities for the companies to accelerate the development of thermal spectrum-based deep learning training tools for use by FLIR and selected partners in integrating artificial intelligence into FLIR sensors and systems,” the company said at the time.