The company's infrared systems are a mainstay for border security and in Iraq and Afghanistan, and could one day be as common in cars as GPS
It's late at night on a foggy country road and you're behind the wheel of a new BMW 7 Series when you fail to notice a deer in your path 30 feet ahead. But an infrared camera, tucked inside the grille of your car, detects its body heat, produces an image of the deer on the dashboard screen, and sounds an alarm. You slam on the brakes, avoiding a potentially deadly collision.
Once found only in the imagination of science fiction writers, infrared technology is now being deployed to detect land mines in Afghanistan, scan the U.S.-Mexico border for drugs and weapons, and extend the nighttime vision of drivers beyond the distance of their headlights. These and other applications for "dual-use" thermal imaging (which means it's utilized by commercial and military customers) make up a $2.5 billion industry that's growing nearly 20% a year, according to market researcher Maxtech International.
And the leading provider of infrared technology is little-known Flir Systems (FLIR). The Wilsonville (Ore.) company, founded in 1978, may be less familiar to the public than the bellwethers that dominate BusinessWeek's ranking of Tech Hot Growth companies, such as No. 3 Apple (AAPL), No. 5 Google (GOOG), and No. 6 Microsoft (MSFT), but Flir ranks No. 8 on our list this year. (The company made its first appearance on our list last year, at No. 16).
Law Enforcement's Eyes
Flir is an overnight success 30 years in the making. The company's bread and butter has been the high-end infrared cameras it develops for commercial and government use—such as law enforcement and border protection—and then soups up for the military. Mounted on helicopters, ground vehicles, ships, and on the telescoping poles of foot soldiers, the cameras have proven crucial in nontraditional combat zones like Iraq and Afghanistan because they can locate explosives and also help discern civilians from armed insurgents. "What's happened is that there's been a change in the nature of warfare, and finding people in ones and twos and threes is more important now than in battle situations in the past," says Earl Lewis, Flir's chairman and chief executive.
Wartime has been a boon to Flir: Over the past eight years, the company has seen annual growth rates of nearly 25%. Sales last year reached nearly $780 million. On Oct. 23, the company reported third-quarter revenues of $276.7 million, a 45% jump over the same period last year. Although most of its business still comes from contracts with the U.S. and foreign governments, analysts believe Flir is well positioned to diversify into several emerging commercial markets.
Flir works with other manufacturers to integrate its technology into the dashboard of a car or the navigational screen of a boat. Vehicle makers then use Flir's technology as a selling point, touting the systems as safety options to customers. Flir also makes its own home-surveillance systems. And it sees potential in what's called thermography—handheld devices that allow building inspectors and homeowners to detect gas and water leaks, poor insulation, other inefficient use of energy, and structural damage invisible to the eye.
The company hasn't cracked the consumer market because its products are pricey: Most of its low-end consumer products run around $3,000. But the company hopes that its base of government and commercial contracts will help drive volume up across its many businesses, sending manufacturing costs down to the point where average consumers can afford the products.
Pushing Night Vision
That's the plan in autos, where Flir stands to gain in the long term if it can make "night vision" an inexpensive option for a majority of car buyers. Currently the company sells its technology to safety-parts maker AutoLiv (ALV), one of its largest customers. AutoLiv, in turn, incorporates the technology in systems it sells to BMW for use in its 6 Series and 7 Series cars; BMW offers it as a $2,200 option. AutoLiv says that it will announce within the next six months three other carmakers that will incorporate Flir's infrared systems.
Flir's technology appeals to "the more tech-savvy customer," says Jacob Harb, advanced planning and strategy manager for BMW North America. And, he says, "it's more applicable in rural areas than in urban areas," since it's especially useful in places with low visibility, where the occasional deer or person on the road would be harder to spot.
Analysts believe night vision in cars is likely to follow a similar path to that taken by GPS navigational systems, which were introduced in BMWs in 1997 as a luxury option but are now included in most cars the company sells. That depends, however, on whether the price comes down significantly. "The market is potentially huge as the price point moves down to $500 or $1,000," says Tim Quillin, analyst with Little Rock (Ark.)-based Stephens.
What makes the opportunity even more alluring is that it's open turf: Flir has no direct competition. The pioneer of the space, Raytheon (RTN), which made night-vision systems for Cadillac (GM), Hummer, and Honda (HMC), pulled out of the auto market in 2004. Two other carmakers, Mercedes-Benz (DAI) and Lexus (TM), have started including "near-infrared" systems, which also extend the driver's range of vision, but don't pick up as pronounced a contrast from warm objects.
Valued in Combat
Success in autos, if realized, would boost Flir's other businesses. "It allows them to scale processes up to high volumes, and then to use what they learned from making high-volume automotive systems to lower the cost of their higher-end systems," says Gabor F. Fulop, president of Maxtech International.
Even if the recession stalls growth in autos, analysts think Flir's military business is secure. While the U.S. Congress is likely to face pressure to pull back on military spending under the next President, analysts believe infrared technology will largely be spared from cutbacks. "This technology area has proven its value over and over again in Iraq and Afghanistan, and therefore I think it will be more insulated from budget pressure than other areas," says Chris Donaghey, analyst with Atlanta-based Suntrust Robinson Humphrey. So far that appears to be the case: On Oct. 2, the company was awarded a $125.3 million contract by the Pentagon to supply the Marine Corps and Navy with cameras for search and rescue, reconnaissance, and combat missions.