Sources: Kratos Acquires Ingersoll Rand’s Systems Integration Business

By Rodney Bosch

SAN DIEGOKratos Defense & Security Solutions Inc. announced on its Web site this week it has acquired a major systems integration competitor for $20 million.

While Kratos officials say they are not at liberty to name the business, sources tell SSI the company is Ingersoll Rand Security Technologies, a wholly owned subsidiary of Ingersoll Rand (IR). When contacted by SSI, Anne Wages in IR’s corporate communications office, said in an E-mail the company is “in a quiet period and are unable to comment at this time.”

According to Kratos’ announcement, the newly acquired business “designs, engineers, deploys, manages and maintains specialty security systems at some of the United States’ most strategic asset and critical infrastructure locations.”

The statement continues:

Additionally, these security systems are typically integrated into command and control system infrastructure or command centers. Also similar to Kratos’ PSS [Public Safety & Security] business unit, approximately 15 percent of the acquired Business’ revenues are recurring in nature due to the operation, maintenance or sustainment of the security systems once deployed.

Ingersoll Rand Security Technologies received a contract worth about $20.4 million in 2008 to install security solutions for Tower One (Freedom Tower) at the World Trade Center in New York City. IR’s list of high profile clients include Yankee Stadium as well several others in the banking and financial services market, according to sources.

Ingersoll Rand Security Technologies was created mainly through acquisitions. Among IR’s largest purchases:

  • In 2002, Electronic Technologies Corporation (ETC) of Dover Plains, N.Y. ETC had 33 offices throughout the United States; its customers included financial service companies, multisite manufacturers and national retailers.
  • In 2005, Security One Systems, which was the largest independent systems integrator in the southeast U.S., operating six branches in Florida.

Ben Goodwin, president of Kratos’ PSS division, tells SSI the newly acquired business brings with it 265 employees and 15 regional offices. Although declining to confirm or identify the business, he said the acquisition includes regional offices in the following cities where Kratos currently does not have a presence: Atlanta, Boston, Charlottesville, N.C., Chicago, Detroit, Miami, Orlando, San Francisco and Toronto.

Goodwin said the business also had a customer call center in Kansas City, Kan., which Kratos will continue to operate 24/7.

“They were very similar to us in terms of other vertical markets that we are in – real estate, energy, education, health care,” he said. “That is one of the nice synergies about our respective businesses, is that it blends very nicely together.”

Kratos’ announcement says the combined business “will be one of the largest and most capable critical infrastructure security system integrators in the industry,” providing the scale to bid on and pursue some of the nation’s largest, most sophisticated security deployments.

“We are more tech savvy-centric and capable than many of our competitors. But what we lacked was as broad of a footprint with as many brick and mortar offices around the country as some of our competitors,” Jim Henry, executive vice president of Kratos|HBE, a part of the PSS division, tells SSI. “This acquisition really increases that by a nearly tripling our physical offices.”

As a pure systems integration services business, Henry said, Kratos is now well positioned to provide national-account end users with a level of customer care other competitors that operate products and systems integration divisions could not achieve.

“The channel conflict in the industry is far more prolific and chaotic than it ever was. We just think there is a better model and the end-user community is served better by an agnostic integration channel as opposed to manufacturers trying to burn the candle at both ends,” he says. 

Kratos acquired Henry Bros. Electronics (HBE), Jim Henry’s former company, in 2010 for about $45 million. The merged entity of Kratos-HBE created revenues in excess of $100 million with HBE accounting for about $70 million of the total, Henry says.

The new acquisition will provide “a magnitude increase in revenue” and further enable the company to leverage its fixed costs, Henry says.

“Providing managed services for large, complex accounts is where I think the new frontier is. We feel as if we are ahead of the game in establishing that and providing the value adds because that is a big consideration on large projects going forward,” he says. “In the broader sense, I have always felt that repeat business of a capital nature from existing accounts, as well as monthly maintenance agreements and managed services agreements, is what our definition of RMR really is.”

For 2012, the acquired business is expected to generate at least $35 to $45 million in revenue and at least $4 million to $5 million in adjusted EBITDA, after expected cost savings and synergies, according to Kratos. The acquired business has more than $20 million in customer accounts receivable and approximately $18 million in working capital.

Kratos is doing a “great job” of putting together a group of integrator acquisitions that is providing them the skills and breadth to be able to do critical infrastructure at the national level, says Sandy Jones, principal of Chardon, Ohio-based Sandra Jones & Co., a consulting and business support and services provider. “There are very few companies that are able to do that in a significant way.”

Jones said Kratos will likely be focused on growing its recurring revenue by at least another 5% this year. 

“As good as they are at what they do, they really have their homework cut out for them. The cash flow is the secret sauce. They have to move that 15% to at least 20% this year,” she says. “That will have an important impact on their profitability this year.”

The $20 million cash transaction is subject to potential adjustment for working capital at closing, and the purchase agreement contains standard and typical indemnifications and other provisions.

B. Riley & Co. LLC acted as exclusive financial advisor to Kratos on the transaction.

Rodney Bosch is managing editor for SECURITY SALES & INTEGRATION. He can be reached at (310) 533-2426.

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