3M making biometrics play

3M announced this morning an agreement to by Cogent, a maker of biometrics products, for $943 million (the press release says when you back out what Cogent has in cash, it's really only a $430 million outlay, but I'm only seeing $272 million in cash and investments on the most recent 10k, so I'm not sure where that number is coming from).

Cogent does “finger, palm, face and iris biometric systems for governments, law enforcement agencies, and commercial enterprises,” though I'll admit I haven't seen them much at the shows or through press releases. Don't know much about them. Maybe that “commercial enterprises” thing is wishful thinking. In the Cogent SEC filings, they say, “We market our solutions primarily to U.S. and foreign government agencies and law enforcement agencies.”

I don't think many of you readers are installing Cogent products.

As for 3M, usually they call me to talk about the security film that they put on monitor screens that makes it so someone else can't peek at what you're working on on the plane - not exactly an integrator's dream product to carry. However, they do have a significant security business (find their most recent 10k here), doing lots of ID stuff to the tune of about $3 billion a year, and they've got $3 billion in cash, so they can throw it around a bit.

Also, they pay a $1 a share in dividends. Not too shabby!

Cogent looks like a pretty healthy company, except that all of its numbers are going the wrong way. Sure, they cleared $7.7 million in net income on $49.8 million in revenues for the first six months of 2010, for a tidy 15.5 percent net margin (good!), but those revenues are down from $62.8 million in the same period last year (bad!).

Net profit is down 55 percent (yikes!). Gross profit is down 37 percent (still kind of yikes).

Despite that 3M is still paying about 15 percent of a premium to buy up the shares. And that seems like quite a lot considering Cogent did, indeed, do $130 million in 2009, but isn't exactly on pace for that in 2010. Is 3M really paying almost a billion dollars (sort of) for a company that might not do $100 million in revenue in 2010?

3M could be looking at the fact that while product revenues have dropped significantly for Cogent, maintenance and service revenues are actually up. That might tell them the business is growing and that government orders of biometric products are bound to be lumpy.

Cogent got 54 percent of its business from one customer in 2009, with that same customer contributing just 25 percent of revenue in 2010.

And that customer is DHS:

The most significant portion of our revenues in the most recent three fiscal years has been derived from sales to the DHS. The DHS uses our solutions in connection with the implementation of the United States Visitor and Immigrant Status Indicator Technology, or US-VISIT, program. We anticipate that the DHS will account for a significant portion of our revenues for the foreseeable future. We do not have any long-term contracts with any of our customers, including the DHS, for the sale of our products, and our future sales will depend upon the receipt of new orders. Any delay or other change in the rollout of US-VISIT or any failure to obtain new orders from the DHS could cause our revenues to fall short of our expectations.

If you look closely at the filing, too, you can see Northrup will be buying at least $5 million in products a year for the next four years, so there's another little base, anyway.

Service revenue doesn't exactly lead to better margins for manufacturers, though. The gross margin dropped from 62.8 percent in 2009 to 49.8 percent in 2010, though that could just be attributable to revenues dropping but overhead not moving much. Something led to them burning through $40 million in cash over the past 12 months.

Was 3M also looking at L-1? What does this do to L-1's valuation?