key metrics axsys technologies inc. rating: hold · 2 morgan joseph & co. inc. investment...

The Disclosure section may be found on pages 12 - 13 of this report.

December 20, 2007

Key MetricsAXYS - NASDAQ $38.69

Pricing Date 12/19/2007

Price Target NA

52-Week Range $43.63-$15.71

Shares Outstanding (mm) 10.7

Market Capitalization ($mm) $414.0

3-Mo Average Daily Volume 104,856

Institutional Ownership 60%

Debt/Total Capital 0.0%

ROE 9.4%

Book Value/Share $13.34

Price/Book 2.9x

EPS($) FY: DecemberPrior Curr. Prior Curr.

2006A 2007E 2007E 2008E 2008E1Q-Mar 0.22 -- 0.25A -- 0.36E

2Q-Jun 0.24 -- 0.32A -- 0.38E

3Q-Sep 0.25 -- 0.34A -- 0.41E

4Q-Dec 0.24 -- 0.33E -- 0.43E

FY 0.94 -- 1.24E -- 1.57E

P/E 41.2x 31.2x 24.6x

Revenue($mm)Prior Curr. Prior Curr.

2006A 2007E 2007E 2008E 2008E1Q-Mar 37.5 -- 35.5A -- 47.5E

2Q-Jun 38.5 -- 43.0A -- 48.7E

3Q-Sep 39.8 -- 45.2A -- 49.9E

4Q-Dec 40.6 -- 46.5E -- 51.2E

FY 156.3 -- 170.2E -- 197.2E

Q1 Q2 Q38

16

24

32

40

48

2007

1 Year Price History for AXYS

Created by BlueMatrix

Company Description: Axsys Technologies, based in Rocky Hill, CT, isa leading supplier of a full suite of optical system solutions to defense,homeland security and commercial markets. It manufactures high-endlenses, cameras, and motion control platforms. It recently announcedthe restructuring of its remaining businesses into two segments: theSurveillance Systems Group and the Imaging Systems Group.

Axsys Technologies Inc.

Rating: Hold

Seeing The Threats; Initiating Coverage of Optical

Systems Provider at HOLD

Investment Highlights:■ We are initiating coverage of Axsys Technologies, a leading provider

of optical systems solutions for military, civil, and commercialcustomers, with a HOLD rating.

■ While we feel that Axsys has perhaps the best technical solutions ina key market, the present valuation seems to reflect that notion. Sharesof Axsys have appreciated by about 145% this year.

■ The company has executed on its strategy of divesting non-defenseunits and concentrating its resources in the optical solutionsmarket. We believe an exit strategy for key shareholders may be to sellthe company to a larger defense contractor, and that could be onereason for the present valuation.

■ However, we believe it would be difficult for an acquirer tostructure an accretive transaction at levels significantly higher thanthe current market price of Axsys shares.

■ Axsys recently sold its Distributed Products segment for $15.5mmin cash and announced its intention to restructure the remaining opticalsystems group into two segments, the Surveillance Systems Group andthe Imaging Systems Group.

■ We forecast total 2007 revenues from continuing operations of$170.2mm, gross profit of $54.3mm, EBITDA of $27.0mm, operatingincome of $22.5mm, and net income of $13.7mm or $1.24 per dilutedshare. For next year, we project total sales of $197.2mm, gross profit of$63.0mm, EBITDA of $36.3mm, operating income of $29.0mm, andnet income of $18.0mm or $1.57 per diluted share.

■ The balance sheet at Axsys is strong. Management has a record ofavoiding large debt issues. We expect that the closing of theDistributed Products transaction will leave the company with no debtand $10mm in cash.

■ Axsys appears well positioned to compete more effectively in thelargest market for optical systems - the military aviation market.Until recently, it had some key elements, such as lenses, cameras andmotion control, but lacked stabilized optical platforms. Now, thecompany can offer complete optical systems for aviation customers inthe U.S. and allied countries.

■ The company also appears well positioned to benefit fromhomeland security measures in the U.S. and elsewhere to buildso-called virtual fences. It has long-range infrared technologies thathave been tested in other countries such as Kuwait.

■ Valuation: The share price has increased from less than $16 in 1Q07 tomore than $38, representing appreciation of about 140%, and webelieve the shares are presently fairly valued at 25x our 2008E EPS,thus we rate AXYS a Hold.

DEFENSE TECHNOLOGY & SPECIAL SITUATIONSMichael French

[email protected]

Initiating Coverage

2 MORGAN JOSEPH & CO. INC.

Investment Thesis

As a leader in the development of optical systems used for military operations, Axsys' products help increasethe efficacy of U.S. and allied military capabilities. The surveillance systems Axsys manufactures are alsoused to help border agents locate illegal entrants into the U.S. Both of these tasks are critical to the U.S.'sglobal war on terror. Since targets are increasingly difficult to find, we expect to see an increased reliance onhigh-end optical solutions such as those provided by Axsys.

That said, we feel that the dramatic appreciation of Axsys' market capitalization over the last six months isevidence that investors recognize the company's strong position in a well-funded market. The price of Axsys'shares have risen from less than $16 in 1Q07 to more than $38, representing appreciation of about 145%. Theshares currently reflect a valuation of 25x our 2008E EPS of $1.57.

Management has defined its strategy for the company as one of consolidation around its core optical systemscapabilities. It has shed non-defense units, including the recent disposal of AST Bearings, and other units inareas such as transportation. Proceeds from those events and some short-term borrowing financed acquisitionsthat bolstered the company's ability to better address optical systems markets.

We think the exit strategy here is for management to consider the sale of the company to a larger defensecontractor or other buyer. We believe this company is a financial vehicle for owner and Chairman StephenBershad, and we do not think too many years will pass before Axsys becomes a target for perhaps one of itsdefense customers.

Considering that Axsys' valuation is near the peak for many defense players, we think the probability of suchan acquisition is unlikely at a significant premium to current levels. We also think the valuation will limitfurther share price appreciation due to investor demand. So, we are initiating coverage with a HOLD rating,but with a positive bias on this well-run, well-positioned technology company.

Company Overview

Axsys Technologies, Inc. was incorporated in 1959 and is a designer and manufacturer of precision opticalsolutions used for aerospace, high-performance commercial and defense applications. Since inception, Axsyshas designed and delivered optical products and motion control solutions to a variety of U.S. military andscientific applications. The company has also supplied infrared surveillance solutions to homeland securitymarket customers such as the U.S. Border Patrol, Army, Navy, Air Force, Coast Guard and several portauthorities. Axsys' expertise in optics is used in programs for the F-16, F-18, Apache, Stryker, M1A2 Abramsand Bradley Fighting Vehicle, many of whose operations and functioning depend on precise optical control.

The company's present management acquired the company in 1986 through a leveraged buyout and has sincefocused efforts on the optics segment and making strategic acquisitions to expand core competencies.Acquisitions include the purchase of Telic Optics, a manufacturer of infrared optics and optical assemblies inApril 2004 for $14mm with a $4mm earn-out, and the acquisition of Diversified Optical Products, Inc. (DiOP)in May 2005, a supplier of infrared surveillance camera solutions to military and homeland security customersand a leading OEM supplier of military-grade thermal targeting and imaging lenses, for $60mm cash. Mostrecently, in April 2007, Axsys acquired Cineflex LLC, a manufacturer of high-precision gyro-stabilized aerial

Axsys Technologies Inc. December 20, 2007


camera systems, for $27mm in cash. The company's acquisition of Cineflex has proved immediately accretive,producing $6.5mm in sales for 3Q07, which compares to reported year-end sales of $8.7mm for all of 2006.On December 3, 2007, Axsys announced the sale of its Distributed Products line for $15.5mm in cash to aprivate equity fund. Going forward, the company will have two units, the Surveillance Systems Group and theImaging Systems Group.

Optical Products

Axsys designs and manufactures products for optical devices and components, both transmissive and reflectivevarieties, that leverage its strengths in optics. It produces a variety of aspheric surfaces and uses adiamond-machined process that enhances the aspheric metal optics through a complicated polishing process.These optics are made into different shapes with aspheric surfaces such as conic, general-case aspheric shapes,cylindrical, and toric. Metal optic products are used when requirements cannot be met with simple glass optics.These optics have the unique advantage of being lightweight, thermally stable, and easily mechanicallyinterfaced with actuation and housing devices. The metal optics are used in high-speed, electro-mechanicalscanners; weapons fire-control systems; next-generation, forward-looking infrared night vision weaponssystems; and high-performance, space-borne instruments used for weather, mapping, and scientific satellites.

The company also produces precision glass lenses, albeit these lenses require the use of conventional grindingand polishing techniques. Hand polishing is used on aspheric lenses in glass, and the diamond turning processis used for aspheric and diffracting lenses in infrared materials. Ultimately, these glass lenses go into thermalcameras or imaging systems and are also sold to OEM suppliers for use in different infrared applications.

The company makes multi-speed and segmented positioning sensors that offer precise accuracy and highresolution. Axsys also manufactures gearless direct current motor drives for applications that necessitateimproved response for rapid start/stop actions like missile seekers, optical stabilization, and turret control. Theefficiency of these motors provides up to one arc-second in a high-performance positioning system.

Product development of precision machined and processed exotic materials is another avenue upon whichAxsys builds. The processed materials include beryllium, AlBeMet, titanium, halfnium, quartz and glass -which is used for space, defense, and commercial markets. Axsys also offers fabrication services, whichinclude manual and central navigation computer (CNC) milling, turning, engineering development model(EDM), lapping and grinding, chemical and special processing and mechanical assembly. The company'sairbearings offer high-speed precision positioning and are primarily made for high-speed scanners for digitalimaging and weapons guidance systems. The heat sinks disperse heat in avionics and satellite electronics, andpositioning optical sensors in forward looking infrared (FLIR) night vision systems is a solution with whichthe gimbals are used.

As a designer and manufacturer of electronic components, Axsys serves the semiconductor capital equipmentand high-end digital-imaging markets, which involves production of laser interferometers and electroniccontrollers and drives. Laser interferometers are designed to provide high-precision distance measurement inelectronics assembly equipment and the interferometers are principally used in the semiconductor capitalequipment market. The electronic controllers alter the speed and position of electro-mechanical systems likeprecision motors, actuators, X-Y positioning stages and laser scanners. Power to a motor is supplied by a drivebased on an input from the controller to reposition itself at an instructed location with a specific speed.



Industry Overview

Axsys, and companies similar to Axsys, assist the U.S. military and its allies in developing and implementingtechnologies that address the perennially changing terrorist threats. We anticipate continued demand foradvanced monitoring and locating technologies as radicals and rogue states remain a threat with dangerousweapons systems.

We expect that the war on terror will persist and require a myriad of technologies, many of which are providedby Axsys. Axsys' technology facilitates the process at which the military can pursue, capture, and kill enemyoperatives. The Information Surveillance and Reconnaissance focus of the military is another industry-widetrend felt by many contractors. This shift of focus is beneficial for Axsys, in our view, because its corecompetency is based on gathering specific information about location, identification, and targeting of hostileassets.

Many military applications require exact controls to guarantee critical accurate functioning such as airbornethermal targeting, missile tracking, space-borne surveillance, semiconductor micro-inspection, the movementof structures, optics, and electronics. Axsys manufactures the optical imaging products that provide high levelsof detail military and commercial users require.

Market Opportunity

We believe Axsys Technologies is well positioned in an important segment of the defense technology sector.The American military continues pursuing an interest in Information, Surveillance, and Reconnaissance (ISR)in order to gain an edge over US adversaries, often hard to identify, follow, and monitor. Axsys' high-endinfrared cameras and optical systems are expected to help the U.S. and allied militaries increase their ability tolocate the enemy or individuals, in the domestic arena and in overseas theaters.

As terrorism persists, the United States and its allies continue to increase their budgets within differentdomestic security agencies, boding well for Axsys' product demand. The U.S. defense budget in itself hascontinued growing in recent years, and the component of the budget most important to companies such asAxsys is the procurement budget. The overall defense budget does not specifically reflect spending onproducts that Axsys or related companies would provide, it often includes spending on bases, troops,construction and other items.

The company has benefited from the U.S. military's transition to an Information Surveillance andReconnaissance focus that relies more on data used for imaging facilitated by Axsys' optical sighting andtargeting (fire control) products. As the company integrates Cineflex into its core business, we expect theacquired company's expertise in camera system stabilization to compliment Axsys' airborne and seabornesurveillance and reconnaissance applications.



Financial Highlights

Axsys reported sales from continuing operations for 3Q07 of $45.2mm versus $33.6mm year over year, or up34.5% and EPS of $0.34 versus $0.25. As mentioned, Axsys' acquisition of Cineflex has proven to beaccretive, producing $6.5mm in revenue during 3Q07 or 75% of total sales produced by Cineflex in 2006.There was a record backlog in continuing operations of $138mm during the quarter, which was up 38% yearover year with the majority of it expected for shipment within the next year. Gross margin for the third quarterwas 32.4%, up from 31.4% year over year due to a better sales mix. EBITDA from continuing operations wasreported as $7.1mm for the quarter, up from approximately $4.8mm year over year. Operating income forcontinuing operations was reported at $6.1mm versus $4.3mm, or up 42% year over year, and slightly higherfrom $6.0mm last quarter. Net income from continuing operations was up to $3.8mm from $2.7mm or up 40%year over year and net income from Distributed Products, placed in discontinued operations, was $383,000 forthe quarter. Total backlog from continuing operations reported by the firm at the end of 3Q07 for the first ninemonths of 2007 was $138.5mm versus $100.2mm last year, or up 38.2%.

For 4Q07, we expect sales from continuing operations of $46.5mm given we continue to see accretive resultsfrom the Cineflex acquisition and strong demand in the Optical Systems Group as proven by the significantincrease in backlog. We expect gross margins to fall modestly to 31.1% for the quarter, but to be up for theyear-ended 2007 to 31.9% as the Distributed Products segment is removed and attention is focused onCineflex and the two new segments broken out of Optical Systems Group. Our forecasts for continuingoperations also include: gross profit of $14.5mm, EBITDA of $6.9mm, operating income of $5.8mm, netincome of $3.6mm and EPS of $0.33.

We expect sales in 2008 to be $197.2mm with EPS of $1.57. We also forecast gross profit of $63.0mm,EBITDA of $36.3mm, operating income of $29.0mm, and net income of $18.0mm. Though we expectmoderate growth throughout 2008, we do feel that the current value of the stock reflects this growth.

Looking at the Balance Sheet at the end of the third quarter, Axsys had $5.2mm in cash and cash equivalents,and a line of credit with an outstanding balance of $10mm that was used for the acquisition of Cineflex duringthe second quarter. The sale of the Distributed Products segment was announced on December 3, 2007, for$15.5mm cash and the proceeds were used to pay off Axsys' existing debt, with the expectation of just over$10mm in cash left at year end, reflected in our estimates.

Competitors

One of Axsys' principal competitors is FLIR Systems, Inc. (NASDAQ - FLIR - $30.18) of Portland, Oregon.FLIR's core business involves the design, manufacturing and marketing of thermal imaging systems andinfrared camera systems. FLIR is significantly larger than Axsys with a market cap of approximately $4.1bnand as of the third quarter 2007, it had $170mm in cash, versus Axsys' $415mm market cap and cash holdingsof approximately $5.2mm in the same time period.

FLIR is segmented into three business units: Thermography, Commercial Vision Systems and GovernmentSystems. The latter two, previous to 2006, were run under the Imaging division. The Thermography divisionproduces cameras that provide sensitive temperature measurement capabilities, imaging processing and also



analytical capabilities for commercial, government and industrial applications. The Government Systems unitmanufactures products that are customized for specific uses giving the user the capability to see in the darkand through most haze, smoke, or fog. FLIR offers these products as hand-held and fixed or vehicle-mountedimaging systems for security and surveillance applications designed for land, airborne, and marineapplications. The Commercial Visions Systems unit is primarily for commercial markets demanding infraredimaging technology products used to see in darkness.

Other competitors in the optics space include Corning (NYSE - GLW - $23.40), and Hardric Labs. Corning'sNetOptix subsidiary is involved specifically in reflective telescope technologies for infrared and visible lightapplications. Hardric Labs is a similar, but smaller private company with a good reputation, albeit with alimited ability to aggressively compete due to its size. Raytheon (NYSE - RTN - $60.80), a large defensecontractor and Axsys' largest source of private sector work, is also sometimes a competitor through its Elcandivision, but the capabilities of the two companies do no significantly overlap. Qioptiq Group is anotherprivate competitor offering a variety of camera and imaging products in the optics arena and is located close toRochester, New York. The Qioptiq Group was formed after Candover Investments PLC (LSE - CDI.L -GBP1808.00), of London acquired seven Thales High Tech Optics companies, including the Avimo Group, aspecialist of precision instruments and creator of the Automated Zoom Microscope.

Competitors within the motion control segment include Danaher (NYSE - DHR - $85.70), Moog (NYSE -MOG.A - $46.17), and Aeroflex. Danaher is the largest and most significant competitor in this area and isinvolved in a variety of markets such as medical devices, electronics and motion control. Because Danaherdoes not manufacture cameras or lenses, it cannot offer a complete optical solution similar to Axsys. Moog isan established manufacturer of control systems for applications in aerospace, defense, industrial, and medicaldevice markets. Moog's controls systems are used for planes, satellites, rockets, etc. Aeroflex, a smallaerospace and communications component specialist, designs and manufactures a variety of integratedcircuits, microelectronic modules, and test products.

Customers

The company's customers include OEMs, equipment integrators, and users of high-precision equipment. Salesare focused toward OEM customers in the aerospace and defense, homeland security, high-end graphic art,medical imaging, semiconductor capital equipment, and industrial automation markets. As of December 31,2006, Axsys' sales from subcontracts with the U.S. government accounted for 57.3% of total revenue andinternational customers accounted for approximately 9% of revenue. The two largest private sector customersduring the same period were both aerospace and defense systems suppliers: BAE Systems (OTC - BAESY -$38.00), representing 12.1% of sales and Raytheon Company, which represented 12.3% of sales. The contractsto BAE Systems are in multiple programs but the largest are related to an armored vehicle program andThermal Weapons Sight program. The Thermal Weapons Sight (TWS) Program is expected to represent 6% ofAxsys' revenue for 2007.

Boeing (NYSE - BA - $86.62) is another one of Axsys' customers, and in the third quarter, Axsys signed acontract with Boeing for the SBINet toolbox, which involves the use of short-, mid- and long-range infraredcameras. During the third quarter, Axsys was also awarded a contract to supply cameras along the borders ofthe United Arab Emirates, a $5.5mm booking for the JET European nuclear fusion reactor, and is in therunning to help Boeing's SBINet program.



Management

Stephen Bershad, Chairman and Chief Executive Officer. Mr. Bershad has been chairman and CEO ofAxsys since 1986. Previously, he was Managing Director with Lehman Brothers (NYSE - LEH - $61.89),where he held a series of senior management positions in merchant banking and mergers and acquisitions.

Scott B. Conner, President and Chief Operating Officer. Mr. Conner was promoted to his new position thismonth concurrent with the formation of the Surveillance Systems Group and Imaging Systems Group businesssegments. Prior to this position, Mr. Conner held the position of VP of Strategic Planning and CorporateDevelopment since joining Axsys in July 2004. Prior to joining Axsys, he held a similar Strategic Planningrole at Quantum Bridge Communications, a developer of fiber optic networking equipment, and led thenegotiations that culminated into the sale of Quantum Bridge to Motorola (NYSE - MOT - $16.00). Mr.Conner also served as Director of Business Development and Strategy at ADC Telecommunications(NASDAQ - ADCT - $15.43).

David Almeida, Chief financial Officer. Mr. Almeida joined Axsys in November 2001 as Vice President,CFO, Secretary and Treasurer. Before Axsys, Mr. Almeida was Vice President – Finance with ADCTelecommunications, Inc., in the Broadband, Access and Transport Group, a provider of global networkinfrastructure products and services. At ADC, Mr. Almeida was also positioned in several executive rolesmanaging finance, human resources, information technology and customer service.

Investment Risks

We believe Axsys faces the typical risks facing most defensive contractors and we are not aware of anymaterial risks to the company that have a high probability of occurring.

Axsys competes against the larger FLIR Systems which has existing business in aviation, an area in whichAxsys would like to expand.

Axsys has retained market share up to now due to its special polishing processes. A viable risk exists thatanother provider could provide products similar to Axsys, since the company does not have its processprotected by a patent. As a result of the complicated production process and limited markets of the advancedlens, we do not foresee any new competitors threatening this barrier.

Defense budgets often change with the ambitions of the Executive branch and political considerations onCapitol Hill. Major changes to legislative or executive leadership could significantly alter priorities fordefense spending. Aside from these risks, the government can cancel contracts, albeit usually somecompensation would be seen unless wrongdoing was involved resulting in the decision to cancel. We do notexpect changes to defense budgets to occur.

The majority of Axsys' business is concentrated within the U.S. government. The majority of thesecontracts are fixed-price contracts which lends the opportunity for improving efficiencies to improve margins,



however cost over-runs in these types of contracts risk potential negative margins, unlike cost-plus-feecontracts. The U.S. Departments of Defense and Homeland Security and NASA, are expected to provideapproximately 85% of fiscal 2007 estimated sales.



AXSYS Technologies, INC.Morgan Joseph & Co.fiscal year ends December 31in thousands of $US, unless otherwise noted

FY 1Q06A FY 2Q06A FY 3Q06A FY 4Q06A FY 2006A FY 1Q07A FY 2Q07A FY 3Q07A FY 4Q07E FY 2007E FY 1Q08E FY 2Q08E FY 3Q08E FY 4Q08E FY 2008E

Revenues by Operating Segments

Optical Systems Group 30,858 31,672 33,640 33,758 129,928 35,539 42,955 38,718 36,782 153,994 37,150 37,707 38,273 38,847 151,977Cineflex - - - - - - - 6,500 9,750 16,250 10,335 10,955 11,612 12,309 45,212

Total Revenue 37,458 38,505 39,775 40,609 156,347 35,539 42,955 45,218 46,532 170,244 47,485 48,662 49,885 51,156 197,188

Total Cost of Goods Sold and Services Provided 25,786 26,202 27,302 28,158 107,448 24,496 28,854 30,560 32,047 115,957 32,444 33,156 33,898 34,672 134,169

Gross Profit 11,672 12,303 12,473 12,451 48,899 11,043 14,101 14,658 14,485 54,287 15,041 15,507 15,987 16,484 63,019

Selling, General and Administrative Expenses 6,986 6,956 6,918 7,299 28,159 5,346 6,243 7,131 7,131 25,851 7,060 6,989 6,919 6,850 27,818

Research and Development Expenses 907 1,212 1,261 1,083 4,463 1,083 1,864 1,436 1,508 5,891 1,523 1,538 1,553 1,569 6,183

EBITDA 4,917 5,251 5,355 5,250 20,773 5,758 7,185 7,130 6,916 26,989 8,263 8,780 9,360 9,906 36,310

Depreciation and Amortization 1138 1116 1061 1181 4496 1144 1191 1039 1070 4444 1804 1801 1846 1842 7292

Total Operating Expenses 33,679 34,370 35,481 36,540 140,070 30,925 36,961 39,127 40,686 147,699 41,026 41,683 42,371 43,091 168,171

EBIT 3,779 4,135 4,294 4,069 16,277 4,614 5,994 6,091 5,846 22,545 6,459 6,980 7,515 8,065 29,018

Non Operating Expenses

Interest Income 109 42 71 68 294 63 56 55 110 284 111 112 113 114 451

Interest expense (17) (45) (10) (8) (80) (9) (263) (191) (134) (597) (146) (159) (173) (189) (666)

Net interest Income (expense) 92 (3) 61 60 210 54 (207) (136) (24) (313) (35) (47) (60) (74) (215)Loss on Extinguishment of DebtOther Income (20) 45 (14) (13) (2) (258) 6 17 - (235) - - - - -Total Non Operating Expenses/Income 72 42 47 47 208 (204) (201) (119) (24) (548) (35) (47) (60) (74) (215)

EBT 3,851 4,177 4,341 4,116 16,485 4,410 5,793 5,972 5,822 21,997 6,424 6,933 7,455 7,990 28,802Income Tax Provision 1,461 1,584 1,647 1,411 6,103 1,676 2,244 2,216 2,183 8,319 2,409 2,600 2,796 2,996 10,801

Income After Provision for Income Taxes 2,390 2,593 2,694 2,705 10,382 2,734 3,549 3,756 3,639 13,679 4,015 4,333 4,659 4,994 18,001

Net Income 2,390 2,593 2,694 2,705 10,382 2,734 3,549 3,756 3,639 13,679 4,015 4,333 4,659 4,994 18,001Gain/Loss from Discontd Operations - 20 - (137) (117) 248 298 383 2,000 2,929 - - - - -Net income, reported 2,982 3,847 4,139 5,639 16,608Net Income available to common stock holders 2,390 2,613 2,694 2,568 10,265 2,734 3,549 3,756 3,639 13,679 4,015 4,333 4,659 4,994 18,001

Diluted EPS 0.22 0.24 0.25 0.24 0.94 0.25 0.32 0.34 0.33 1.24 0.36 0.38 0.41 0.43 1.57Basic EPS 0.23 0.25 0.25 0.24 0.97 0.26 0.33 0.35 0.34 1.28 0.37 0.40 0.42 0.45 1.64

Sources: Company data, Morgan Joseph estimates





Current AssetsCash and cash equivalents 2,734 1,874 5,747 6,044 6,044 6,195 4,250 5,176 10,276 10,276 11,913 13,863 16,185 18,838 18,838Accounts receivable plus other receivables 21,555 20,612 18,904 21,321 21,321 23,356 22,320 20,270 21,284 21,284 22,348 23,465 24,638 25,870 25,870Assets held for Sale 14,416Short Term Investments - - - - - - - - - - - - - - -Income taxes—deferred and current 3,313 3,374 3,230 3,675 3,675 3,836 3,997 3,556 3,659 3,659 3,734 3,827 3,923 4,023 4,023Inventory 39,146 41,225 43,352 44,229 44,229 47,610 51,575 48,718 51,154 51,154 53,712 56,397 59,217 62,178 62,178Other Current Assests 1,300 1,497 1,147 368 368 309 342 379 379 379 379 379 379 379 379Prepaid Expenses 994 994 1,037 1,366 941

Total Current Assets 68,048 68,582 72,380 76,631 76,631 82,343 83,850 93,456 86,752 86,752 92,085 97,931 104,343 111,288 111,288

Property, Plant and equipment, net 15,272 19,573 21,207 22,860 22,860 23,464 15,441 16,230 17,042 17,042 17,894 18,788 19,728 20,714 20,714Net Intangible Assets 10,181 9,917 9,712 9,507 9,507 9,180 12,891 12,588 12,588 12,588 12,588 12,588 12,588 12,588 12,588Goodwill 61,048 61,048 61,048 62,231 62,231 62,231 84,089 82,649 82,649 82,649 82,649 82,649 82,649 82,649 82,649Other Assets 1,066 1,073 1,052 1,116 1,116 1,035 1,568 1,574 1,574 1,574 1,574 1,574 1,574 1,574 1,574Total Assets 155,615 160,193 165,399 172,345 172,345 178,253 197,839 206,497 200,604 200,604 206,790 213,530 220,881 228,813 228,813

Current LiabilitiesLine of Credit 14,000 10,000Accounts payable 10,015 10,536 8,341 10,895 10,895 10,336 10,530 11,307 11,872 11,872 12,466 13,089 13,744 14,431 14,431Accrued Expenses 13,152 13,689 16,038 18,348 18,348 19,338 17,587 20,978 21,188 21,188 21,400 21,614 21,830 22,048 22,048Deferred Revenue 5,287 5,652 7,401 6,088 6,088 8,976 10,004 10,064 10,165 10,165 10,266 10,369 10,473 10,577 10,577Current Portion of Capital lease obligations - - - - - - - - - - - - - - -Liabilities held for Sale 2,648Current Portion of Long term debt - - - - - - - - - - - - - - -Total Current Liabilities 28,454 29,877 31,780 35,331 35,331 38,650 52,121 54,997 43,225 43,225 44,132 45,072 46,046 47,056 47,056

Long Term Debt - - - - - - - - - - - - -CAPITAL LEASES, less current portion - - - - - - - - - - - - - - -Other Long Term Liability 4,981 5,236 5,350 5,826 5,826 5,907 7,610 8,243 8,243 8,243 8,243 8,243 8,243 8,243 8,243

Total Liabilities 33,435 35,113 37,130 41,157 41,157 44,557 59,731 63,240 51,468 51,468 52,375 53,315 54,289 55,299 55,299

Common stock 106 106 106 106 106 107 107 107 107 107 107 107 107 107 107Additional paid-in capital 98,129 98,381 98,815 99,111 99,111 99,605 100,135 101,143 101,143 101,143 101,143 101,143 101,143 101,143 101,143Accumulated other comprehensive income - - - - - - - - - - - - - - -Retained Earnings 24,102 26,715 29,409 31,977 31,977 34,021 37,868 42,007 47,886 47,886 53,165 58,965 65,342 72,263 72,263Treasury Stock (157) (122) (61) (6) (6) (37) (2) - - - - - - - -Total Stockholders' Equity 122,180 125,080 128,269 131,188 131,188 133,696 138,108 143,257 149,136 149,136 154,415 160,215 166,592 173,513 173,513

Total Liabilities and Stockholders' Equity 155,615 160,193 165,399 172,345 172,345 178,253 197,839 206,497 200,604 200,604 206,790 213,530 220,882 228,813 228,813






Operating ActivitiesNet Income 2,390 2,613 2,694 2,568 10,265 2,734 3,549 3,756 3,639 13,679 4,015 4,333 4,659 4,994 18,001Reconciliation of net loss to net cash provided by / (used in) operating activities:Income from discontinued operations (929) (929)Depreciation and amortization 1,138 1,116 1,061 1,181 4,496 1,144 1,191 1,039 1,070 4,444 1,804 1,801 1,846 1,842 7,292Amortization of debt issuance costs 3 6 9Deferred Income Taxes 339 163 460 (139) 823 156 (105) (306) (306) (561) (306) (306) (306) (306) (1,224)Stock Contribution to 401 (k) plan 17 18 16 19 70 22 22 26 26 96 26 26 26 26 104Loss on disposal of capital assets 19 (48) 7 54 32 88 18 38 40 184 40 40 40 40 160Stock Based Compensation Expense 203 257 348 285 1,093 295 338 255 250 1,138 250 250 250 250 1,000Impairment of Intangible assets 131 - 131Others - - - - - - - - - - - - - - -Net changes in operating assets and liabilities, net of acquisition:

Accounts receivable (2,734) 943 1,708 (2,417) (2,500) (2,035) 1,036 (1,973) (1,973) (4,945) (1,973) (1,973) (1,973) (1,973) (7,892)Inventories (1,280) (2,025) (2,127) (877) (6,309) (3,381) (1,072) (5,519) (5,519) (15,491) (5,519) (5,519) (5,519) (5,519) (22,076)Deferred Revenue (1,757) 365 1,749 (1,313) (956) 2,888 485 60 60 3,493 60 60 60 60 240Accounts payable 1,996 521 (2,195) 2,554 2,876 (559) (983) 4,122 860 3,440 860 860 860 860 3,440Accrued Expenses (711) 620 2,381 1,172 3,462 1,271 (1,952) 3,588 3,588 6,495 3,588 3,588 3,588 3,588 14,352Other current liabilities and LT liabilities (115) 24 (151) 84 (158) (162) (148) 79 79 (152) 79 79 79 79 316Others current assets and other assets (55) (197) 278 (208) (182) 23 (281) 213 213 168 213 213 213 213 852

Net Cash provided by Discontd Ops (138) (84) (25) (45) (292) (37) (50) 1,533 - 1,446 - - - - -Net cash provided by / (used in) operating activities (688) 4,286 6,204 2,918 12,720 2,581 2,048 5,988 2,027 12,645 3,138 3,452 3,823 4,154 14,566

Investing ActivitiesCapital expenditures (855) (5,249) (2,497) (2,629) (11,230) (1,640) (999) (2,066) (2,066) (6,771) (2,066) (2,066) (2,066) (2,066) (7,888)Purchase/sale of short term investments - - - - - - - - - - - - - - -Purchase of Telic - earn out payment (2,817) (2,817) (1,183) - (1,183)Acquisition of business - - - - - - (27,020) (17) - (27,037) - - - - -Proceeds from Sale of Cinflex 15,500Proceeds from Sale of Capital Equipment 90 42 (39) 93 9,589 9,589Other - - - - - - - -

Net cash used in investing activities (3,672) (5,159) (2,455) (2,668) (13,954) (2,823) (18,430) (2,083) 13,434 (9,902) (2,066) (2,066) (2,066) (2,066) (8,264)

Financing ActivitiesPayments / borrowings on long term debt (2,500) (4,500) (1,000) - (8,000) - (11,000) (4,000) (10,000) (25,000) - - - - -Proceeds from Exercise of stock options 9 12 84 35 140 84 163 565 565 1,377 565 565 565 565 2,260Tax Benefit from Exercise of stock options 6 1 40 12 59 63 43 76 182Proceeds from Long Term Debt 2,500 4,500 1,000 8,000 25,000 25,000Payments / borrowings on Capital Lease Obligations - - - - - - - - - - - - - - -Payments of Debt Issue Costs - (69) (69)Payments from Stock buy back program (1) (1)Net cash provided by / (used in) financing activities 15 13 124 47 199 147 14,136 (3,359) (9,435) 1,489 565 565 565 565 2,260

Effect of exchange rate changes on cash and cash equivalents - - - - - - - - - - - - - - -

Net Increase/decrease in cash and cash equivalents (4,345) (860) 3,873 297 (1,035) (95) (2,246) 546 6,026 4,232 1,637 1,951 2,322 2,653 8,562

Cash and cash equivalents, BOP 7,079 2,734 1,874 5,747 7,079 6,044 5,950 3,704 4,250 6,044 10,276 11,913 13,863 16,185 10,276Cash and cash equivalents, EOP 2,734 1,874 5,747 6,044 6,044 5,950 3,704 4,250 10,276 10,276 11,913 13,863 16,185 18,838 18,838




Required Disclosures

Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q38

16

24

32

40

48

2005 2006 2007

Rating and Price Target History for: Axsys Technologies Inc. (AXYS) as of 12-19-2007

Created by BlueMatrix

I, Michael French, the author of this research report, certify that the views expressed in this report accurately reflect my personal viewsabout the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specificrecommendations or views contained in this research report.

Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc.

Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subjectcompany within the next three months.

Investment BankingServices/Past 12 Mos.

Rating Percent Percent

BUY [B] 67.57 29.33

HOLD [H] 30.63 11.76

SELL [S] 1.80 0.00

Meaning of Ratings A) Buy means reasonable outperformance relative to the market over 12-18 months.B) Hold means market-type risk adjusted performance; potential source of funds.C) Sell means expected to underperform the market.

Other DisclosuresThe information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to beall inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. MorganJoseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securitiesmentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their ownaccounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed areour present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updatesto the opinions or information provided herein. Additional information is available upon request.

© Copyright 2007 by Morgan Joseph & Co. Inc.



Morgan Joseph & Co. Inc.600 Fifth Avenue, 19th FlNew York, NY 10020Tel. 212.218.3700Fax. 212.218.3789

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key metrics axsys technologies inc. rating: hold · 2 morgan joseph & co. inc. investment...

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