Acacia Research Corporation (NASDAQ: ACTG) is a diversified holding company that acquires and operates businesses across the industrial, energy, and technology sectors. With a focus on long-term value creation, Acacia has built a compelling portfolio of assets that are poised to capitalize on emerging industry trends and deliver sustainable growth.
Business Overview and History Acacia was founded in 1993 as a patent licensing and enforcement company, primarily focused on the technology sector. Over the years, the company has evolved its strategy, transitioning into a value-oriented acquirer of operating businesses. Through its wholly-owned subsidiary Acacia Research Group, LLC, the company engaged in the licensing and enforcement of patented technologies, assuming responsibility for advancing operational expenses while pursuing licensing and enforcement programs.
Acacia has built an impressive track record of licensing success, executing over 1,600 license agreements as of September 30, 2024 across nearly 200 patent portfolio licensing and enforcement programs. Since January 1, 2020, the company has generated gross licensing revenue of approximately $233.9 million and returned approximately $91.1 million to its patent partners.
In 2021, Acacia made its first major operating company acquisition, purchasing Printronix, a leading manufacturer of industrial impact printers. This marked a significant shift in the company's business model, as it sought to leverage its capital and operational expertise to build a diversified portfolio of cash-generating assets.
In November 2023, Acacia further diversified its operations with the acquisition of a majority stake in Benchmark Energy, an independent oil and gas company. This strategic move demonstrated Acacia's ability to identify and capitalize on attractive opportunities in the energy sector, which has continued to generate strong cash flows and operational results.
More recently, in October 2024, Acacia announced the acquisition of Deflecto, a leading specialty manufacturer of essential products serving the commercial transportation, HVAC, and office markets. This transaction, valued at $103.7 million, is expected to be immediately accretive to Acacia's free cash flow and earnings per share, while also providing significant opportunities for value creation through operational improvements and strategic growth initiatives.
Financial Strength and Operational Performance Acacia's financial position and operational performance have strengthened considerably in recent years, driven by its disciplined approach to capital allocation and its ability to integrate and improve the businesses it acquires.
Financials For the most recent fiscal year (2023), Acacia reported revenue of $125.1 million, net income of $67.06 million, operating cash flow of -$22.51 million, and free cash flow of -$28.7 million. In the most recent quarter (Q3 2024), the company generated revenue of $23.31 million, a net loss of $14 million, operating cash flow of $70.38 million, and free cash flow of -$117.07 million. The significant revenue increase of 131% year-over-year was primarily driven by the full quarter impact of the Benchmark energy operations acquisition. The net loss in Q3 2024 was attributed to $4.1 million in unrealized losses on equity securities investments and $2 million in non-recurring legal expenses. Operating cash flow showed substantial improvement compared to the prior year quarter.
As of September 30, 2024, Acacia reported total cash, cash equivalents, and equity securities of $374.2 million, up from $403.2 million at the end of 2023. This robust balance sheet provides the company with significant financial flexibility to pursue additional strategic acquisitions and investments.
During the nine months ended September 30, 2024, Acacia generated $70.4 million in operating cash flow, a testament to the cash-generating capabilities of its operating subsidiaries. The company's book value per share stood at $5.85 as of September 30, 2024, excluding the impact of $14.9 million in non-recurring legal expenses, the book value per share would have been $6.00.
Acacia's diversified business model has also contributed to its financial resilience. In the third quarter of 2024, the company's Energy Operations segment generated $15.8 million in revenue and $8.4 million in adjusted EBITDA, while the Industrial Operations segment contributed $7.0 million in revenue, an 11% increase from the prior quarter.
Liquidity As of September 30, 2024, Acacia reported total cash, cash equivalents, and equity securities of $374.2 million, up from $403.2 million at the end of 2023. The company's debt-to-equity ratio stood at 0.002, with a current ratio of 16.39 and a quick ratio of 15.95. Acacia also has access to an $85 million revolving credit facility at Benchmark, with $70 million drawn as of Q3 2024. This robust balance sheet provides the company with significant financial flexibility to pursue additional strategic acquisitions and investments.
Business Segments
Intellectual Property Operations: Acacia's Intellectual Property Operations segment invests in and engages in the licensing and enforcement of patented technologies through its wholly-owned subsidiary, Acacia Research Group, LLC (ARG) and its subsidiaries. ARG owns or controls the rights to multiple patent portfolios, covering technologies used in various industries. For the three months ended September 30, 2024, this segment generated revenues of $486,000, a decrease of $1.3 million compared to the prior year period due to fewer executed license agreements. For the nine months ended September 30, 2024, revenues were $19.44 million, an increase of $13.1 million compared to the prior year period, driven by an increase in new license agreements with higher average license fees.
Industrial Operations: The Industrial Operations segment consists of Printronix, a leading manufacturer and distributor of industrial impact printers. Printronix operates globally, with manufacturing, configuration, and distribution sites in Malaysia, the US, Singapore, China, and the Netherlands. For the three months ended September 30, 2024, Industrial Operations revenues were $7.01 million, a decrease of $1.3 million compared to the prior year period due to lower printer unit sales. For the nine months ended September 30, 2024, revenues were $22.18 million, a decrease of $4.3 million compared to the prior year period.
Energy Operations: In November 2023, Acacia acquired a majority stake in Benchmark Energy, an independent oil and gas company with assets in Texas and Oklahoma. For the three and nine months ended September 30, 2024, the Energy Operations segment generated revenues of $15.82 million and $31.84 million, respectively. This included oil sales, natural gas sales, natural gas liquids sales, and other service sales.
Risks and Challenges While Acacia has demonstrated its ability to successfully acquire and integrate diverse businesses, the company is not without its risks and challenges. The ongoing integration of Deflecto, as well as the continued optimization of Benchmark Energy's operations, will require significant management attention and execution.
Additionally, Acacia's Intellectual Property Operations segment, while a smaller contributor to the overall business, remains subject to the inherent volatility and uncertainty associated with patent licensing and enforcement activities. The company's ability to continue identifying and executing on attractive acquisition opportunities will also be critical to its long-term success.
The IP licensing and enforcement industry has faced challenges in recent years due to changes in the patent environment. Acacia has not acquired any new patent portfolios since 2021, highlighting the difficulty in finding quality patent intake. The industrial and energy sectors Acacia operates in are expected to see moderate growth, with the industrial automation and oil/gas industries forecasted to have compound annual growth rates of 5-8% and 3-5% respectively over the next 5 years.
Legal and Regulatory Issues In September 2019, Slingshot Technologies sued Acacia's subsidiaries, alleging misappropriation of confidential information. The case is ongoing, with the court transferring it to Delaware Superior Court in 2023 after initially dismissing some claims.
Acacia was also involved in a dispute over profit interests related to former executives' exercise of Veritone warrants, which was settled in August 2024 for a $14.5 million payment by Acacia.
Future Outlook and Guidance For the Deflecto acquisition, Acacia expects the company to generate revenues in the range of $128 million to $136 million, and $17.5 million to $19.5 million of EBITDA for 2024. Benchmark Energy, the company's energy operations segment, delivered consolidated revenues of $15.8 million and adjusted EBITDA of $8.4 million in Q3 2024. Benchmark is focused on acquiring predictable cash flow through shallow decline oil and gas properties with minimal capital intensity. For Printronix, the industrial operations segment, Acacia expects it to continue generating free cash flow on an annual basis.
Conclusion: Acacia Research Corporation has transformed itself into a diversified holding company with a compelling portfolio of operating businesses. Through its strategic acquisitions and operational improvements, the company has positioned itself to capitalize on emerging industry trends and deliver sustainable growth and value for its shareholders. With a strong balance sheet, robust cash flow generation, and a proven track record of value creation, Acacia is well-equipped to navigate the challenges ahead and continue its ascent as a leading multi-industry investment platform.