FLIR Systems, Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Greetings and welcome to the FLIR Systems First Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce Todd DuChene, Senior Vice President, General Counsel and Secretary of FLIR Systems. Thank you. You may begin.

[Todd DuChene:]

Good morning everyone. Please note that our earnings press release and presentation slides that we will refer to on this call are available under the events and presentation section of www.flir.com/investor. Before we begin this conference call, I need to remind you that statements made on this call other than historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Words such as anticipates, estimates, expects, intend and believes, and similar words and expressions are intended to identify forward-looking statements. All of these statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the press release we issued earlier today for a description of factors that could cause actual results to differ materially from those forecast. The forward-looking statements we make today speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today. Let me now turn the call over to Andy Teich, President and CEO of FLIR Systems. Andy?

[Andy Teich:]

Thank you, Todd. I’d like to welcome everyone to FLIR’s First Quarter 2015 Earnings Call. With Todd and me today is our COO, Tom Surran; Interim CFO, Dave Muessle, Chief Marketing Officer, Travis Merrill; and SVP of Corporate development, Shane Harrison. I will start on slide 4 of the presentation. This morning we recorded first quarter revenue of 345 million and earnings per share of $0.34. While revenue was down approximately 2% compared to the prior year as the recent movement of the U.S. dollar added approximately 17 million of headwind to our revenue. Earnings per share were up 35% excluding charges related to our restructuring activities. Adjusted operating margin of 19% was nearly 5 percentage points higher than the first quarter of 2014. Our international operating footprint as well as the savings realized from our restructuring drove the growth and profitability despite the revenue pressure. Cash flow was strong as well with operating cash flow representing a 156% of the net income. Overall backlog finished the quarter at 557 million improving both sequentially and year-over-year. During the quarter, we introduced several new products across the spectrum of performance and price. At the premium performance end we introduced New Science and maritime cameras and at the entry level we continue to introduce Lepton based products that we expect to attract new customer in our existing markets. These included the pocket sized C2 for industrial trades people and TCX thermal security camera for small and medium sized businesses. On the consumer side, we recently launched FLIR FX home monitoring camera that is a highly differentiated product that provides people a very versatile, reliable, efficient and fun imaging and security solution. Additionally our OEM segment automotive product line takes another step for its broader adoption of our technology by being included as an option on the 2016 Cadillac CT6, the first American made make to offer our thermal technology. Moving to slide 5, in our earning release today we reaffirmed our outlook for 2015. We continue to expect revenues between 1.55 billion and 1.6 billion for the full year and earnings per diluted share in the range of the $1.60 to $1.70. This range incorporates our current views of currency rates for the year. We also announced today our regular quarterly dividend of $0.11 per share which will be payable on June 5, to shareholder of record as of May 22. I’ll now pass the line over to Dave to review the first quarter financial results. Dave.

[Dave Muessle:]

Thanks, Andy. The following discussion on pre-operating results for the first quarter excludes restructuring expenses totaling $314,000 in 2015 and $8.4 million in 2014. On slide 7, you’ll see a summarized income statement. First quarter consolidated revenue was $344.5 million a decrease of 2% compared to the first quarter of 2014. The increased strength of the U.S. dollar during the past year impacted the revenue comparison year-over-year as a revenue on a constant currency basis increased by approximately 3%. Our security and detection segments reported a 32% and 25% increase in sales year-over-year respectively. All of our other segments reported year-over-year declines most notably an 8% drop in surveillance. However, our instruments and maritime segments which are most impacted by currency due to their sales volumes in Europe and in local currencies, would've shown increases of 7% and 9% respectively on a constant currency basis. Sales to the U.S. Government represented 15% of total revenue in Q1 compared to 20% of revenue in the first quarter of last year. International revenue was 54% of total revenue in both 2015 and 2014. Consolidated Q1 gross margin was 51%, a 3 percentage point increase compared to last year. Consolidated operating margin before restructuring was 19% compared with 14% in the first quarter last year. Segment level operating expenses declined year-over-year by 2% due to currency and restructuring benefits. Corporate administrative costs were lower due to reduced legal spending associated with several matters that existed in 2014. Our tax rate in the quarter is 24% which is very comparable to the 2014 rate when excluding discreet items from last year. Net earnings excluding restructuring costs were $48.1 million, an increase of 33% over last year and earnings per fully diluted share were $0.34, an increase of 35% over Q1 of 2014. Turning to Slide 8, you will see that we closed the first quarter with cash of $547.8 million, an increase of $16.4 million during the quarter. Stronger U.S. dollar reduced value of cash held by our operations outside United States by $31.4 million. Our cash flow from operations in the first quarter was $74.9 million, a 156% of quarterly earnings. As we indicated in our last call, we saw reasonably good collections during the quarter as accounts receivable declined by $42.9 million during the first quarter, but inventories did increase by $19.7 million in the quarter. We had capital expenditures of 13.1 million in the first quarter and returned $15.4 million to shareholders through the payment of dividends. We did not repurchase any shares of our stock during the first quarter under the 15 million share repurchase program that we announced in February. However, for the remainder of 2015, we expect to continue our long standing approach to buybacks whereby purchase activity is governed by our view of relative value, expected capital needs and M&A opportunities. As Andy stated, we are reaffirming our full year 2015 outlook for revenue and fully diluted earnings per share. While the strengthening dollar was a significant headwind in our revenue in the first quarter, the impact was largely in line with our expectations. This concludes the summary of our first quarter results. Let me now turn the call over to Tom Surran to cover our operational highlights for Q1. Tom?

[Tom Surran:]

Thank you, Dave. Slide 10 is a summary of our segment operating results. Despite top-line softness, first quarter consolidated segment operating income grew 13% over the first quarter 2014 and segment operating margin improved by more than 300 basis points, 23% excluding restructuring charges. Total order backlog finished the quarter $557 million which is 8% higher than first quarter of 2014. Moving to Slide 11. During the first quarter the Surveillance segment revenue declined 8% year-over-year to 112.9 million and strength in our integrated systems products was more than offset by softness in our airborne gimbals in manned portable product lines. In the prior year we had significant deliveries of our BRITE Star Airborne Systems to U.S. Department of Defense Program. Delivery to international customers made up nearly 60% of Surveillance segment revenue in the quarter. It should be noted that at the beginning of this year we reclassified our Personal Vision Systems product line from the OEM and emerging segment to the Surveillance segment in order to better align the product development, sales functions with the needs of our customers for these products. Prior year results have been adjusted for this reclassification. Surveillance segment operating income of $30.3 million excluding restructuring charge increased 11% versus the prior year which represents 460 basis point increases in operating margin driven by improved product margins, of favorable margin shift in product mix and lower operating expenses. Surveillance segment order flow was down versus last year but faced a challenging comparison as Q1 2014 included a single customer order with over $30 million with surveillance product. Declines in U.S. government orders and delays in number of international orders were also contributing factors. Surveillance 12 months backlog finished the quarter $270 million representing a book-to-bill ratio of 0.8 times. Surveillance continues to fill its order book with a higher number of smaller size orders which fits well with our commercially developed military qualified value proposition to our customers. Turning to slide 12, instrument segment first quarter revenue was larger than flat compared to the prior year finishing at $83.8 million. On a constant currency basis the segment would have grown 7% as recent product introductions gained traction in the various markets. Stronger gross margin as well as lower operating expense helped drive 18% growth in instruments operating income versus last year. And operating margin improved 520 basis points to 34% excluding the impact of restructuring charges. Near the end of the quarter we’ve gained shipping the C2 pocket size fully integrated thermal imager. It is based on our Lepton camera core which you’ll see on slide 13. We also introduced new versions of our K-series fire fighting cameras that feature our new flexible scene enhancement or FSX technology which produces ultra-crisp thermal imagery. Additionally we introduce four new high end cool systems for the science and R&D market. You can expect continued product expansion throughout the year with new innovations in both the high end and low end of our insurance products suite. Slide 14 summarizes the OEM in emerging segment with Q1 revenue of 39.8 million was down 17% versus the prior year. This decline was the result of divestment of our OCG business which contributed over 3 million of revenue last year as well as reduced deliveries to our defense related OEM’s and negative FX impact were approximately $1.5 million and weakness in European markets. OEM and emerging operating income was up $8.8 million with in line with the prior year excluding the impact of restructuring charges, as a result of favorable margin shift and product mix and lower operating expenses which resulted in 330 basis point improvement in operating margin versus 2014. Turning to page 15 of the presentation you’ll see an overview of our next generation FLIR ONE for both the iOS and Android operating systems. This new version has a different form factor from the first generation product and features 4 times the resolution. It also has a built in shutter which provides automated temperature measurement calibration. The FLIR ONE is on track for a mid-year launch and will be available through a number of retailers and online vendors. Moving to the Maritime segment on slide 16, first quarter revenue was down 3% to $51 million. However on a constant currency basis the segment would have grown 9%. Over a half of Maritime revenues was transacted in foreign currencies and given the significantly stronger U.S. dollar in Q1 compared to the prior year; segment revenue was negatively impacted by approximately $6 million. This currency impact flow through to profitability with operating income falling 45% to 4.8 million excluding restructuring charges and operating margins decreasing to 9%. Slightly offsetting the profitability weakness was 13% growth in FLIR branded thermal camera revenue year-over-year. During the first quarter the Maritime segment launched the new M400 thermal camera that features VGA thermal imaging 3X continuous optical zoom and HD color camera as well as the high intensity LED light all in the Gyro stabilized gimbal that can be controlled via multifunction display. Also introduced with the FLIR Ocean Scout anti-thermal imager that has the power to detect human sized target up to 600 yards away. The Raymarine business significantly expanded its line of fresh water efficient electronics with the introduction to several new models in its Dragonfly product line as well as the Wi-Fish platform that offers Wi-Fi streaming capability to Andriod and iOS mobile devices being an app. Raymarine also introduced the high performance eS Series of multifunction displays and three new sonar models bringing cutting edge professional level sonar performance to Raymarine multifunction displays. As shown on slide 18, the security segment had year-over-year revenue growth of 32% to $38.8 million. Growth was in across all product lines and regions with particular strength in thermal products which grew 58% over the last year and had 82% growth in unit volumes. The FLIR branded visible line of product grew well, as new product introductions including a suite of IP network camera in the MPX HD Over Coax technology gained significant traction in the market. Security operating profit was $3.8 million and a margin improvement of 400 basis points to 10% due to a higher percentage of higher margin thermal sales as well as controlled operating expenses. Last week, we began shipping the FLIR FX the most versatile and technologically enabled Wi-Fi home monitoring camera available. The FX features motion detection analytics, built in battery for mobile use and on board image and video storage and several optional housings which enable outdoor, dashcams productivity applications. The camera also features the ability to uniquely summarize a day’s worth of motion events into a summary clip via rapid recap cloud based service. The product offers FLIR’s first subscription service where consumer can upgrade the camera to extended cloud based storage, increase the number of rapid recaps they can create. Also introduced last week was the FLIR TCX, the lowest price thermal security camera on the market that is enabled by our Lepton camera core. In addition security segment has released a full line-up of 2 megapixel and 3 megapixel FLIR professional grade security cameras that further expand the segment’s visible camera offers. On Slide 20, you will see detection segment first quarter revenue of 18.2 million, increased 25% versus the prior year largely due to strong growth in the explosives and radiation product lines. Detection backlog increased significantly to $97 million as another full rate production order for the DR SKO Program was received. This one for $51 million which follows the $27 million order we received at the end of 2014. Improved gross margins and explosives and on the DR SKO program coupled with an 18% reduction in operating cost drove detection operating profit ability to $2.7 million, which was significantly improved over the prior year where there is an operating loss of $1.2 million excluding restructuring charges. That concludes my summary of the segment’s first quarter. I’ll now pass the call back to Andy.

[Andy Teich:]

Thanks Tom. Our first quarter of 2015 executed largely within our expectations albeit with some headwinds on the FX front. We continue to execute against our key strategic initiatives to include continuing to develop innovative new products across our various segments and price performance points. Our Lepton technology again allowed us to introduce ground breaking new products at the entry level which will both build overall awareness and expand existing markets. We’re confident that our CDMQ approach continues to deliver unique value proposition for our traditional government and military oriented customers in an environment where overall funding continues to be constrained. Operationally, we saw meaningful improvement in our emergence coming from the realignment and restructuring actions that were taken last year. We plan to continue to invest in our marketing organization to further strengthen our brand and increase overall awareness of the benefits of our technology in a wide range of applications. We expect to see these actions to create a strong platform for growth as we move forward. As many of you know our former CFO Tony Trunzo resigned during the quarter to pursue another career opportunity. We are actively engaged in the search for a new CFO and look forward to filling that role later this year. I would also like to remind our shareholders and the analysts that we’ll be hosting an Analyst Day and Investor Day on May 21st in New York. At this event, we will be providing you with an update on our vision and strategies for growth and we’ll provide an opportunity for a closer look at our various products and technologies. That concludes our comments on the first quarter. We’ll now open up the call for questions. Operator?

[Operator:]

Thank you. We’ll now conduct our telephone question-and-answer session. [Operator Instructions] Our first question comes from Pete Skibitski with Drexel Hamilton. Please state your question.

[Pete Skibitski:]

Excluding FX organic revenue growth of 3% and it is probably your best first quarter since around 2011, I believe. You reiterated guidance, so it looks like revenue is going to accelerate for you the rest of the year. So I just want to ask you, how do you feel new product acceptance is going? How your end markets kind of acting the way you expected coming into the year?

[Andy Teich:]

Yes I would say that they are executing well and in line with our expectations and particularly on the new product front. We did launch several new products during Q1 and specifically those that were introduced in the instrument space and in the maritime space. Both got good traction and in some cases beyond our expectations. We saw particularly good reaction to the C2 product line and also to both the new sonar products and the new lower end entry level point fishing and GPS products that were launched in the Raymarine line during the quarter.

[Pete Skibitski:]

And then just I want to ask about U.S. Government revenue it was down pretty substantially again around 25%. Is that your expectation for the full year or is that timing? And can you maybe comment about Europe, maybe differentiated between government and commercial in Europe?

[Andy Teich:]

So the U.S. government revenue for the quarter, I think it was 15 % actually and that a little water more for us relative to prior periods. It’s a bit hard to predict at this point how U.S. government spending is going to go. I would expect that it probably wouldn’t go much lower than that at this point but we really have to see how the first half plays out to understand what the full year is going to look like on that front. European business for us was about flat I think for the quarter, in the surveillance segment. And at this point I think that we’re going to see the majority of our growth probably coming from other international regions, to include the Middle East region as we execute the rest of the year.

[Operator:]

Our next question comes from Peter Arment with Sterne, Agee. Please take your question.

[Peter Arment:]

Andy, the question I guess -- can you quantify the defense business in terms of the OEM emerging. I think it was mentioned that there was lower course, that there is a -- can you, Andy help, I mean how bigger percentage that is within OEM?

[Andy Teich:]

I don’t have a specific percentages, I think we can get back to you on it, but particularly on the un-cooled side of that business we saw weaker demand during the quarter. From the revenue standpoint, deliveries of our higher end systems were still on track with plan during the quarter.

[Peter Arment:]

Okay. That’s helpful. And just if I could sneak one more in just, on the inventory, I didn’t catch for the specific reason why it was up, but if we just look back over the last year, your inventory return showed some improvement but this time it goes back to around two turns. Is there -- its conceptually or we’re going to -- is there anything that is going on and we just need volume to get the inventory returns back up?

[Andy Teich:]

Well, actually we mentioned in surveillance there is some slip of some customer orders that we expected to capture in the quarter; that due to various reasons slid into this quarter. So, there was some inventory ready to ship for those orders that now we will be shipping in this quarter. We also have a facility move that’s occurring later in the year and we had some build up of inventory to make sure we had adequate protection during that move.

[Operator:]

Our next question comes from Tim Quillin with Stephens. Please take your question.

[Tim Quillin:]

Maybe just qualitatively, if not quantitatively on the OEM and emerging segment, can you talk about how much of that business you consider growth oriented and how much maybe is not as growth in your mind, and how overall you think about the growth of that segment both this year and in the future?

[Andy Teich:]

Tim, we certainly look at that segment as having both the stable element and growth element. So, combined in the OEM segment is our emerging business segment, which includes the mobile business and also our traffic segment. And we view both of those businesses as growth businesses and then we also look at our Lepton core business as a growth business within that segment. When you look at the other piece of the business relative to un-cooled cores and cooled cores that are oriented towards government and military customers. That business tends to be a bit more lumpy, a little bit harder to forecast. So, that’s one that we’ll have to watch how its demand fluctuates based on what our end customers demand look like. The third components of the business of course are traditionally un-cooled camera cores that are sold into more industrial type applications. These are people that are actives in adjacent market spaces with us in security and maritime, and we still view those as growth oriented businesses.

[Tim Quillin:]

Okay. Thank you. And can you just remind us or bring us up to date on the number of new Lepton based products, you have introduced so far and I will paraphrase this by saying that I know this is a unfair, but Lepton was introduced 16 months ago, and it's a pretty exciting differentiated core and the pace has seen relatively measured in terms of the Lepton based products. And I am just wondering if there is a gating factor in terms of how many products you can introduce or how you will evaluate opportunities to bring Lepton based products to market?

[Andy Teich:]

Well, I’ll start with the first question in terms of how many products that we have introduced and not including the cores themselves as we do have multiple variance of core technology using the Lepton sensor. But in terms of the end product development that we’ve done at this point, there’ve been six products that had been launched since January of 2014, when we initially launched the first product which was the FLIR ONE. I think what’s important to note, there are two things. Number one is that there are a number of different new markets and platform configurations that we can address using Lepton technology. And then the second thing is that step number one in terms of developing new products around Lepton is developing a platform to support. So in the case of our instrument segment for example we’ve developed a platform that today there are two products out in the market that utilize that same core architecture. So once you have that platform core architecture developed, it’s the time to market developed variant products based on that is reduced. We’re very excited about the technology. I would say, particularly if you look at the products were launched just recently during the most recent quarter, the C2 and TCX security camera, we’re very excited about not only the unique form factor that those products have, but also the imaging performance and the overall value proposition that those offer into the target applications is quite unique. So I think it offers a very nice opportunity for incremental growth in those segments. Tom you want to add anything else to that.

[Tom Surran:]

Well there’s a constraint, of course in terms of the number of products we can introduce. We actually have a fairly long list of product definitions and products we’d like to introduce with the Lepton, but we also have to balance this with making sure we maintain our position at the high end of the market and with the constraint of research dollars we have some exciting new high end products that obviously those are programs we want to make sure get completed. But we do have a number of things we’ll be bringing to the market in the future that will include Lepton.

[Operator:]

Our next question comes from Jim Ricchiuti with Needham & Company. Please state your question.

[Jim Ricchiuti:]

I was wondering -- I know you’ve touched on gross margins; you touched on in the presentation. But can you talk a little bit more about how we might think about gross margins over the balance of the year, just given what you see as the mix of business?

[Shane Harrison:]

Hey Jim its Shane. Margins in Q1 were a little high, little helped by the FX -- the FX situation. I think going forward for the rest of the year looking at ’14 is probably very good metric to use. We don’t think that FX help let’s call it, it's going to continue at that pace given that the rates kind of come down in the mid-year as far as year-over-year comparisons. The help that we had this quarter too is -- we had a big help on absorption in the inner [indiscernible]. The detection products and the DR SKO products that’s in detection both had a very good quarter; that should continue, but still kind of an under scaled part of the business. And thermal in the security business had a very good quarter as a percentage of that business and that helped that margin quite a bit. It’s not expected to have such a high percentage of thermal throughout the rest of the year.

[Jim Ricchiuti:]

And just as it relates to the DR SKO order and the way that plays out in the second half and into early 2016, can you give us just some sense as to how much of that we might see you might be shipping against in Q4?

[Andy Teich:]

So the first order that we received in 2014 we will be completing here in the second quarter. The new order that was received this quarter we will be shipping from this point over the next 12 months. Relatively linearly we have currently a little bit of Q3, a little bit of a connection or drop between the two programs. We are working with our customer to try to increase that linearity over that 12 month period. But it’s a preliminary schedule. But that’s basically what it looks like. So from this point, next 12 months, that second order will be executed and in this quarter we will be completing the order from 2014.

[Operator:]

Our next question comes from Jonathan Ho with William Blair. Please state your question.

[Jonathan Ho:]

Just wanted to start out with the Cadillac opportunity, and maybe understand sort of the timing that you guys will start to see the benefit, and just to clarify is the 2016 model year or you're talking about 2016 as a calendar year opportunity?

[Andy Teich:]

It’s a model year opportunity. We’ll start shipping product into that platform in the later part of 2015.

[Jonathan Ho:]

Got it, and then can you talk about maybe what the magnitude of opportunity would look like?

[Andy Teich:]

We don’t typically talk about effects of single products on the overall top line of business. It’s not going to be huge. I think the bigger opportunity there is to look at what the adoption is at the brand level and look for further expansion across multiple model lines within the brand there. This first product with their offering, it’s quite an exciting product, but it’s not going to be earth shattering from a volume stand point.

[Jonathan Ho:]

Got it, and then if we look at sort of the 3% growth target that you’ve given and some of the currency headwinds added there, can you talk about what are the levers that give you sort of the big confidence that growth is going to accelerate from here and maybe your expectations around currency just given that it seems to still be fairly unpredictable at this point? Maybe what are your assumptions on that side?

[Andy Teich:]

Okay. So I’ll start with the later. At this point we’re not factoring in further movement in currency rates. We're assuming that they’ll remain relatively stable to where they are today. In terms of levers for growth within the business, it really comes down to two different things. One is the continued introduction of new products both in existing markets and the new markets, and we have seen the majority of the growth of coming in the business coming from either the introduction of new products or the introduction of new products that address new market segments. The second area is, and Travis -- I’m sure will talk about it later in the call here; our continued efforts that we are doing both in the marketing area and brand building area. The overall exposure of the company from a product and brand stand point has gone up exponentially versus a year ago. And ultimately we expected that share gain in terms of awareness will manifest itself in product sales over the course of the rest of the year.

[Operator:]

Thank you. Our next question comes from Jeffrey Kessler with Imperial Capital. Please say your question.

[Jeffrey Kessler:]

It appears that a good part of the margin gain that you had comes from two sources. Number one, obviously corporate control, cost control and efficiencies of the corporate level, but also the product mix. Not just new products but the way you were able to get better margin out of the mix of the new products. Could you talk a little bit about how that kind of broke down in getting the higher margins you did between corporate and getting better efficiencies and margins out of the new products you’ve been generating?

[Andy Teich:]

I’ll actually just cover the corporate piece first and then Tom can talk a little bit about the specific product mix piece. The biggest driver in corporate expense year-over-year for us is legal expense. And as we've mentioned in the prepared comments we have significantly less legal spending in the current year versus last year. So that’s the primary driver in terms of corporate expense reduction. The second issue relative to product mix, obviously one of the biggest drivers there is the thermal content within the various product lines as a significant contributor. But even within the thermal product lines particularly in the surveillance business, the type of product that we’re shipping there drives what the overall margin looks like. Tom you want to add some commentary?

[Tom Surran:]

Absolutely, that on the mix is that be also the type of thermal imager and particularly our OEM market. We had larger cooled sales which are typically higher margin. But that business as Andy mentioned earlier is a bit lumpy. I don’t want to underplay though that we had improved product margins during the quarter and so yes there were certainly restructuring activity. Yes, we have some favorable swings as the thermal and even the cool thermal helped. But we also had improved product margins during the quarter.

[Jeffrey Kessler:]

Okay. The second question actually relates to something that I mentioned before. The recent IFC show, a big change in FLIR’s position in the business was that people began to actually notice that FLIR was not just a niche thermal company and it was basically more full line product company and security with both obviously cores and with product and also with thermal sensors that began to enable visible light product. I’m just wondering what you have done to kind of build up the brand and increase brand visibility in your marketing in those areas where they were small niches before, but now they are obviously the growing parts of your business.

[Travis Merrill:]

Hi, Jeff. This is Travis. I’ll take that one. As it relates to the security business specifically we’ve obviously got sort of a multiple brand portfolio there with those the FLIR brands on high end, industrial critical infrastructure, obviously strongly associated with thermal technology; and then on the consumer side we’ve got the lower FX brand. And I’ll tackle the second one first which is we’ve continue to expand our distribution and channel reach and with that obviously has come a lot of exposure and to really connect those two brands we’ve taken some stuff and you may have seen some of this at the IFC show but to connect those brands a little bit more and just have greater association between the two. I think the FLIR FX which Tom referenced in his prepared comments is also a good example of that about picking up FLIR brand which is traditionally associated with thermal technology, associated more with commercial and industrial type years and bringing it also into the consumer space with a very clear value proposition and very clear and strong differentiation.

[Jeffrey Kessler:]

Okay. And as -- and what was clear from the show was that the FX was part of this search of new -- you want to call it search of new connected products for both consumers and for the home. And that is the revenues from that product begin to show up in which quarter -- are we seeing that, did you already begin to see a little bit of that in the past quarter or is it just coming in the third and fourth quarter.

[Andy Teich:]

We began shipping that product in the current quarter for the FX specifically.

[Travis Merrill:]

So, we’re at the minimal sales of the FX in the prior quarter but nothing into the channel.

[Operator:]

Our next question comes from Nova Oponick with Goldman Sachs. Please give your question.

[Gavin Parsons:]

Hi, this is Gavin Parsons on for Nova, good morning everyone. Going back to Lepton FLIR one specifically, the price points come down a lot since it was introduced and discount and which is actually this morning kind of order in the $200 range. Are you seeing higher demands or better response for lower price points and if that has any implication on margins.

[Travis Merrill:]

Hi Gavin, this is Travis again. The first generation FLIR one which we obviously introduced past year and began shipping in the third quarter of last year has continued to see some growth particularly in the [indiscernible] regions and we’ve got a little more aggressive as you pointed out in the promotion of that as we prepare for the introduction of the second generation FLIR one which as Tom mentioned in his comment, will be introduced around midyear, this year. So, overall [indiscernible] continues to be showered, we don’t plan to discontinue the first generation model as it really brings with a unique form factor and a slightly different value proposition from the next generation FLIR one and we’re still pleased with the sell through that we’re seeing on that.

[Gavin Parsons:]

Great, thanks. And on the M&A, you mentioned the impact of the strong dollar on the large cash balance you have overseas. Are you looking at doing a deal internationally or do you think about the borrowing to do it in the U.S. or does that change the timing that you are looking that at all.

[Andy Teich:]

I would say it’s really dependent on the opportunities that we see in the pipeline. We have the capacity to do an international deal or a U.S. deal based either on existing cash reserves or borrowing capability, so I think it’s much more driven by the opportunity itself and in terms of how it fits with the strategic growth that in other business.

[Operator:]

Our next question comes from Michael Ciarmoli with KeyBanc Capital Markets. Please state your question.

[Michael Ciarmoli:]

Andy low buyback activity in the quarter I mean I know you guys like to look at the relative value of the stock I mean it actually dip below 30 in the quarter. Was there any reason specifically for not being active?

[Andy Teich:]

No again we look at the total opportunity set for the use of capital and making those decisions it’s like it will be more active on that front going forward, but during the quarter we were just considering our cash balances relative to M&A opportunities that we saw on the horizon and the relative valuation of the stock at the time and made the decision not to do buybacks. But again I think we’ll be more active on that front going forward.

[Michael Ciarmoli:]

And then FX, what was the positive contribution to operating income in the quarter? I mean it sounded like certainly a headwind on the top-line but was there much of an impact on operating income?

[Dave Muessle:]

Michael this is Dave. Overall for the company actually even though we had the headwind on the top-line, we actually on a consolidated basis saw a little bit of positive impact on operating income basis. Depending on which are the segments you look at there’s a little bit of variation as to what each of the segments are obviously on the top-line instruments and maritime was most negatively impacted, but actually in the case of maritime that fell all the way down to the bottom line in some regards because a lot of their inventory cost from contract manufacturing is in USD so we don’t get the benefit there. But in instruments with a lot of our production in Estonia and Sweden we actually see the benefit on a cost sales and operating expenses on that business, so we actually saw a positive impact to the bottom line in the instruments group. As far as the other segments it’s pretty neutral. Just don’t have the impact that we see on the instruments in maritime business.

[Michael Ciarmoli:]

So it was a slight positive than overall across all segment and just thought the corporate level are slight positive to operating income?

[Dave Muessle:]

That’s correct.

[Michael Ciarmoli:]

And then just the last one. Andy I guess you had 11% organic growth last quarter certainly the backlog I guess up 8% assuming constant currency that would seem like 13%. A lower single-digit organic growth number this year I guess we had certainly you gave some examples of the BRITE Star order and some of the OEM but it would seem like mid-single-digit organic growth I mean is that the right way to think about this sort of in constant currency for the remainder of the year?

[Andy Teich:]

It is that’s really what our expectation is. I think the Q1 can from a seasonality standpoint typically is a lower growth quarter for us. Also we saw particularly slow activity in the Middle-East region largely driven by low oil prices during the quarter, but we expect those conditions to improve as the year goes on.

[Operator:]

Thank you. Our next question comes from Pete Skibitski with Drexel Hamilton. Please state your question.

[Pete Skibitski:]

Couple of follow ups. Andy on the M&A, how full is the pipeline?

[Andy Teich:]

We have a number of opportunities that we’re looking at. I can’t really give you a direction quantification. The bigger issue here is looking at overall fit and valuation and as you know at this point the valuations that are out there are running pretty high at this point, so really drives us back to that first point that we really want to make sure that we’ve got a very good fit strategically and a very solid integration plan that we can get the value that we want to see ahead of acquisitions.

[Pete Skibitski:]

Understood. And then I just want to follow up on cash flow. I know the free cash conversion was good this quarter, but I think expectations were really high because of that large receivable or receivable growth you guys had in the second half of last year. I think it involved maybe an international customer. So I’m wondering, did you guys collect on all the big receivable from last year or is there still something outstanding? I’m trying to get to whether or not working capital is going to be a source of cash for you guys this year.

[Andy Teich:]

No we did not collect on all the receivables that are out there, so we still expect to have meaningful cash accretion during the second quarter.

[Pete Skibitski:]

Okay. Most of them come into second quarter in particular. Okay, thank you.

[Operator:]

Our next question comes from Peter Arment with Sterne, Agee. Please state your question.

[Peter Arment:]

Just a follow up on Pete’s question on M&A. I’m just trying to get an idea of kind of directionally. I mean if you look at the last couple deals you did, DigitalOptics certainly it was a great deal for you regarding Lepton and traffic kind of marks kind of got you into those expanding your channels. How are you thinking about just M&A from a category because you are carrying a lot of cash on your balance sheet, so are these large transactions that you are looking at, can you give us a little color further?

[Andy Teich:]

The pipeline has a broad spectrum of deals in it both from valuation and in terms of the contribution to the business from a strategic stand point. We’ve done a fair amount of M&A activity historically to build out a vertical integration capability to business. So you’ll probably see less activity in that area. But we still have significant opportunity in terms of expanding distribution of the markets that we’re pursuing, we’re also taking look some adjacent technologies as well that could fit well together with the core technologies of thermal imaging and some of the other sensing technologies that we have within the business.

[Operator:]

Our next question comes from Tim Quillin with Stephens Incorporated. Please state your question.

[Tim Quillin:]

Thank you for taking my follow up. I just had a couple details and then I fill a question I guess. But on stock comp and depreciation they are both down barely significantly year-over-year. So if you could just update us on expectation for stock comp depreciation and amortization in CapEx if you would and then the philosophical question I guess is in terms of the automotive markets where the night vision systems are still going into these very high end automobiles safety vision is actually proliferating across a lot of models right now and I’m wondering why infrared can’t play a broader role and safety vision like collision of avoidance et cetera. Thank you.

[Andy Teich:]

I’ll answer the - our finance folks are getting you answer the first question. I’ll answer the second question. There are two issues here Tim, relative to the adoption of thermal in the automotive space and those two issues are present in many of the other market that we operate in as well and that’s price and awareness. I’m sure simple concepts. We still haven’t in the end user price of thermal imaging option come down meaningfully and I think the thing it’s going to bring that down is really going to be having the feature deployed across more models and starting to see that be more of competitive points between different models. We’ve reduced our cost fairly significantly in that area and as a result our price source suppliers. But the end manufactures have held the prices relatively constant for the feature. The second thing is relative to awareness I think your first point about the fact that the presence of cameras and a variety of different roles in vehicles increasing is a positive thing relative to use of thermal imaging or long-term. Just the fact that people see more cameras and cars performing roles of collision avoidance or navigation or line departure warning things like that, what will happen as the conversions of consumers wanting cameras in their cars comes together with the value proposition to thermal brands to differentiated value proposition that it brings on many different fronts on those applications will ultimately drive adoption into that market. The other thing is at this point we haven’t seen adoption of Lepton class product into the automotive space. But we’ve seen an opportunity there as well that many of these applications can be satisfied with a lower resolution sensor that the vehicle driver actually never sees the data. But the data is being used in conjunction with the visible sensor to provide meaningful decision making capability.

[Dave Muessle:]

Tim, this is Dave. A little bit on the question related to kind of the run rate on some of the items stock comp we did see a little bit of normally in the current quarter related is stepping changes and so forth. I would not expect to see that level that same pattern I think were maybe really back to historical levels on stock comps so I would not take that as a run-rate indicator. For depreciation there’s probably a few things going on there. Number one would be FX because we do have facilities and operations internationally and then we got some benefit there. We also have some intangibles that are running their expiry date as far as some of our acquisitions in the past, so you’ll see some of that start dropping off so that’s impacting that. And then from a CapEx standpoint we do have a little bit of ramp right now for probably this quarter as well related to the building that were going down and our OEM business. So that’s what I would expect there as far as run-rate and so forth.

[Operator:]

Thank you. Our final question today comes from Jeff Kessler with Imperial Capital. Please state your question.

[Jeff Kessler:]

Following three question to follow up to what you said about adjacencies what you’re looking at in the pipeline [indiscernible] involve technologies such as analytics and the other types of things that can empower video and particularly whether it has not in the past but increasingly in the future empowering infrared and thermal base video?

[Andy Teich:]

Well Jeff this is certainly an area of interest for us and we have in the past made acquisitions in that space. We made the Traficon acquisition a couple of years ago which gave us a platform for video analytics. And it’s a key point for us is that since it’s a really enabled the differentiating capabilities that thermal imaging has in the security space you really need video analytics so we have been leveraging those development capabilities and they will manifest themselves in product launches that will occur later this year, but it’s also an area where we can continue to expand and we’ll likely have some focus on the M&A world.

[Operator:]

Thank you. We’re actually going to take one last question and that comes from Michael Ciarmoli with KeyBanc Capital Markets. Please state your question.

[Michael Ciarmoli:]

Just Andy can you talk about some of the trends maybe that you saw in the APAC region in the quarter maybe in some of your building markets and security markets over there?

[Andy Teich:]

Don’t have any specific trends to note in the APAC market. Yes fundamentally it was fairly flat market over there. We have traditionally seen pretty good growth in the China market and that was subdued a little bit. We tend to launch the new products in our product pipeline slightly later in the APAC region and we just recently had a meeting over there where we were launching several new products that were launched in the other markets earlier in the quarter, so I would expect to see some response from that as we execute the second quarter.

[Pete Skibitski:]

Good. Well I’d like to thank you all for joining us on the call today. I also want to specifically recognize the continued hard work and dedication of the nearly 3,000 FLIR employees around the world. We look forward to providing further updates on the business on our upcoming Investor Day Meeting that I mentioned at the beginning of the call and then also at our conference call that will be scheduled after our Q2 earnings release. Thank you everyone.

[Operator:]

Thank you. This concludes today’s conference. All parties may disconnect. Thank for your participation.