FLIR Systems, Inc.
Q4 2007 Earnings Call Transcript

Published: 14 Feb 2008

[Operator:]

Good Morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the FLIR Systems Fourth Quarter 2007 Financial Results Conference Call. I will now turn this call over to Mr. Wit Davis, Senior Vice President, General Counsel, and Secretary of FLIR Systems. Sir, you may begin.

[William W. Davis:]

Thank you. Good morning, everyone. Before we begin this conference call, I need to remind you that other than statements as to historical facts, the statements made on this conference call 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 expects, anticipates, intends, believes, estimates, and variations of such words and similar expressions are intended to identify such 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 statement to reflect events or circumstances occurring after today. Let me now turn the call over Earl Lewis, Chairman and CEO of FLIR Systems. Earl?

[Earl R. Lewis:]

Well thank you, Wit, and thank you all for joining us this morning. As you know we are all very pleased with our financial performance in '07. The three divisions had excellent results and executed well against our strategy to increase demand with low cost high performance infrared systems. We earned $0.89 a share, an increase of 35% for the year and for the seventh consecutive year achieved record revenue operating income, earnings per share and cash flow. Over the past five years our total shareholder return has been a compounded 39% per year. Our fourth quarter revenue increased 31% and earnings per share rose 15% to $0.30. During the fourth quarter, we recorded additional expenses of approximately $4 million associated with the conclusion of legal matters involving former employees, some of these dating back to the late 90s. In addition, we incurred greater legal cost associated with several other ongoing litigation matters. We also saw some unusually high operating expenses in our Thermography business during the quarter due to exchange rate fluctuations social [ph] cost, associated with option exercises of higher sales incentives which in total cost over $3 million in Q4. Operating expenses in 2008 should be approximately same as our annualized Q4 spending, however they will not be spread evenly over the different quarters. In 07 our operating margin was 24.6, and when you exclude the impact of stock-based compensation, this was our highest in the company history. Our cash flow from operations for the year was a record at a $116 million, with the fourth quarter cash flow from operations of $55 million, by far the best quarterly cash flow in our company's history. Our backlog at the end of the year was $393 million, up 43%, compared with the end of '06. It was flat compared with the end of '03, however we had to reclassify approximately $22 million of the ARH backlog from current to non-current and as you know we only report current backlog in our $393 million. Order activity was strong and consistent all year; orders received in both the third and fourth quarter were at an annual run rate exceeding the $1 billion, supporting our outlook for 2008. Since our last earning call in October, we have closed on two previously announced acquisitions Extech Instruments and Cedip Infrared. Extech closed November 7th, for total consideration of $40 million in cash. Extech reports to our Thermography division and contribute approximately $5.5 million to their revenue in 04. We closed the first part of the Cedip Infrared Systems acquisition on January 3rd of this year, acquiring and controlling interest of 69% or approximately $43 million net of cash acquired. We are currently in the process of completing the standing market offer in France to purchase the remaining shares. And as stated previously, neither transaction is expected to be material to 08 earnings per share. However, both are expected to be accretive in subsequent years. Arne will discuss his plans for both of these companies in his comments later. We also issued outlook for 2008 this morning, we expect another very good year. For the full year we expect net revenue to be in the range of 1 billion to 1.05 billion an increase of approximately 32%. And net earnings to be in the range of $1.13 to $1.20 per fully diluted share, a growth between 27% and 35% compared with this year, with 07 rather. This guidance includes full year revenue and earnings estimates for Cedip and Extech acquisitions and assumes a tax rate of approximately 30%. We expect all three divisions to post strong revenue and profit growth again in 08. With that I would like to have each of the Presidents comment little bit more in detail about their businesses in Q4 and their outlook for 08. We will start with Bill Sundermeier, President of our Government Systems Division. Bill?

[William A. Sundermeier:]

Thank you Earl. Government Systems Division had record financial results in Q4, driven by strength across a broad range of customers and applications. Q4 revenue was $114.3 million, up 33% compared with last year's Q4 revenue of $86.2 million. Orders were strong again although backlog decreased as a roll set by $11 million to $305 million due to the reclassification of $22 million of ARH backlog from current to non-current, given the delays in the program. Fall of 2007, revenue was $382 million, an increase of 48% from last year, and backlog rose by 39%. Q4 operating profit was $42 million and operating margin was 37%, looks like an excellent profitability at all locations. For the year, operating profit was a record $133 million with an all time best operating margin of 35%. Our portfolio have been indefinite delivery/indefinite quantity contract vehicles grew by 8% in the fourth quarter as ID/IQ contracts received total $44 million representing strong demand from our customers not reflected in current backlog. The December 31st, balance of ID/IQ contacts not in backlog was $353 million. The base of customers and applications in GS continues to expand and sales in the fourth quarter were made to over 90 different customers and represented more than 20 different products. In some cases we sold existing products to new U.S. military customers, for example, we received an order from the U.S. Marine Corp for Brite STAR II airborne imaging systems for the test and evaluation on the UH1Y Helicopter. This order highlights the broad acceptance of Brite STAR II beyond the ARH program and provides an example of the benefits of our business model. Rather than design unique one-off products funded by military customers, our self funded product roadmap delivers products that meet the needs of several customers allowing us to effectively leverage our investments. In other cases, we were able to penetrate completely new markets with new products. Such as the order we received from the Finnish defense company Patria, for our new remote weapon sight, station sight. These systems will be integrated into Patria's new 120 millimeter unmanned motor to it [ph], which can be monitored in to various tract and wheel chassis as well as boats. We believe the remote weapon station sight market in an emerging application with a strong growth potential. And still in other cases we were able to further expand global reach of our existing technology as demonstrated by the $13 million order from the Columbian Ministry of Defense, Star SAFIRE HD systems that will be used by the Columbian Air Force on-board helicopters and performance of national security missions. We are optimistic that 2008 will be another strong year for government systems, which may record breaking backlog and a solid portfolio of ID/IQ contracts. Visibility entering 2008 is stronger than ever. Since visibility combined with a constant stream of emerging opportunities both in the U.S. and abroad gives us confidence that our business model is working. And 2008 will be another excellent year for GS. That concludes my comments, and I'll turn over the call to Andy Teich to discuss Commercial Vision Systems.

[Andrew C. Teich:]

Thanks Bill. Commercial Vision Systems revenue increased 38% in Q4 to $37.9 million and by 39% to a $135 million for all of 2007. Orders were strong as well with backlog increasing an additional $9 million in Q4 to $68 million. For the year backlog increased by 60%, strong revenue and backlog growth occurred in all our major product lines during Q4 and for the year. Operating income for Q4 improved by 26% to $7.7 million and by 51% to $26.8 million for the year. Fourth quarter expenses were impacted by higher sales commissions and bonus expense reflecting our strong performance for the year. Our operating margin for all of 2007 was 19.8%, compared with 18.2% in 2006. Notable events during Q4 included the rapid growth in unit volumes particularly in our uncooled security, maritime and components and cores businesses. We continue to see excellent demand for border security worldwide, and in Q4 we received orders from integrators for development on orders in the U.S., Europe and Asia. Demand in several nascent markets including airports, petrochemical plants, utilities and high value residential customers was very good in Q4, and we will grow further as we continue to expand distribution in these and other areas. In our continuing effort to build awareness about the benefits of thermal imaging and commercial applications, we exhibited at numerous trade shows including the Consumer Electronic Show in Las Vegas, where we specifically targeted the automotive aftermarket with our PathFindIR products. Our venture with AMI semiconductor is now a bit ahead of schedule and we will be qualifying the first production parts in the first half of 2008. This relationship will not only address our anticipated need for significantly higher production capacities, but it should also continue to lower the cost of our uncooled infrared sensors aiding customer at option. Autoliv, our OEM partner in automotive night vision market has reached agreement with another automotive OEM customer during Q4. This customer a European maker of super premium automobiles represents our third win in this market and will begin offering our products beginning in the year 2010. While volumes from this customer will be modest due to the low overall production volumes of their vehicles, we are seeing strong and growing interest from numerous automakers and bringing this flagship customer onboard will further validate the value of having this capability in premium automobiles. Looking to 2008, we expect another excellent year with growth and market development progress somewhere to 2007. Our distribution network, product suite and growing awareness of infrared technology support our plan for rapid growth in unit volumes particularly in our uncooled security and surveillance and maritime businesses and our cores and components business outlook is supported by record backlog. Of note, we expect modest growth in automotive unit volumes in 2008 as a majority of our new business is slated for the year 2010 and beyond. In short, our markets are strong as they have ever been and our strategy is playing out very well. With that I will now pass the call on to Arne Almerfors for his comments on the Thermography division results.

[Arne Almerfors:]

Thank you Andy. I am pleased to report that Thermography once again had strong results in Q4. Revenue increased 25%, compared with Q4 of last year. Excluding the Extech acquisition revenue grew by 18%. On an annual basis revenue increased 19% from '06, 17% excluding Extech. Demand for our new T-Series cameras introduced during the third quarter is exceeding expectations. With new, state-of-the-art features and position between our established T and E-Series product line, the T-Series occupies the sizable and profitable segment of the market. The InfraCAM unit volumes continued to show good growth during the quarter as well, rising nearly 70% versus last year and demonstrating expanding markets at the lowest price points. GasFindIR also continued its excellent performance in Q4, with revenue more than double the prior year. Interest in this product continues to expand across a diverse customer group and we are encouraged that the current growth or experience will continue into 2008. Operating income for the quarter was $25.9 million and operating margin was at 9% down from 37% in Q4 of last year. This decline was due to additional spending in Q4 as a result of Swedish social costs on exercise options, incremental sales incentives and exchange rate impact as well as the lower margins delivered by the Extech product line. We expect better margins in 2008. The Extech Instruments acquisition closed in November and we have already begun the integration process. In fact, last week we introduced an Extech branded version of our low price InfraCAM product to sell through Extech's well established distribution channels in the U.S. Overtime, as we introduce new lower price Thermography products, we expect Extech to represent a major high volume distribution channel in the U.S. The acquisition of Cedip Infrared products closed on January 3rd of this year and thus did not affect Q4 or 2007 results. Already, however, we are beginning to integrate Cedip sales and distribution infrastructure with our own to take advantage of growth opportunities particularly in the Science camera market. We expect to have Cedip fully integrated in the second half of 2008. We are very excited about the prospects for both Cedip and Extech and are delighted to welcome both teams to FLIR. And finally, the production ramp up in our newest Thermography [ph] manufacturing facility that we acquired in Q3 is proceeding very well. This facility will be used to manufacture low price products and we expect significant production volumes out of this factory this year and in the future. Looking to 2008, we expect to continue on the long term growth, as we have been on over the past several years. We are paying close attention to the strength of the U.S. economy that are currently experiencing strong market activity worldwide, across product lines and market segments. With the best and diversity of our markets we do not foresee any material impact on our business from the economic situation and are looking forward to a strong 2008. And that concludes my comments and let me now turn it back to Earl.

[Earl R. Lewis:]

Well, thank you Arne. As you heard from the comments of the Presidents, FLIR business has never been stronger. Backlog exit in the year is at record levels, substantially new opportunities are ahead. We believe that 2008 will be another outstanding year. Our strategy of reducing the cost of infrared technology and expanding markets to drive growth continues to pay off. As well as our focus on managing cost and gaining more operating leverage from our rapidly increasing sales. We will continue to invest in R&D, expand our distribution channels, and increase the awareness of infrared technology across the broad range of markets we serve. We see many additional opportunities for continued growth in all of our businesses. And look forward to making the vision of infrared everywhere a reality. I also want to mention the Board of Directors has extended my employment contract through 2009. I remain energized by the significant opportunities to bring this useful and fastening technology to more and more people around the world. And finally, the most importantly I would like to thank the employees of FLIR with now over 1,700 of us, for their outstanding contributions to the success of our company last year. With that Steve, the call is yours to provide detailed outlook for Q4 and the 07 financials, and then we will take some questions.

[Stephen M. Bailey:]

Thank you Earl. Revenue for the fourth quarter of 2007 totaled $242.6 million, an increase of 31% over the same quarter of 2006. Revenue was provided by Government Systems divisions of $114.3 million, a 33% increase over last year by our Thermography division of $90.4 million an increase of 25%, for the comparative period and by Commercial Vision Systems division of $37.9 million, a 38% increase over the same quarter of last year. For the quarter Government Systems, Thermography and Commercial Vision Systems, revenues represented 47%, 37% and 16% respectively of the total period revenue. Our international revenues for the quarter were 41% of their total revenue. While revenues from the U.S. government sales accounted for 35% of revenue. For the year ended December 31, 2007, our revenues totaled $779.4 million, an increase of 36% as compared to 2006. For the year, all divisions have reported revenue growth over the same period of 2006 with revenue growth of 48% for Government Systems, 19% for Thermography, and 39% for Commercial Vision Systems. For the year, Government Systems revenues of $382.3 million, is 49% of total revenue; with Thermography at $261.8 million; and Commercial Vision Systems at $135.2 million, representing 34% and 17% of total revenue respectively. For the year, international revenues and U.S. government sales were each 39% of revenues for the year. We closed the year with a backlog of approximately $393 million flat with our backlog at the end of the third quarter, and an increase of $119 million or 43% over the backlog at the end of 2006. We ended the year with a backlog by division of $305 million of Government Systems, $68 million for Commercial Vision Systems and $20 million for Thermography. The gross margin for the current quarter was 56.6% as compared to 56.2% in the fourth quarter of last year. The increase in average gross margin is primarily due to improved margins associated with higher volumes at Government Systems coupled with slightly lower gross margins at Thermography and Commercial Vision Systems as a result of sales products mix at each division and the inclusion of Extech's lower distribution markets. For the year, gross margins were 55.6% as compared to 54.8% in 2006. Research and Development expenses of $20.8 million were 8.6% of revenue for the quarter, as compared to $16.3 million or 8.7% of revenue in the fourth quarter of 2006. For the year, the company incurred research and development expenses of $72.5 million, 9.3% of revenue as compared to $60.6 million or 10.5% of revenue for 2006. Year-to-date the company has also incurred $8.9 million of expenses related to funded engineering programs which are reported in cost of sales. Approximately $700,000 of these costs were recognized in the fourth quarter. Selling, general and administrative expense in the fourth quarter of 2007 of $53.5 million were 22.1% of sales, as compared to $33.1 million or 17.8% of sales for the same period of 2006. The cost increase of $20.4 million is across the board in all disciplines and support the business development and revenue growth including approximately $5.4 million of legal and settlement costs, $5.3 million of incentive compensation, and $1.1 million of stub period operating expenses of Extech, our recent acquisition. For the year; selling, general and administrative expenses were a $168.9 million, 21.7% of revenue as compared to $117.4 million or 20.4% of revenue for the same period last year. Of the $52 million, the year-over-year increase approximately $20 million is associated with higher legal fees, incentive compensation programs and stock-based compensation expense. Such legal and administrative costs while recurring in nature are expected to be incurred at a lower level as a percent of revenue in 2008. Earnings from operations for the fourth quarter 2007 totaled $62.9 million or 25.9% of revenues as compared to $55.1 million or 29.6% of revenue in the fourth quarter of 2006. Quarterly earnings from operations as provided by the operating divisions were $42 million from Government Systems, a 46% increase over the fourth quarter of 2006; from Thermography of $25.9 million, down 3% from last year; and from Commercial Vision Systems, $7.7 million, up 26%, from the fourth quarter of 2006. Year-to-date earnings from operations were $191.8 million or 24.6% of revenue, a $54.9 million or 40% increase as compared to the $137 million or 23.8% of revenue through the same period of 2006. Earnings from operations year-to-date were Government Systems of $132.8 million; Thermography $73.2 million; and Commercial Vision Systems of $26.8 million, with operating expense at approximately $41 million. Interest expense for the quarter totaled $2.7 million, and year-to-date of $10.2 million. The year-over-year interest expense increase of $1.3 million is primarily due to short term borrowings during the current year. During the quarter, the company recognized interest income of $1.9 million and other net income of $3.1 million primarily due to currency gains of $3 million. Year-to-date the company has recognized $5.6 million of interest income, currency gains of $2.5 million and other income of $1.4 million. Effective tax rate for the quarter and the year was 28.5%, compared to 23.9% in 2006. The increase in the rate over the prior year's result of higher proportion of domestic income in 2007 and its higher associated statutory tax rate and reduction in available tax credits. Fourth quarter net earnings are $46.6 million of $0.30 per diluted share, a $6.8 million or 17% increase as compared to net earnings of $39.8 million or $0.26 per diluted share last year. For 2007 net earnings are $136.7 million or $0.89 per diluted share, a 35% increase as compared to $100.9 million or $0.66 per diluted share for 2006. We finished the year with cash of $203.7 million as compared to year end 2006 cash balance of $138.6 million. Our cash provided from operating activities during the quarter totaled $55 million and $116.1 million for the year. Capital expenditures for 2007 were $44 million with $14.9 million spend during the fourth quarter. During the year the company repurchased 176,800 shares of its common stock for $3.7 million at an average price of $21.14 per share. During the first three quarters of 2007 the company paid in full [ph] a credit agreement loan balance carried over from 2006 of $45.5 million, however, we did borrow $19 million in the fourth quarter to fund a portion of the Extech acquisition. At December 31, 2007 net accounts receivables were $203.4 million, an increase of $35.9 million or 21% as compared to year end 2006. Inventory has increased $43.4 million or 32% since year end 2006, but only $5 million since the end of the third quarter. The increase has been on support of business activities, backlog growth and in particular some components which require lengthy lead times. This concludes my summary of the fourth quarter and full year 2007 results. Let me now turn the call back to Earl.

[Earl R. Lewis:]

Great, thanks, Steve. And Lisa I guess we are ready for some questions. Question And Answer

[Operator:]

[Operator Instructions]. Your first question comes from David Gremmels with Thomas Weisel Partners.

[Earl R. Lewis:]

Good morning Dave.

[David Gremmels:]

Good morning, great quarter.

[Earl R. Lewis:]

Thanks.

[David Gremmels:]

Couple of questions on the supplemental spending bills and your participation there. First, we didn't really get the first installment of the supplemental until late December and looks like the bulk of the procurement dollars won't pass till later in the year. Did that have any impact on Government Systems bookings? And second, looks like at least one year programs is pretty well supported in that December appropriation when do you expect to see orders against that?

[Earl R. Lewis:]

The one program we hope to see orders this quarter. That's Bill and I [ph] debate that and talked to the customer all the time. I think we have a good probability seeing the order in Q1. If the one you are talking about so on big enough which essentially is a GS order [ph].

[David Gremmels:]

And then just... I mean in terms of the timing of the [Multiple Speakers]

[Earl R. Lewis:]

The other part of your question related to whether we have that... our order entry was very strong in Q4 for Government Systems. When you back out the reclassification of ARH, which had effectively $22 million reduction in Bill's backlog; his backlog went down 11 on very strong sales. So in reality his order intake was very strong in Q4. We are now with help of that supplemental.

[David Gremmels:]

And then --

[Earl R. Lewis:]

Hello. David. Operator?

[Operator:]

Yes sir, just one moment.

[Earl R. Lewis:]

Okay. Operator?

[Operator:]

Just one second sir.

[Earl R. Lewis:]

Operator is... are we okay?

[David Gremmels:]

Hey can you hear me?

[Earl R. Lewis:]

Yes David I think you... I think you might have just stopped prior to our rule on follow-up questions I am not sure.

[David Gremmels:]

I was just readying my follow-up which is the reclassification of the ARH order that you just mentioned.

[Earl R. Lewis:]

Yes.

[David Gremmels:]

Can you say... I mean is there any risk to that $22 million given the comments that's your decision, is there any risk that those orders could be canceled rather than just delayed?

[Earl R. Lewis:]

We don't believe so, no. We do not believe that there is risk to those orders. We believe we'll deliver those products. We also think there is a possibility will get worse [ph].

[David Gremmels:]

Great, Okay. Thanks very much.

[Operator:]

Your next question comes from Michael Lewis of BB&T Capital Markets.

[Michael Lewis:]

Good morning. Hello everyone nice quarter again. Bill I just want to ask you a question here, yesterday we attended the DOD's 2009 budget priorities briefing around a hill [ph]. One of the comments that really stood out to me was that the Air Force would like to bring on a higher proportion of ISR airborne platforms over the next few years and this is outside of course the uptick that we are seeing in unmanned systems. So I was wondering if these comments would kind of run in line with what your business development folks are seeing in the pipeline of opportunities in the defense segment right now does that kind of make sense to you?

[William A. Sundermeier:]

It does make sense certainly, ISR is the major priority out there and we see that in the out years certainly you mentioned '09 funding, I certainly think that there is going to be a trend for more ISR platforms and that would certainly mean more sensors in the market space.

[Michael Lewis:]

But do you know any specific platforms that they are targeting here?

[William A. Sundermeier:]

Not at this time.

[Michael Lewis:]

Okay. And then just as a follow up to David's question, are we expecting to see more information on ARH around the summer time 2008? Is that when we can expect to see this program kind of come out of flux [ph] right now?

[William A. Sundermeier:]

There is a couple of things that are going on with ARH first, the lots performance is going to come out and how that will that did. There is a defense acquisition board review that happened here recently to restructure the program and all of that isn't official. So I am thinking that it is probably going to be somewhere in Q2 or we are going to see what the new program schedule is and when the aircraft will be delivered and that is going to come more or like until so far there is going to be additional lots that will be here happening in the second part of this year and some in to next year. So that whole program will be spelled out here in the next few months about how it's going to be implemented.

[Earl R. Lewis:]

Just to add a comment here though clearly 08 and 09 I think from my standpoint will be... the biggest opportunities in Government Systems will be ground based. Moving sensors that are attached to vehicles or boats, and that seems to be along with perimeter security, the short run major opportunities for FLIR to participate in '08 and '09.

[Operator:]

Your next question comes from Paul Coster with J.P. Morgan.

[Earl R. Lewis:]

Good morning Paul.

[Paul Coster:]

Yes good morning to you as well, and it is a good morning isn't it for FLIR. So 2007 in retrospect on the Government Systems side it feels like you saw ground vehicles suddenly becoming a major platform for you, and is that correct first of all? But also in the context of this 25-year roadmap that the DOD has outlined for unmanned ground vehicles and aero vehicles for that matter, is this something that you are tied into; do you see this trend as a long term trend?

[Earl R. Lewis:]

I don't think that ground vehicles were a big deal for us in 07, particularly Paul, I do see it in the future, I will let Bill comment here... well Bill why don't you go ahead and comment on that and then I will come back.

[William A. Sundermeier:]

Sure in 2007 we identified many opportunities for vehicle based platforms and sensors, so most of what we received was for fixed surveillance given, you know the RAID program for both Army and the Marine Corp that was the major driver and it came to large gimbaled systems, but we have certainly identified moving out for both small and large gimbaled systems and stabilized systems for vehicles from these to MRAPs and to even larger systems than do ID defeat and renewal. And those programs were bidding, we're tracking and we hope to see opportunity here in 2008 with major programs.

[Earl R. Lewis:]

We have been invested, Paul on this idea of ground based fixed and moving sensors now for 3 or 4 years. Clearly as one of our strategy because there is a lot more of those in our helicopters and planes, it isn't for those parts of our business and important it is just that there is so much more opportunity in that part of the defense acquisition and the necessity for those kinds of sensors we see as being extremely important going forward, when it comes to terrorism, when it comes to the way, the military has to operate now and the various theaters that its going to operate in the future. So this idea is not new to us its one that we have been planning for, for a long time. And that my point and Bill's point is we are starting to see a number of requests for more information, for bids, and for interest in those kinds of sensors is significantly higher now then it was a year ago and significantly higher than it was two years ago.

[Paul Coster:]

And a quick follow up unrelated, Earl in your prepared remarks you talked about operating expenses and how they will map out in 2008. Can you just help me a little bit there I think I understood that the fourth quarter annualized is the right... we should be looking for but I may have misunderstood?

[Earl R. Lewis:]

Yes essentially we think that that's probably not too far off of what we will end up spending for the whole of next year. Fourth quarter was an unusually high expense rate and we try to point out some of those areas where we thought that the spending in Q4 exceeded our normal run rate. We will of course increase our spending next year. Our only point in bringing that up I think is to say that yes in Q4 we had some unusual expenses. I would not escalate those by huge amount in any of the models you build for all of '08.

[Operator:]

Your next question comes from Brian Ruttenbur with Morgan Keegan.

[Brian Ruttenbur:]

And my question is a start off with on operating margins, following up with Paul, you had operating margins 24.6, it sounds like you are going to increase that operating margin going forward to what 25% where... can you give us some kind of parameters there?

[Stephen M. Bailey:]

I hate to pick on any one line item just because of the weight, the mix develops between the three different divisions and the mix within the divisions can develop as well. Clearly we want to be in that range, I don't know as we need to be any finer than the 24 to 25 at this point.

[Brian Ruttenbur:]

Okay can you give us some kind of perspective on how the quarters will shake out, it will build throughout the year, the first quarter will be down from the fourth quarter and then it will build from there like it has seasonally is that what we should be looking for?

[Stephen M. Bailey:]

Less of that in 08 than you've seen historically and one reason is because of the strong backlogs we have. So, I am hoping that we are a little more level in our output in '08, than we were historically.

[Brian Ruttenbur:]

Okay. And then final cash balance at the end of Q1 should be around?

[Earl R. Lewis:]

While we've got fairly major infusion of course in to the acquisition of Cedip that happened after we closed the books. I think we ended Steve with about $200 million. We spend around $60 million net with Cedip in Q1, and we are generating cash at 30 to 40 somewhere in there perhaps in Q1.

[Operator:]

Your next question comes from Jeffery Kessler with Lehman Brothers.

[Unidentified Analyst:]

[Indiscernible] in place of Jeff. Just a quick question. How do you guys view sort of the risk towards your top line guidance with respect sort of the weak economy I guess every one is facing particularly I guess with relation to your commercial division?

[Earl R. Lewis:]

Well I'll let Andy talk. I don't but, today anyway the vast majority of the commercial products effectively go into higher end applications. Fairly wealthy people for security boats that are on the high end of the boat market the whole security environment some of those essentially ending up in borders and borders patrol and they are going to fund the automotive application. Again all of the high end of the automobile. So at least today we are probably not penetrating every joke so to speak relative to a infrared sensor, eventually we will but today I think we are more on the high end of people's wealth curve when they buy these today, but Andy you can comment on that.

[Andrew C. Teich:]

Sure. I think you covered it all but just looking at three of those segments within Commercial Vision Systems, the maritime segment for example that boating industry in total is actually suffering pretty strongly, but I think that what's happening is instead of people going out buying new boats they are buying accessories for their existing boats and we address a very unique capability in that segment that has not been addressed in the past. So we are seeing very strong unit and volume growth in that area. In securities I think also we offer capability that others can't offer and the need to protect some of the facilities that I discuss in the preliminary comments of airports and petrochemical and things are... those needs are growing. So sales there are good. And then on the cores and components piece which still is the biggest piece within CBS. Some of that demand is also driven by some of our military customers that we're selling cores and components and the demand has been growing near that business can take us to increase.

[Unidentified Analyst:]

Okay.

[Earl R. Lewis:]

I don't think any company is immune and I worry a little bit more about Arne's business in that regard than I would in Andy's some more edge because... we penetrate the building market for example to a high degree. But even there that market should be based on turnover and I think what slows the turnover and buildings. I don't think any company is immune from disaster in the economic world. I think FLIR is in a pretty good position given the tremendous breadth of our end-user markets.

[Unidentified Analyst:]

Okay and I guess as a quick follow-up to that. What is your view sort of on the cost control is like should... things do weakened some extend your top line. I mean how much control variability do you have around your cost to and help maintain margins?

[Earl R. Lewis:]

Most of our cost of course are people costs. And if we slow up our rate of higher end we will slow up our cost increases in '08. We haven't made that decision yet, that's why we could make if we saw a downturn.

[Operator:]

Your next question comes from Jim Ricchiuti with Needham & Company.

[James Ricchiuti:]

Hi, thank you. I was wondering if you might elaborate on the plans to use the Extech channel, Arne may be just talk a little bit about how you see that unfolding as you put more product through that?

[Arne Almerfors:]

Yes, one of the most important reasons for acquisition was of course to get an incremental distribution channel in to what we call more the mass market going forward. And Extech will serve these purposes and they have already started selling InfraCAM version for Extech and they will of course moving forward be a very significant channel for new coming products.

[James Ricchiuti:]

Any sense as to how many products you could have going through that channel say by mid to end of 2008?

[Arne Almerfors:]

That is something I don't think I will... will release to.

[Earl R. Lewis:]

We will start of with probably one product, see how it goes.

[Operator:]

Your next question comes from Tim Quillin with Stephens Incorporated.

[Timothy Quillin:]

Good morning.

[Earl R. Lewis:]

Good morning Tim.

[Timothy Quillin:]

Firstly on the G-BOSS program obviously there is some clear identifiable funding related to that program. How do you think about G-BOSS in terms of your guidance, with the initial tranche of funding and also the potential for additional funding? How does that all factor in to your guidance?

[Earl R. Lewis:]

Well we feel that back up the second Tim, where we do our planning every year is we take a look at all of the different programs and we rate their probabilities. So to answer your question G-BOSS is a highly rated program in our forecast, not a 100%, but it's highly rated compared to some others that would be 20% probability for example whereas G-BOSS is greater than 50 in our mind. And that's why we put together the programs, so I can't give you, it's not an absolute if you will, but it's certainly one that we do think will happen... higher probabilities and lower.

[Timothy Quillin:]

Okay, second question is related to say could you help us in terms of modeling expected revenue, is it going to be roughly the same as 06, or they grow anything as $25 million in '06? And then what's the split between Government and Thermography there? And then how... presumably we are going to have a minority interest line there as well, if you could help us think about that? Thank you.

[Earl R. Lewis:]

Tim I am going ask you to ask that question again, we will start with the back end of it, we are making an offer for the balance received if so, we certainly hope to not have a minority interest carried to next year. If we do it's not going to be a large amount of money one way or the other. But from a controlled standpoint we hope to take control of it in February, with our tender. Can anybody remember question two here?

[Unidentified Company Representative:]

I just wanted to... while we are bringing Tim back I will just make a follow up comment to that, Tim there is many market... will be concluded in early March. So we will know the amount of the minority interest if any. I think all expectations are that if there is any at all, it will be tiny. So I wouldn't consider that to be a major modeling dynamic there.

[Earl R. Lewis:]

Tim, can you come back and, I am sorry I didn't get your Government Thermography question in my head.

[Timothy Quillin:]

In terms of the revenue from say, do you expect it to be higher than it was in '06 and then it is $25 million and what would be the rough split between what falls in Government and what falls in the Thermography segment.

[Earl R. Lewis:]

I am not sure I understand but I am going to guess. That within the acquisition of Cedip there was a very small business that made gimbals that will report to the Government Systems group that business had total revenue of $2 million or $3 million I believe last year. If that's the question you are asking?

[Timothy Quillin:]

Yes that's so it's vastly Thermography and then in terms of revenue I guess the question is has it grown since the '06 revenue that you disclosed of $25 million?

[Earl R. Lewis:]

No not much and the other piece just to make sure you understand. There is around $5 million of Cedip revenue that will end up going through our commercial business.

[Timothy Quillin:]

Just to complicate it further for me. Thank you. [Multiple speakers]

[Unidentified Company Representative:]

May be just a simplified a little bit. When you see our consolidation Cedip will be reported formally as part of our Thermography business. We will talk about in our conference calls all aspects of the Cedip business, but it is going to roll up in the Thermography. So all of the revenue and all the profitability and the consolidated financial will show up in Thermography.

[Timothy Quillin:]

Okay brilliant thank you. That helps. Nice quarter I appreciate it.

[Earl R. Lewis:]

Thank you. Thanks a lot Tim.

[Operator:]

Your next question comes from Antonio Antezano with Bear Stearns.

[Antonio Antezano:]

Could you please discuss may be in more detail your plans to start production in the EMI and what kind of feedback [ph] gross margins we could have after the start of production there?

[Earl R. Lewis:]

That program is going very well, Andy you want to comment some more on it.

[Andrew C. Teich:]

So as I stated in the preamble comments we will... we are actually receiving initial parts now and are... we will begin qualification of those. We won't actually go into volume production out of AMI until the fourth quarter of this year and that is a new part for us, it's a slightly different configuration than what we are building right now. And we do expect lower costs to come out of that but I don't believe that we will see any impact on gross margin in 2008 from taking delivery of those parts as the total quantity in 2008 will not be meaningful in terms of our total production.

[Antonio Antezano:]

Should we see it back on 2009 then?

[Stephen M. Bailey:]

Well the larger change in 2009 will be with respect to our automotive business because we will... the parts that will be coming out of AMI will be targeted at our next generation automotive products and the gross margin really won't change significantly there because we have passed that cost savings on to the customer as the automotive market is demanding lower and lower prices but those are reflected also in increased volumes by picking up some new automotive OEM's.

[Earl R. Lewis:]

I think in total I would not look at this acquisition is changing gross margins. I would look at acquisition as investment; I would look at it as changing our ability to price lower in the market both in our earnings business, Bill's business, and Andy's business. So we will use that lower cost detector to continue down this curve of demand versus price that we have set out to do now for 5 years and this is a continuation of it

[Operator:]

Your next question comes from Jeff Rosenberg with William Blair.

[Jeff Rosenberg:]

Good morning. I wanted to ask about your overall revenue guidance and the fact that it's nicely above your sort of long-term growth expectations for the business. Should we think about that as we look at the different divisions as being driven largely by continued outsized growth on the government side in '08 or do you think it's more balanced where each of the divisions has the potential to grow above the longer-term expectations?

[Stephen M. Bailey:]

Clearly Thermography will be growing significantly above its historical rate of 15% to 18% as result of the acquisitions that we have made. So their top-line growth will be significant driven by internal growth and new products and the acquisitions. So Thermography is well ahead of its historical growth rate on the top-line. Commercial Vision has been growing in the 30s and we expect that will happen again and our Government Systems business with the strong backlog and with the programs we identified we would expect it to continue. So I think I made a comment where all three divisions we expect very, very solid growth from '08 and we do.

[Jeff Rosenberg:]

Okay. And then I just wanted to ask for a little bit of follow-up on the Thermography margins and the expectation for improvement there is... are the acquisitions accretive to the margin profile or how does that fit into the equation?

[Earl R. Lewis:]

No, they are not. But we do expect to see better gross margins coming through. Call the traditional Thermography then and that is mainly due to a product mix that we see coming through the year. But we have better products coming through Thermography, we also have had... we had in Q4 some costs that we do not expect that will repeat themselves.

[Operator:]

Your next...

[Earl R. Lewis:]

But to answer the rest of your question the two acquisitions will not necessarily be accretive in '08 to the Thermography margins.

[Operator:]

Your next question comes from [indiscernible] Capital.

[Unidentified Analyst:]

Hey guys, good morning.

[Earl R. Lewis:]

Hi Randy.

[Unidentified Analyst:]

Could you comment a little bit, you mentioned with regard to Commercial Vision that there was some activity on border security. Can you comment with regards to how that relates to SBI?

[Stephen M. Bailey:]

Yeah, both Bill and Andy are involved with SBI in different roles. Why don't... Andy go ahead.

[Andrew C. Teich:]

Sure Randy, the way we segregate the business within the company is that CBS is calling on a large number of system integrators globally and business that goes through system integrators is counted by CBS because of the channel that we have set up and support capability we have set up to deal with those integrators. So SBInet as a program has a couple of components, but the main component is being handled by Boeing and we view Boeing as a system integrator. So Boeing at this point has placed orders with us for the next phase of SBInet and we are feeling very good about that relationship that we have there. There is also other U.S. Border Patrol business in a program called NSS which is a mobile component of the SBInet program and that's being handled by a difference integrator and we have also been awarded a contract there, so we are doing pretty well with regard to SBInet at this point.

[Earl R. Lewis:]

Bill?

[William A. Sundermeier:]

And we are providing all the sensors from that out of our Boston operation doing very well.

[Earl R. Lewis:]

You have got the airborne ones we hope.

[William A. Sundermeier:]

Yeah, the airborne portion of that we are focused onto, its going to be a nice additive to our business

[Earl R. Lewis:]

There has been some procurements Randy that the U.S. Border Patrol has done direct outside of SBInet and those are recorded as revenue directly in build... we sell direct to the end user.

[Unidentified Analyst:]

Okay thank you very much.

[Operator:]

Your next question comes from David Gremmels with Thomas Weisel Partners.

[David Gremmels:]

Yes, thanks. Just one quick follow up, just wanted to ask to go a little deeper in to your operating margin assumption for 2008. It seems that there are some tail wins here, you had some legal costs in '07 that shouldn't repeat and Arne talked about some expenses in Thermography that shouldn't repeat, plus you should have some operating leverage. So I guess I am just wondering why we wouldn't see more operating margin improvement in '08 and maybe significant improvement in '08?

[Stephen M. Bailey:]

Well the only thing we are trying to do with those comments was identify some things that happened in Q4 that are not repetitive. But overall the Q4 spend rates are probably not too far off of where will be on average for next year. We all of next year, this year rather if we keep doing that will be continuing to develop our distribution channels, develop our marketing, our marketing strategy, we put significantly more money in the marketing starting late last year than we had in the past and we will continue to do some of that. So I think that the operating margins that we have generated historically are very good operating margins and we want to continue about at that level and we will probably spend accordingly and produce those operating margins. I don't have any desire to push the operating margins to 30% for example, Dave.

[David Gremmels:]

Okay and then just a last one, the '08 tax rate assumption, what are you assuming there for the R&D tax credit?

[Stephen M. Bailey:]

Think we have not...

[Earl R. Lewis:]

We have not assumed anything for R&D tax credits. You are probably aware David that the enabling legislation for R&D credits is not in place at this time so we have not factored that in to our assumptions with regard to...

[Stephen M. Bailey:]

If it were to happen Dave, its only about $2.5 million roughly. So you can you know, brought a penny a share.

[Operator:]

Your next question comes from Chris Donaghey with SunTrust.

[Chris Donaghey:]

Good morning Earl. With the strong sequential uptick in R&D expense in the quarter, can you maybe just talk about product development and introduction qualitatively in 2008?

[Earl R. Lewis:]

I don't think we had a strong uptick in R&D in Q4 compared to the run rate. It was relatively constant but that doesn't preclude your question. In all three of our divisions we have really a multitude of new products that we are planning on launching and I rather not talk about them because it's... I think it's always premature to talk about what's in R&D relative to product launch. But I can tell you that all of us are very excited about some of the things that Arne is doing relative to his '08 product launch, some of the products Andy is showing us that are in the development phase in terms of meeting we had today and yesterday, and Bill is constantly pushing the new ground applications with modified or new products. So I think the suite of products that we have under development now is just right and the spending that we're doing we will increase next year... this year, given an idea [ph] but not significantly. We have always said we will spend around 10% and that we are a little bit less than that in Q4 as a result of the spike in revenue not as a result of reduction in spending. So, steady issue goes from speed relative to our R&D spend but a lot more in the pipeline each year because that spend keeps going up fairly significantly in terms of absolute numbers.

[Chris Donaghey:]

Great, okay. Great, thanks Earl.

[Operator:]

[Operator Instructions]. Your next question comes from Antonio Antezano with Bear Stearns.

[Earl R. Lewis:]

Hi.

[Antonio Antezano:]

Quick follow up on Thermography business, maybe if you can discuss a bit more of your plans to introduce thermal cameras with lower price points and I was wondering we should respect new thermal cameras significant... with price significantly lower than the entry price, right now I think its $5000? Hello.

[Operator:]

Okay if everyone will stand by, the speakers lines has disconnected. Please hold and the call should resume shortly. This is the operator the call should resume shortly please hang on the line. The call will resume in just one moment. Please hold on the line. Mr. Lewis you may proceed with your call sir.

[Earl R. Lewis:]

Hi Lisa I am sorry, I don't know what happened.

[Operator:]

Okay. And sir we have the question Anthony Antezano with Bear Stearns.

[Earl R. Lewis:]

Is he still on.

[Operator:]

Yes sir.

[Antonio Antezano:]

Yes.

[Earl R. Lewis:]

Antonio could you repeat it, I am sorry we didn't pay...

[Antonio Antezano:]

It was a follow up on the Thermography business whether you could disclose a bit more of your plans to introduce thermal camera with lower price points. Including if price point is 5000 I was wondering we should expect something significantly low there?

[Earl R. Lewis:]

Eventually yes, but we are not going to really give into when we plan to launch or what we plan to launch, but our long range strategy as you know starts back in 2000 or earlier when we started introducing significantly lower and lower and lower priced products and that trend is one that we think is very real and will continue to just keep developing those products. The timing of those releases I don't really want to talk about but clearly the strategy to do that is one that we have entered into and talked about over and over again and we will continue to get in to it. Let me just elaborate on one thing I probably failed to mention earlier, it was a good question about the economy. One of the things in the building trade that we are seeing which is a fairly strong point for FLIR is that the energy cost that people are seeing is requiring more and more audits of home energy use and that I suspect we will see growing no matter what happens with the general economy. Just want to make that point about the core building market.

[Antonio Antezano:]

Thank you.

[Earl R. Lewis:]

Operator do we have another question, I am sorry do you have a follow up?

[Antonio Antezano:]

No thank you, thank you.

[Earl R. Lewis:]

Okay.

[Operator:]

Yes sir, your next question comes from Tim Quillin with Stephens, Inc.

[Earl R. Lewis:]

Okay.

[Timothy Quillin:]

I thought I would try one more time but I am just trying to get a sense of G-BOSS is such a large potential chunk of revenue that I think is worth noting but in terms of your probability waiting are you looking at a $250 million opportunity and say we have a 90% chance of getting all of it and that goes in to our guidance, are you looking at the initial tranche of funding saying that's relatively certain so that gets in to guidance but I just... I view it as a big enough?

[Earl R. Lewis:]

Okay Tim, lets see if I can comment. Relative to this year we are giving guidance. As you know we have a backlog in the Government Systems business of about $300 million entering '08. The G-BOSS business that we expect to book for the marine corp is approximately $70 million this quarter and could go in to next quarter. There is other programs similar to the G-BOSS program but it's not called G-BOSS, it may or may not book this year. The majority of the $70 million we think we will do and is factored very highly in our guidance this year. The balance of the order that may come from other applications for example the army is factored very well at this point.

[Timothy Quillin:]

That's extremely helpful and Bill can you give an update on the --

[Earl R. Lewis:]

Let me just explain something we hadn't told. I am now talking from a cell phone, so any question I will relay it to Bill but go ahead and ask it now and we will pass it to Bill.

[Timothy Quillin:]

You can probably answer this as well, but just an update on the BOSS bid and the FAD/DV bid.

[Earl R. Lewis:]

Yeah, well the BOSS bid where we have submitted and we are waiting for an answer and the whole FADS program is changing daily and I am not sure exactly where the stake is going to end up in the ground on that deal and...

[Stephen M. Bailey:]

Right now there is a lot of PR profile under agreements. There is still requirement out there 4000 to 5000 but we don't anticipate seeing that RSP's but perhaps Q2 will be awarded and in future maybe even Q3. So that is certainly shifting around substantially on us.

[Timothy Quillin:]

Okay brilliant thank you.

[Earl R. Lewis:]

You are very welcome.

[Operator:]

Your next question comes from Randy Gordsen [ph] with [indiscernible] Capital.

[Unidentified Analyst:]

Hey guys, sorry I sound so gloomy I am actually very excited, I just have a bad head cold. We are happy to see that you are re-signed by the Wareo [ph]. My question is on the UV [ph] program that sounded great that you got a Brite STAR order, how does that progress and are you subject to some more issues that you had on air [ph]?

[William A. Sundermeier:]

Well with the UV program for the Yankee that's moving along and delivers those. The Marine Corp currently has 41 of our Brite STAR I and a significant number of Star SAFIRE II, therefore it is about 125 in size and what we are starting to see here is then test Brite STAR Block II and as they get through their testing we come to see out year funding for the 125 systems all occurring through Brite STAR II's but that is going to come in, in traunches if you will as they leave their aircraft, we will probably see orders of 10 to 20 at a time. But probably not until the second half of this year where we start to see any kind of order activity.

[Unidentified Analyst:]

Thanks Bill, that's great stuff.

[William A. Sundermeier:]

You are welcome.

[Operator:]

And there are no further questions at this time, do you have any closing remarks.

[Earl R. Lewis:]

No Lisa, I think we are passing the cell phone around so we are probably done. Just thank everyone for their commitment to FLIR and listening to us this morning and we again look forward to 2008 being another terrific year.

[Operator:]

Thank you for participating in today's conference. You may now disconnect.