FLIR Systems, Inc.
Q1 2008 Earnings Call Transcript

Published: 30 Apr 2008

[Operator:]

Good morning, my name is Polly and I would be your conference operator today. At this time, I would like to welcome everyone to the Flir System's First Quarter 2008 Financial Results Conference Call. I will now turn the conference over to Mr. Wit Davis, Senior Vice President, General Councilor and Secretary of Flir System. Sir, you may begin.

[William W. Davis:]

Good morning everyone. Before we begin this conference call, I need to remind you that other than statements has the historical fact; 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 expect, anticipate, intend, 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 forecasted. The forward-looking statements, we may 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 Earl Lewis, Chairman and CEO of FLIR Systems. Earl?

[Earl R. Lewis:]

Well, thank you William, and thank you all for joining us this morning. We are, as you... I am sure know, quite pleased with our Q1 results. Our financial performance was very good and our long-term strategies continue to deliver excellent results. First quarter revenue of nearly $237 million, increased by 47% from the first quarter of 2007 and was the second highest quarterly revenue in the company's history. Organic revenue growth for the quarter was 35%, though the second highest ever. First quarter operating margin was 23.3%, up a 4 percentage point from the first quarter of '07, operating margins were particularly strong in our Government Systems and our Commercial Vision Systems division, as both achieved record performance. Thermography margins were down from historical levels as anticipated, due primarily to the impact of our acquisitions of Cedip and Extech. We expect these margins to improve over time as planned efficiencies are realized. Earnings per share increased 33% over last year to $0.24 per share, cash flow from operations for the quarter was a record $55 million, is slightly higher than our fourth quarter. We spent $18 million during there quarter to buy 700,000 shares of our stock during the brief decline in the stock growth in early March, $68 million to pursue that. We also repaid the remaining $90 million balance on our credit facilities during this quarter and then deducted the quarter with a $159 million in cash. Orders were strong in all three divisions resulting in a backlog at the end of the quarter for the new record of $471 million, up $78 million compared to the end of the 2007, excluding backlog acquired from Cedip, backlog growth of $61 million in total. On April 8th, we announced and closed the acquisition of Ifara Tecnologias, a leading provider of middleware and client application software used to create sensor networks. We paid €7 million in cash or about $11 million. Ifara will operate a separate business unit within our Commercial Vision Systems division and will also support our Government Systems division. Ifara will initially have little direct financial impact but we are very excited about bringing these institutionally critical technologies in-house. [Indiscernible] will talk more about this later in her call. Also M&A related we successfully completed the standing market order in France, purchased the remaining shares in Cedip Infrared Systems, we now own 99.8% of Cedip's outstanding shares and the company has been listed on the Alternext market. With that, each of the three presidents would comment greater detail on the result of their businesses; we will start with Arne, President, Thermography division. Arne?

[Arne Almerfors:]

Thank you, Earl. Thermography revenue increased 4 to 7% with the first quarter of 2007. Excluding the Extech and Cedip acquisitions traditional thermography revenue grew by 17%. Growth in the Americas and Asia-Pacific was healthy during the quarter, Europe was relatively slow but we expect improvement in Q2. Demand for high-end R&D products and GasFindIR was excellent during the quarter as shipments increased over 100%. GasFindIR strengths was the result of good demand internationally and we are making good progress in developing the R&D markets. Operating income for the quarter was $15.5 million and operating margin was 20%, down from 27% last year. Gross margins in our traditional thermography business were essentially flat with the prior year. The [indiscernible] margins were affected by the impact of exchange rates, acquisitions and some of higher R&D expenses. Extech's instrumentation business has a lower intrinsic margins [indiscernible] and the rest of the [indiscernible] which would impact mordiance [ph] by a few points moving forward. We will however, we expect to see better margins for the reminder of the year. Integration of the Extech and Cedip acquisitions is proceeding well. Extech's significant value to field will be a realized through the sale of new lower priced thermography products through their high volume distribution center. In the mean time, we are expanding Extech's distribution capacity internationally and have introduced an Extech branded version or a low price InfraCAM product to sell through their channel. Our expectations for the Extech branded InfraCAM are modest, but it should lay the foundation for the high volume less market products of the future. At Cedip, we are beginning to integrate sales and distribution infrastructure to eliminate redundant expenses and provide increased distribution with both lease and Cedip products. We expect the LCD to be fully integrated by the end of this year 2008. The thermography industry evolves, the need for a new and improved product that's effective price points will only accelerate. As we have seen with exceptional demand for our new T-Series cameras, customers expect based on the odd features and attractive form factors every price point. With that end we are aggressively investing in new product development across all... in higher product line. For example, if the high-end of the thermography market we recently introduced the GTSMA [ph] the high-definition T60 camera. The T60 provides optimum temperature judgment accuracy, outstanding facial resolution, special image enhancement software, JPEG [ph] and other productivity boosting features. Looking to the reminder of 2008, we expect solid growth. To-date, we have not seen any impact of slower U.S. economy; and our overall market positions are strong. We will continue our long standing strategies of expanding our markets and introducing new low-priced products in Q2 and beyond. With our new manufacturing capability in Estonia and new distribution channels, these products will drive strong growth for the rest of 2008 and beyond. That concludes my comments. So let me now turn the call over to Andy Teich, President of our Commercial Vision Systems division. Andy?

[Andrew C. Teich:]

Thanks, Arne. Commercial Vision Systems revenue increased 67% in Q1 to a record $43.7 million. Orders were strong as well and we added over $12 million of backlog, $9 million as a result of the Cedip acquisition. Orders were very good in each of our served market during the quarter and our strategy to increase demand through lower cost, infrared technologies continues to produce results. Operating income doubled from Q1 of last year to a record $9.8 million and our operating margin for the first quarter was 22%, up from 18% in the first quarter of last year. In the security and surveillance market, we received several orders for both long-range cooled cameras and short-range uncooled cameras for a variety of projects worldwide. In the U.S, we received orders from integrators supplying both the U.S Custom and Board of Control Mobile Surveillance System program and the FBI net program. For these applications, our long-range censors have performed very well on the field, both in test against suspect and against the competition. We feel we are well positioned to participate in these potentially large order protection projects going forward. In the security business, it's strong overseas as well. Of interest, we sold a large quantity of uncooled cameras to two major golf resorts in Europe. To be installed, where lighting and censor installation are not possible. In maritime orders doubled from last year despite softness in the overall maritime market. In addition, to our aftermarket business, we've had success in pursuing maritime OEM as several of them are now offering a navigator system as an option on their product. Navigator has been so well received that the Motor Voting [ph] magazine named it product of the year for navigational aids. Success we've experienced in the security and maritime markets is due in part to the distribution network we built over the past few years. Our overall number of dealers continues to increase as we recently added 59 new dealers in security and 24 in maritime for a combined total of over 500 today. Ultimately, we plan to have nearly 1000 dealers in these markets. In the automotive market with our partner Auto Lease [ph] we've captured yet another major auto OEM account. This one is for a second German manufacturer with systems to be introduced in late 2009 with the 2010 model year. These systems will be based on our second generation design which includes automated pedestrian intersection from [indiscernible]. We have now won a total of four automotive manufacturers and are very excited about the opportunity in the market going forward. In a slightly different transportation night vision market a major RV manufacturer Country Coach is now offering a path finder product as an option on their high-end motor home. Other markets that are growing nicely include the fire fighting market, where funding from team of fire acts is driving orders and the airborne law enforcement market where Q1 orders rebounded from a weak 2007. Our venture with AMI Semiconductor remains ahead of schedule and we are currently producing images from the first product. This relationship has helped us drive additional costs from our uncooled infrared censors allowing us to introduce lower-priced products to drive demand. As Earl mentioned earlier the Ifara Tecnologias acquisition is very important for FLIR and for CDS [ph]. Their networking middleware will allow our cameras to communicate with each other through multiple protocol. The system also allows easy integration with many other security censors such as radar, ground censors, access control devices and electronic maps. Ifara also has the strong video analytics capability bringing real-time rule based intrusion alert, object classification and tracking into our products in a low cost manner. In the coming months we will be imbedding Ifara's Nexus technology into most of our new products in many of our existing platforms. We expect continued solid growth in CDS for the rest of 2008, we have yet to see any adverse effects from the U.S. economy and feel our markets are as strong as ever, giving us confidence in our forecasts for the year. And with that I will now pass the call on to Bill Sundermeier, for his comments on the Government Systems results.

[William A. Sundermeier:]

Thanks, Andy. Q1 was another excellent quarter for the Government Systems division. Through our unique product strategy, customer focus, sales model and global operations infrastructure we have created a business model that delivers both high growth and strong profitability. Q1 revenue was $113.7 million up 40% compared with last year's Q1 revenue of $81.2 million. Orders were outstanding as well as backlog increased by $66 million to an all time high of $371 million. Excluding backlog acquired from Cedip, backlog increased by $61 million. In addition to the large orders we publicly announced order activity was widely dispersed and particularly strong overseas. Q1 operating profit was a record $42.6 million and operating margin was 37%. With excellent visibility entering the quarter due to the substantial backlog and long-term contract vehicle our factories worldwide were able to operate at high levels of efficiency, improving overall profitability level. During the quarter we received orders totaling approximately $75 million for the Marine Corp G-BOSS program through the U.S. Army Space and Missiles Defense Command. We are pleased that the U.S. Army continues to value our systems for these critical force protection applications and we expect to see additional significant orders for similar missions over the next few quarters. Although the specific timing and amounts are not yet certain. During the quarter we were informed that we were not selected for the Army's Bass program. Even though this program was upside to our plan we are disappointed in the Army's choice as we know we provide the best technologies and value for the war fighter. Internationally we received a large order during the quarter out of Sweden for a custom designed thermal imaging systems for use in surface-to-air missile site. And a large order from an ally in the Middle-East for Star SAFIRE III system used for homeland security and high value asset protection mission. We also received several smaller orders from government customers in Japan, Austria, Spain and U.K. for a variety of missions. Business was strong across the board and airborne maritime and land based applications each grew at least 30% during the quarter. The airborne market was driven primarily by large gambled systems out of our proven operation. They expect deliveries of our small ball systems to increase as our new calling system a phonogram proven lightweight... contains up to five payloads becomes established in the market. We remain optimistic for the reminder of 2008 and beyond and are expanding customer base is the value provided by our products and our commercially developed military qualified model. With record backlog a significant base of long-term contract vehicle and a large pipeline of opportunities on the horizon the future continues to look bright. That concludes my comment I will turn it back over to Earl.

[Earl R. Lewis:]

Well thank you all. As you can see from the comments from our Presidents the success that FLIR experienced during 2007 has been into '08. Even with our rapid growth in unit volumes over the past few years untapped market opportunities remain enormous. And we believe FLIR is still in the very early stages of exploiting these markets. Our strategy of reducing cost with infrared technology and expanding market making infrared technology available to more and more people. However, many people are either unaware of how infrared technology can make them safer, more aware and more productive or they aren't able to afford it. Our goal is to bridge that gap. And we are well on our way. Thus we reaffirm our outlook for '08 of revenue between $1 billion, $1.05 billion, up 35% from last year and a full year earnings per share between $1.13 and $1.20 up 27% to 35%. I would also like to comment on just everyone... remind everyone rather there are a number of other executives who I have entered into MD5 stock trading plan over the past year. We have also established an insider trading policy designed to minimize the impact of insider activity on our investments. This policy requires all sales by section 15 officers to be transacted to MD5 plan. Such plans must be established during an open window and no sales are allowed to occur until at least one earnings announcement and a closed window of the past. Once established these plans will not be altered and if canceled these plan cannot be established for six months. Six of our offices have options that will expire in February '09 and you could expect to see sales from us due to this in the upcoming period. First you will see sales by millions if I exercise its buying options and diversify my personal holdings. At the conclusion of these sales, I will continue to have a significant portion of my personal wealth investment in FLIR. With that Steve call is yours to provide some details on the Q1 financials and then we will take a few questions. Steve?

[Stephen M. Bailey:]

Thanks, Earl. The financial information that will be discussed today includes the operating results of Cedip Infrared Systems, which was acquired in early Q1 and Extech Instruments which was acquired in Q4 of 2007. Extech will be combined with our Thermography division and accordingly the results would be included in the Thermography division financial results. Cedip financial results will be inflective primarily in Thermography for the portion of their operations will report through CVS and the Government Systems as well. For 2008, we'll provide appropriate disclosure of material impacts on Cedip and Extech to assist and understanding the comparison to FLIR 2007 pre-acquisition results. References to future periods beyond 2008 will be on a fully consolidated and integrated basis with the FLIR operations. Revenue for the first quarter of 2008 totaled $236.9 million, an increase of 47% from the same quarter last year. Revenue from our Thermography division increased 47% over the first quarter of 2007, a 17% organic increase excluding Cedip and Extech revenue. Revenue from our Government Systems and Commercial Vision Systems divisions increased 40% and 67% respectively, as compared with first quarter 2007. For the quarter, revenue was distributed 48% from Government Systems, 34% from Thermography and 18% from Commercial Vision Systems. Our international revenues for the quarter were 37% of the total revenue, while revenues from the U.S. government sales also accounted for 37% consolidated revenue during the period. As previously disclosed we closed the quarter with a backlog and that is orders in hand for delivery within 12 months of $471 million, an increase of approximately 20% or $78 million over a backlog at the end of 2007. Excluding backlog acquired in the Cedip transaction backlog rose by $61 million for the quarter. By divisions, backlog amounted to Government Systems 371 million, an increase of 22% over the year-end, Thermography $20 million flat with year-end 2007 and Commercial Vision Systems $80 million, an increase of 18%. The gross margin for the current quarter is 55.2%, as compared to 55.7% in the first quarter of last year. The research and development expenses of $23.1 million were 9.8% of revenue for the quarter as compared to $18 million or 11.2% of revenue for the first quarter 2007. Selling, general, administrative expenses for the first quarter 2008 were $52.6 million which were 22.2% of sales as compared to $35.8 million or 22.2% for the same period 2007. Earnings from operations for the quarter totaled $55.1 million or 23.3% of revenue as compared to $36 million or 22.3% of revenue in the first quarter 2007, the 53% or $19.1 million improvement of operating profit as compared to the first quarter of 2007 is a result of a 47% increase in revenues while incurring a 41% operating cost increase for the same period. Interest expense for the quarter totaled $2.5 million, as compared to $2.7 million in the same period last year. Interest expense of $1.8 million relates to the interest cost and amortization of transaction cost of the $210 million convertible notes. The remaining in interest expense in both years primarily relates to credit line borrowings in those respective periods. During the quarter, the company earned $1.4 million of interest income while incurring $1.3 million at currency losses. For the prior year first quarter, interest income was $1.1 million and currency gains amounted to $1 million. Based on the anticipated mix of foreign and domestic income for the full year, the effective tax rate for the quarter was approximately 29% and we expect the annual rate to approximate 29 to 31% for the full year. For the first quarter, net earnings were $37.3 million or $0.24 per diluted share, a 42% increase in net earnings compares with net earnings to $26.3 million or $0.18 per diluted share, the same quarter of 2007. We finished the quarter with cash of approximated $159 million as compared to year-end 2007 cash balance of $204 million. Our cash provided from operating activities during the quarter totaled $55.2 million cash used in investing activities of $80.5 million was primarily applied as $68.2 million for the acquisition of Cedip and capital expenditures of $10 million with $2.3 million applied to other investments. Cash used by financing activities during the quarter included the net repayment of $19.3 million, the credit agreements $17.7 million applied to the repurchases... 700,000 common shares of average prices $25.40, while receiving $5.6 million of proceeds from the exercise of stock options. Other long-term assets on the balance sheet increased during the quarter to $83.4 million, an increase of $66.7 million. The increase is primarily due to the purchase price of Cedip that is in excess of the net tangible assets acquired. The purchase price allocations study has not been completed for the acquisition and the excess purchase price of approximately $63 million, this been reported in this other asset category until such time that it can be appropriately valued for reporting as intangible assets and goodwill. This concludes the financial summary. I will turn the call back to Earl.

[Earl R. Lewis:]

Okay, thanks Steven. Polly, we are ready for questions. Question And Answer

[Operator:]

Yes sir. [Operator Instructions]. Your first question comes from the line of Brian Gesuale [ph].

[Unidentified Analyst:]

Nice quarter.

[Unidentified Company Representative:]

Thank you.

[Unidentified Analyst:]

I am wondering that, if you guys will care, maybe have Arne's share, a little bit more detail on product strategy and thermography, talk about maybe some of the new products that you expect to really hit and how the synergies with the distribution are really going to drive that business going forward?

[Unidentified Company Representative:]

Yeah, that's about a half an hour answer. Let me just say that we have our roadmap for the total spectrum of products and the high volume product development that moves on and has been going on for certain period of time has been complemented by the acquisition of Ifara [ph] and still now that I expect distribution company and that's just principle to how is going forward and we will continue to develop products in both ends so are just the product such that which means higher and then lower. And we expect to see more of higher volume come through moving forward to the low-end side. And it's going to come as [indiscernible] or that in Q2.

[Unidentified Analyst:]

Okay, terrific, maybe just one other question on the financial side. Can you talk about legal expenses, how they were incurred in the quarter and maybe how expect those to go out through on the year?

[Unidentified Company Representative:]

I guess we are not going to say what they were but they are too much.

[Unidentified Analyst:]

They always are.

[Unidentified Company Representative:]

And unfortunately they'll probably remain fairly high for us throughout this year, due to couple issues that we hope will be solved by the end of the year. But there are running higher than we'd like that's for sure.

[Unidentified Analyst:]

Okay. Great thanks a lot guys.

[Operator:]

And your next question comes from the line of Antonio Antezano [ph].

[Unidentified Analyst:]

Good morning.

[Unidentified Company Representative:]

Hi.

[Unidentified Analyst:]

I was wondering given the very strong backlog that you reported, what is preventing you from raising your guidance for the full year.

[Unidentified Company Representative:]

Conservativeness we'll look at that. Well I think conservativeness. We'll look at it the end of Q2 and that's what we've done every year basically. We don't like to do quarterly guidance particularly and I think that won't give it a good strong review at the end of second quarter and that we think it should be adjusted for full adjustment. I think remember the only time we've really ever missed that forecast is when I decided half way threw to increase it because everything looks so good and we therefore miss it. I think its conservative thinking on my part I just that's what we've said about month ago, two months ago and the whole world has been changed that fast. We don't know what are the results there are a lot of other things that are happening in our general economy you are going to be either. Although historically they haven't had a big impact on this. But as not sure where that's going. We would give you a good answer at the end of second quarter is what we think the [indiscernible].

[Unidentified Analyst:]

And quick follow-up on the AMI facility you mentioned that you are ahead of the schedule and what respect... before you mentioned the additional... of any significant impact on gross margins, but as you are now ramping up what would be the impact on your operations now?

[Unidentified Company Representative:]

Andy you want to?

[Andrew C. Teich:]

Well I don't expect there will be any financial impact in 2008. our plan although this program is running ahead of schedule with regard to technology side as I mentioned imaging parts are ready, we still don't expect to switch AMI on in terms of producing parts of we'll release [ph] to the market fully end of the year.

[Operator:]

Your next question comes from the line of Paul Coster [ph].

[Unidentified Analyst:]

Andy if I may on the border protection side of your business, is any of it in backlog at the moment and do you expect given the nature of the program that it will start to appear in backlog moving forward?

[Andrew C. Teich:]

No. There is very little of it in backlog because we basically treat that business as booking ship business. So the model for CDS is to have very rapid shipment capability from price on the border and that's the way we treat the orders coming from prime, such as Boeing on the SBInet program.

[Unidentified Analyst:]

Even if it scales of you think it will remain at certain [ph] business?

[Unidentified Company Representative:]

I believe so Boeing has been releasing orders on basis such that we can ship the product right away and they wipe the fact that we can do that.

[Unidentified Analyst:]

Okay got it. On the... I mean we've got enough scale now for the differences between North America and Europe explanations so why was Europe a little bit weak relative to North America, is there any lessons you learned there?

[Arne Almerfors:]

I would say that the setup in distribution has taken somewhat longer time in India that's we call it and we have seen the success in Americas and in Asia Pacific. And I expect the improvement through in Q2 and that renew [ph] general economic conditions that actually would support the fact that they were somewhat slower.

[Operator:]

Your next question comes from the line of Chris Donaghey [SunTrust].

[Chris Donaghey:]

Good morning guys. A great quarter overall. I wonder if you can talk a little bit about orders in the quarter and just can I get this back to the backlog question, very strong sequential increase in backlog from Q4 to Q1, is the company's policy still to not announce orders unless they hit some $5 million threshold, and if that's still the case then implication must be that the number of orders in that $1 million to $5 million range must be going out pretty significantly?

[Earl R. Lewis:]

Yes, with one small exception, there are somewhere as we cannot announce, as you might imagine, but given that, and that's not a big deal, I don't believe in the last quarter. But yes, we've had lots of smaller orders as well.

[Chris Donaghey:]

And, can you kind of help us out with the geography... geographical representation on those orders?

[Earl R. Lewis:]

I'll ask Bill, but I don't think there has been, majority of backlog build of course was in those business and we've seen good strength out of Europe, and I think that that is running at least as well as it has historically on our outlook side. So around 40% to 45% of rate.

[William A. Sundermeier:]

Yes, I would agree with that, we had a lot of orders internationally and quite a few in the two to three unit categories and that hit our threshold to announce... very strong hopefully in U.S. and International lot of small orders in addition to large orders we did announce make fairly all three of the performance wins [ph] and guarantees so to speak, we are strong. Many of those are smaller.

[Chris Donaghey:]

Okay great and Bill just

[William A. Sundermeier:]

Hey Chris sorry about that.

[Operator:]

Your next question comes from the line of [indiscernible]

[Unidentified Analyst:]

Bill quick question for you, I just wondering as we look out at the DoD supplemental budget which I guess Congress is looking at sometime next month. Can you give us any sense of the opportunity that you guys see there?

[William A. Sundermeier:]

Jim, I have little trouble hearing you, I think you asked about supplemental?

[Unidentified Analyst:]

Yes, I did... sorry I am... question was just with respect to that supplemental, how do you guys see the opportunities?

[William A. Sundermeier:]

Primarily we're attracting the funding yesterday, going to quite a few of the DoD based that we already have to keep the unfunded portions of those IDI to [ph] some more of the rate type opportunities should be funded through that and some other programs in the lead times phase. So we're watching it closer and hope we would get the IDI things and provide good backlog.

[Earl R. Lewis:]

It's always been tough for us to pick out our name even though its budgets in general.

[Unidentified Analyst:]

Yeah.

[Earl R. Lewis:]

It's never been... the big companies they can do it, they can pay all of that my program, we're kind of down in the ladder, so when they say security for example they do not [ph] include. But I think that clearly in the you know about funding for our potential orders relative to as far as that to the innovation like in the jukebox [ph] program. We do know where some of the major funding will or will not come from, but I don't think we have a clear indication to tell you that supplemental will add significant amount of volumes to our company.

[Unidentified Analyst:]

Okay and if I could log one into to Arne. Arne, are you gaining share or is this market just expanding at a faster rate then we've expected?

[Arne Almerfors:]

I would say the market is definitely expanding and we are expanding the market you could say since we have been in the market leader over years and through that effect we have been able to open new market segments in markets and expand the markets and we are tracking our market side and we are definitely keeping our market side with performance, So it's a combination of keeping our market side with brewing the market, and the market is expanding especially when you go into the high volume area.

[Unidentified Analyst:]

Congratulations on the quarter.

[Unidentified Company Representative:]

In the Far East transaction.

[Arne Almerfors:]

Oh yes, we see very positive growth with Far East with something like.

[Unidentified Company Representative:]

Arne has been judged, is having 60, 70 to 80% market share depending on which part of the market share you are breaking it down to so, with the advent Danaher clearly they have helped the market grow. Lots of advertising and that's what happens many times and that's very healthy for everybody. Well I don't see them gaining market share on at this point.

[Unidentified Analyst:]

Thank you.

[Operator:]

And your next question comes from the line of Jonathan Ho [ph].

[Unidentified Analyst:]

Good morning, great quarter guys. You guys have mentioned some of these new G-BOSS opportunities as coming up then just wanted to get a little bit more color from you in terms of the Brite STAR program and maybe the potential magnitude that you are seeing for I guess the programs that are shipping up that are tied to G-BOSS?

[Unidentified Company Representative:]

You know we made the mistake last quarter, I think it was... who was that who trapped me there from... no, anyway. I just hate to comment on future orders, but Brite STAR is basically the army use of the equipment that the Marine Corp.

[Unidentified Company Representative:]

The army originally started the program and the Marine Corp. came on as a requirement or assistant. And we have to interpret that the program offices is [indiscernible] program office and we have received but nine systems of the Marine Corp requirement and that will fulfill the Marine Corp. requirement and we will be moving into additional army requirements that are proposed but not yet coming. I hope that answers the question.

[Unidentified Company Representative:]

Great, additional opportunity there.

[Unidentified Analyst:]

Fantastic. In terms of just the SG&A, we saw significant growth in revenue and we just wanted to kind of understand why we are not seeing a little bit more leverage on the SG&A side?

[Unidentified Company Representative:]

The question I asked too. Jonathan one is that as you look at the quarter comparison on the SG&A, its pretty much in line if you will as a percent of revenue with Q1 of last year, so they do kind of grow together, but there are certainly certain areas that has been, I think some additional fund expanded particularly in some of the marketing and sales development areas in anticipation of some of the products and products intervention going forward.

[Unidentified Company Representative:]

With that said, clearly, I think I have made this comment before, I think, make it again, we have a track to keeping the lowest cost possible or cost that was sold and I think we improve in that, we backward integrated, we know we can do that well, we know we can hold as possible [ph]. With that said, we're now in a different phase to a certain extent, we're trying to have the three-year brand become the brand for infrared applications in many, many different applications and that is expensive doesn't come cheap, and we're stepping up to that and we are spending the money to make that happen. I think that's an investment the future that will payoff for this company for many, many years and we're not too worried about generating additional operating margins, frankly. Our operating margins are excellent, so what we want to do is make Danaher [ph] sure that our name is so well established in these markets and we'll spend the money to do that. It's a worthwhile investment, although sometimes I do ask the same question.

[Earl R. Lewis:]

Jonathan one other thing to remember is, a big chunk of Arne's cost structure is in Europe and exchange rates have fairly negative impact on his cost structure, Andy too, Andy's got some cost in Europe and frankly Bill's as well. So we're not fully, when you look at the expenses, we're not fully U.S. dollars denominated and weakening of the dollar definitely impacts expense trajectory in Q1.

[Unidentified Company Representative:]

We did see some leverage there.

[Unidentified Company Representative:]

Yeah we did.

[Unidentified Company Representative:]

So I think we are in the right track. It's a balance and it's a balance I think we're about right on.

[Operator:]

And your next question comes from the line of [indiscernible].

[Unidentified Analyst:]

Good morning.

[Unidentified Company Representative:]

Good morning.

[Unidentified Analyst:]

Well its nice to know I am so memorable Earl. I just want to follow up on the G-BOSS program, a year ago for the fiscal '08 budget year Marine Corp. had requested funding and had discussed a quantity of 440 sensors for that program, has that changed?

[Unidentified Company Representative:]

Well, again I want to separate the G-BOSS program which for the Marine Corp. and Marine Corp. actually had much smaller subset of that number and they will be through there requirements for both star threes [ph] and for their requirement now in Q3. So they have purchased all of those and they have another 29 on their requirements for star three's [ph] yet purchased and are watching the funding for that. They will be done. There is a total requirement in that came through at that time we should... we have included Marine Corp. as well as Army, and the Army is still working on their requirements of struggling those some of that requirements we're seeing with the G stock [ph] and finally determining what their final number is going to be then the funding process continues from there. So the Marine Corp. will be here with there requirement shortly and then we would be moving on to army requirements and then we can determine [ph].

[Unidentified Company Representative:]

There is potentially a larger order out there though.

[Unidentified Analyst:]

And is the army requirement larger than the Marine Corp?

[Unidentified Company Representative:]

Yes.

[Unidentified Analyst:]

Okay and just one detail for Steve, what was D&A in the quarter?

[Stephen M. Bailey:]

So now you are going to come with the question for me, I can't fine the right schedule for. D&A for the quarter was $8 million.

[Operator:]

And your next question comes from the line of [indiscernible].

[Unidentified Analyst:]

Good morning, nice quarter. Could you give us a little more color on your margin, I guess some of the commercial vision, it seems it was very strong this quarter compared to the previous run rate and is it sustainable throughout the year?

[Unidentified Company Representative:]

Well, I'll address the second question first, which is with regards to sustainability, this is the rate at which we intend to be running going forward and I expect it will be north of 20% going forward. In terms of the change versus prior quarters, we continue to get some efficiencies out of the volumes that we are running through our fab our detector foundry and those resulting higher in margins through the cores and components business in commercial system which is still about half of our total business for that, for that triple [indiscernible].

[Unidentified Analyst:]

Okay, so it's really volume driven so we could see these expand beyond this level then?

[Unidentified Company Representative:]

Well, I don't expect it to expand significantly beyond this level at this point because we have stated before that as we get additional efficiencies on our cost side, we intend to utilize that to leverage the price elasticity of the market.

[Unidentified Analyst:]

Okay. Fair enough.

[Unidentified Company Representative:]

Thank you.

[Operator:]

And your next question comes from the line of Michael Lewis.

[Unidentified Analyst:]

Good morning, actually this is Mike Nesset [ph] for Mike Lewis. Just a couple of quick questions. First was CapEx it was at least $15 million in Q4, $10 million this quarter, how do you expect that trend throughout the reminder of the year?

[Unidentified Company Representative:]

Probably not a bad number. That's, yeah, I would worry [ph] that $10 million is pretty that we have around... there is only one real large expense, $4 million type number, on the horizon, the balance of the precedence are all standing around $10 million each for the year.

[Unidentified Analyst:]

Great, and, lastly is that, very recently Defense Secretary Gate down capacity in theatre, is still not good enough. Does that has any implications on your business?

[Unidentified Company Representative:]

I can't get what you said.

[Unidentified Analyst:]

Very recently Defense Secretary Gate said that drown capacity in theatre?

[Unidentified Company Representative:]

It's been UA--

[Unidentified Analyst:]

UAB capacity.

[Unidentified Company Representative:]

Yeah, okay.

[Unidentified Analyst:]

Okay, it's still not good enough. Does that have implication, if you were to increase the number of UABs overseas?

[Unidentified Company Representative:]

I think we are by far the largest infrared suppliers for UAB market. So as, now there is some platforms around, some we aren't but in total, I almost positive that we supply more UAB systems with infrared equipment then anyone else in the world. Yeah, might... which one goes but I think that's very favorable to clear we state that out as a market we want very active in.

[Unidentified Analyst:]

Okay.

[Operator:]

And at this time sir, there are no further questions in queue.

[Unidentified Company Representative:]

Great.

[Operator:]

I am showing there is a follow up question from the line of Paul Coster.

[Unidentified Company Representative:]

Okay sure, yeah Paul.

[Operator:]

And he has withdrawn his question.

[Earl R. Lewis:]

Okay, fine. Well, thank you all for listening into us today, we appreciate very much, we enjoyed this kind of conferences to be honest we look forward to many more of them. Thank you very much.

[Operator:]

Thank you sir. This concludes today's conference, you may now disconnect.