FLIR Systems, Inc.
Q1 2009 Earnings Call Transcript

Published: 23 Apr 2010

[Operator:]

Good morning. My name is Monica, and I will be your conference operator today. At this time, I would like to welcome everyone to the FLIR Systems first 2010 financial results conference call. I will now turn the call over to Mr. Wit Davis, Senior Vice President, General Counsel and Secretary of FLIR Systems. Sir, you may now begin.

[Wit Davis:]

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 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 Lewis:]

Thank you, Wit, and thank you for joining us this morning. We are very pleased with our performance in the first quarter. We are in $0.35 per share and a 6% increase in revenue to $287 million. Our commercial business did much better than they did last year. And this planned the government systems revenue was little changed. Gross margins and operating margins improved from Q4 and remained at near record level. Both of our commercial businesses reported better year-over-year margins in Q1. While our government margins were down slightly from last year, but remained very strong. Cash from operations was $82 million. And cash balances increased by 40 million during the quarter. Our 12 month backlog at the end of the quarter was $543 million down approximately 4%. And in line with our expectations. With that, I am going to turn the call this call over the Andy to discuss Q1 commercial systems, Andy.

[Andy Teich:]

Thanks Earl, the new commercial systems vision has been together for nearly four months and we've made significant progress capitalizing on the combination. We are working to streamline the sales and marketing organization, leverage operational synergies and coordinate R&D efforts. When we are done, we expect to have a even stronger position as the market leader in commercial infrared. Overall, Commercial Systems Division revenue in Q1 was a $129 million an increase of 17%, compared to the combined first quarter results of thermography and CDS a year ago. Operating income for Q1 was $34 million up 25% from the prior year. While operating margin was a very strong 26%, the promising signs of an economically recovery we saw in the fourth quarter were sustained throughout Q1 and led the healthy growth across most product lines. Thermography revenue in Q1 was $75.6 million, an increase of 18% from the first quarter of 2009. Excluding the impact of currency thermography revenue grew 11%. Operating margins were 27%, up from 25% last year, due to better gross margins and operating leverage. The US improved substantially at the first quarter as growth in both the mid-range and the high volume segment accelerated. Asia-Pacific continued its strong growth across most product lines, applications and countries. EMEA revenue was up only slightly, however as the economic recovery in most European countries lagged the most recovery in the United States. We made some changes to our organization in Europe and expect better performance in the second half of 2010. Thermography unit volume increased over 40% compared to last year a substantially better result than in 2009. Volumes were up across almost all product lines, indicating a return to the broad based multi-application demand drivers we experienced prior to the economic downturn. Turning to Commercial Vision Systems, revenue was $53.4 million an increase of 16% compared to first quarter a year ago. Backlog remained very strong at $101 million down just $2 million from year-end. Operating income for Q1 was $13.8 million up 22% from the prior year and the highest in CDS history. Operating margins were 26% up 1% from the prior year due to higher gross margins which were partially offset by increased operating expenses. Demand in the security and surveillance market was excellent as worldwide orders were up over 30% from the first quarter of the prior year driven by outstanding growth in Europe. Unit growth was up nearly 60% continuing the trend towards lower-priced short and mid-range uncooled cameras purchased with private industry funding. Our global distribution network now boasts 433 dealers worldwide up nearly 100 from a year ago and reflecting our focus on expanding distribution for long-term growth. In the maritime market, orders were up dramatically compared to the prior year and reached the highest quarterly level ever. Demand was strong across product lines from the top of the line Voyager system to the new M-Series multi-sensor system to the new First Mate handheld camera. The maritime business has great promise for the future. Demand in cores and components, the largest CDS segment was down slightly from the first quarter of 2009 due primarily to the timing of orders from some of our major military OEMs. The auto segment which had been slow for most of 2009 grew significantly during the first quarter reflecting the addition of the second large OEM as well as improved take rates. Recently we launched a new segment with MCDS called personal vision systems. The segment was created to drive growth of our commercial handheld system for law enforcement, security professionals and personal use. The H-Series handheld camera that sold nearly 2,000 units of introduction nine months ago. We continue to introduce new products at a rapid rate. In Q1 we launched three new models including the world's first commercial high definition IR camera, the Tau 640 uncooled camera core which utilizes our first ever 17 microbolometer and we leveraged the short wave infrared expertise from the recently acquired Salvador Imaging team in Colorado Springs to develop and launch the Tau shortwave infrared camera core. Looking forward, we continue to see strong performance for the combined commercial systems business as the worldwide economy stabilizes and we effectively execute our high volume, low cost growth strategy. Before I conclude my comments, I'd like to take the opportunity to thank my friend and former colleague Arne Almerfors for delivering to me a very well run thermography business. After getting more familiar with this business over the last four months, I am even more confident that this business whose prospects for the future are very bright. With that, let me now turn the call over to Bill Sundermeier to comment on the results of the government systems business.

[Bill Sundermeier:]

Thank you, Andy. For the first quarter government systems revenue was $158.3 million, a decrease of 2% from the prior year. Q1 operating income was $62.8 million was down 14% primarily due to revenue mix and increased operating expenses. Operating margins of 40% remained very strong in the quarter. First quarter order activity was a bit better than expected and our backlog of $480 million at March 31 was only $15 million lower than year end. We received over 80 orders during the quarter, the value of which was split nearly evenly between domestic and international. Airborne applications represented the majority of the orders with ground based applications a strong second. In the US, delayed procurement decisions related to Afghan search requirement are slowing order activity. We do not expect the situation to improve in the second quarter as the pipeline remains healthy and we expect better orders in the second half. In the force protection area, we received orders totaling $21.7 million from the US navy for our Star Sapphire III stabilized multi-sensor systems and the Recon III handheld binoculars to support the marine core ground based operations, surveillance systems GBOSS program. This award supports near-term program requirements and there is an interim award before the expected program of record process which we believe will coincide with the fiscal year 2012 budget. In addition, the army recently released a request for information related to the integrated tower needs of the BETSS-C program. This RFI may relate to interim requirements prior to the army's plan program of record for BETSS-C. We are pleased with this recent activity from both the marines and army as it supports the premise that our force protection solution are and will continue to be critically important. Q1 was also a solid quarter in airborne market. We received a $12.4 million order from the army for Star Sapphire systems for Black Hawk Medevac helicopters. And a $13.5 million order from the naval surface warfare center, Crane Division for our BRITE Star II major designation, multi-sensor systems for marine core and navy applications. We received two other sizeable orders for the Bright Star II totaling $15 million further demonstrating the wide spread adoption of our flagship designation platform. A key area of growth for government systems is in the military vehicle applications for targeting IED detection, situational awareness and driver vision enhancement. We have leveraged our airborne multi sensor system an uncalled low cost system expertise to develop an extensive product portfolio for these emerging applications and see a strong pipeline of demand. In fact, early in Q2, we received a delivery order for 20.9 million under a $35.2 million IDIQ for the LRGM vast program which will utilize our talent to stabilize multi-sensor system. The government system division has the broadest product portfolio in its history and is targeting more applications than ever before. To take advantage of the opportunity we have increased our investment in sales and marketing, in particular we are increasing our Washington DC presence to better position us early in the procurement process. Looking towards the remainder of 2010, we continue to believe government systems revenue will be flat to slightly up during the year, based on the current level of backlog and the factored order of forecast. Our objective as we progress through the year is to build a strong order book for 2011, as we work through a planned mix changes. We also expect operating margins will hover around Q1 levels throughout the remainder of the year. That concludes my comments; let me turn the call back over to Earl.

[Earl Lewis:]

Well thank you Bill, we are seeing a good recovery in our commercial business and expect strong growth from it from the rest of the year. Our government system business is still reported on plan and its expanding sales foot print and marketing activities are positioning us for a long term growth. In all of our markets we continue to focus on improving our operations, expanding our distribution, proving the quality of our products and then leaving a promising growth market. We have a significant cash position, no debt then after we retire our convertible bonds in June and a very strong cash flow. This will enable us to continue the strategy of using financial strength, make value creating acquisitions, invest in our existing business and when appropriate repurchase our own common stock. We do not acquire any of our own stock in Q1. We still have nearly 17 million share authorized for repurchase. We will continue to seek opportunities to buy back our share in the future. The M&A market while difficult to predict has some interest in opportunities for FLIR and we continue to be very active in that market. We have had some questions recently about whether FLIR intents to be in paying a dividend. This is a topic what you regularly evaluate and we will continue to do so. Our size and our cash flow can certainly support a meaningful dividend, but given the opportunities we see in front of us and the likely significant increase in personal dividend tax rate next year. We do not intent to institute a payout in the near future. Before I turn the call over to Steve for his review of the financial in detail, I'd like to again thank our dedicated employees for their terrific focus, execution and their contribution to FLIR's continuing success. With that, Steve

[Steve Bailey:]

Thank you Earl. Revenue for the first quarter 2010 totaled $287.3 million, an increase of 6% from the same quarter last year. Revenue from government systems was a $158.3 million, 2% less from the first quarter of 2009, while commercial systems revenue was $129 million an increase of 17% for the first quarter 2009. Revenue from our commercial division of $129 million is comprised of commodity revenue of $75.6 million an increase of 18% over first quarter 2009 of which approximately 7% of the increase was due to currency due to a weaker dollars compared to the first quarter of 2009. Revenue from the Commercial Vision Systems up $53.4 million with an increase of 16% as compared to the first quarter of 2009. For the quarter, revenue was distributed 55% from government systems, 46% from Thermography and 19% from Commercial Vision Systems. Our international revenues for the quarter were 42% of total revenue while revenues from the US government sales accounted for 38% of consolidated revenue during the period, down from 45% of revenue for the first quarter of 2009. We closed the quarter with a 12 months backlog to $543 million a decrease of approximately 4% or $20 million less in our backlog at year-end 2009. By division backlog [amounted] the government system $418 million Thermography $24 million and Commercial Vision Systems, $101 million representing declines from year end 2009 by all division of 15 million. Government systems were 3% Thermography, $3 million or 11% and commercial vision systems of $2 million or 2%. Gross margins for the current quarter was 57.6% as compared to 58% for the first quarter of last year and as compared to 56.5% for the fourth quarter of 2009. Research and development expenses of $24.8 million or 8.6% of revenue for the quarter, as compared to $22.4 million or 8.2% of revenue for the first quarter of 2009. Selling and general administrative expenses, in the first quarter of 2010 of $56.2 million were 19.6% of sales as compared to $51.9 million or 19.1% for the same period in 2009. Earnings from operations for the quarter totaled $84.3 million or 29.4% of revenue as compared to $83.4 million or 30.6% of revenue first quarter 2009. Interest expense for the quarter totaled $1.2 million as compared to $2.8 million for the same period last year. The quarterly expense relates the remaining $58.5 million of convertible notes and the decrease in year-over-year expenses due to the conversion of notes to common stock in 2009. During the quarter the company earned $254,000 of interest income and $53,000 of other income comprised of currency loss of $214,000 offset by $264,000 of other miscellaneous income. For the first quarter of 2009 the currency gain was up $896,000. Based on the anticipated mix of foreign and domestic income for the full year the effective tax rate for the quarter was set at 33%. For the first quarter net earnings are $55.9 million or $0.35 per diluted share. The 3% increase in net earnings compares to a net earning of $54.3 million and an equivalent 35% per diluted shares for the same quarter 2009. We finished the quarter with cash of approximately $462 million as compared to year end 2009 cash balance of $422 million. Our cash provided from operating activities during the quarter totaled $82.2 million. Cash used in investing activities of $37.9 million was primarily applied to capital expenditures in the amount of $36.9 million of which included the acquisition of a facility in Santa Barbara of $29 billion. Depreciation during the quarter amounted to $7.1 million. Cash provided by financing activities during the quarter of $1.6 million is primarily due to cash benefits from stock option exercises. Cash balances of March 31, were reduced by $6.2 million due to the effective exchange rates during the quarter. As mentioned earlier the company expects to convert or redeem the remainder of its $58.5 million of convertible notes during the second quarter. Today we will be providing notice to the trustee of the company's 3% convertible senior debentures of our intent to redeem these debentures on June 8, of 2010. As required by the indenture governing the debentures we will also be notifying the holders of the rights to require the company to repurchase ventures on June 1, 2010. The specific terms and conditions of the reduction in this repurchase arrival will be contained in the separate notices mailed order about May 5, 2010 by the trustees to the holders of the debentures. The debentures are currently convertible into shares of our common stock. In the expected event that the holders convert their debentures into common stock prior to redemption date, there will be no impact on earnings per share or cash flow. In the event some or all of the holders, do not convert prior to redemption such holders will receive the face value of their debentures in cash which will reduce cash but also reduce clearest fully diluted share count and may subsequently increase earnings per share. This concludes the summary, Earl I will turn the call back to you.

[Earl Lewis:]

Thank you Steve. May be I will go off script for a minute. As I think most of you know this was Steve's last call as our CFO and this presents me the opportunity to reminisce a little bit. Steve and I joined in 2000. The company had I believe a $100 million in debt. We were doing about a $160 million in revenue and about 11% of our revenue went to pay for the debt certain [lever] you are meant to. By the end of next quarter, this quarter Q2 we will probably have $0.5 billion in cash, no debt whatsoever which is kind of interesting that we just got rid of the last bit of it. The company that's gone during that roughly 10 years from a market capital of $70 million to four something billion today. Much of that has been due to Steve's steady hand calm approach to life, you can tell by how he presents our numbers each quarter and his unswerving if you will, dedication to doing things right. That was very much appreciated Steve, we will miss you, Tony has big shoes to fill in many ways, we would like to come up and sit on your porch and look out at your vineyard someday, if you will let us. And we hope you come back and see us many times, we will indeed miss you, we look forward to see how Tony handles this next year, next quarter I think. And again, all of us at FLIR are sincerely in your debt for everything you've done for us.

[Bill Sundermeier:]

Thank you Earl and you're welcome on the porch with a bottle of wine at any time.

[Earl Lewis:]

Maybe after today. Is there (inaudible).

[Bill Sundermeier:]

They are ready. With that now Monica we are ready for questions.

[Operator:]

[Operator Instructions]. Thank you. And we will pause while we compile the Q&A roster. And your first question comes from the Peter Arment.

[Peter Arment:]

Congratulations on the nice results and Steve, best of luck in the future. I guess this question is more for Andy. We've seen really nice margin improvement in commercial vision. And could you maybe just give us a little color, what's going on there? I know you got a lot of success across the border with new product introductions and thermography and commercial vision, but we've seen some nice sequential gains here in this kind of a sustainable level. Thanks.

[Andy Teich:]

Yes Peter I think that the level is sustainable. As a result, this quarter was particularly good because of the volume of shipments that we did. So, we did get some nice operating leverage in the thermgraphy business. We had very high shipments in that business during the quarter. And we had favorable mix in that commercial vision system business. And that can vary a little bit quarter-to-quarter depending on the mix of products that we ship that is produced in the factory in Santa Barbara versus products that we shipped is produced by DeltaVision in Sweden. Of course in those cases the company still realizes all the margin but in some cases where I have a high shipment quarter where I am shipping a lot of product out of those factory for Sweden for border programs then it pulls the CVS down a little bit.

[Peter Arment:]

Thank you.

[Peter Arment:]

Actually Peter, they're more than sustainable.

[Peter Arment:]

Duly noted.

[Operator:]

And next question comes from the line of Michael Lewis.

[Michael Lewis:]

Good morning. Thank you for taking my question and again Steve, good luck to you. Earl, I want to talk about capital spending and it looks like we're starting to witness some momentum in the both domestic and international capital spending market. Now, what I want to talk to you about was how co-related is the commercial segment with the improvements in the spending environment and where should we expect to note the greatest volumes of volume increases going forward. That's the question. Thank you.

[Earl Lewis:]

Yes, that's an interesting question. As we drive the price down on our products which commercial is doing, we should be less susceptible to the whole capital cycles. And I don't know that we've really seen that yet. I think we still are at least now, when you think about selling for example to the boating industry and some of those, those are commercial. Those are people taking money out of their pockets. So, I think in terms of correlation Mike, we'll price it less of it over the future in the commercial systems business than we have in the past. Clearly basically unofficial. Clearly, we are susceptible to it though. I mean if you look at Q4 in thermography, it's almost always very strong and that's people spending capital money at the end of the year. So while I think it will decline, I think right now, it's probably a pretty good correlation. This capital spending goes up particularly in our high end thermography and commercial both. We should see increases in those, in that revenue.

[Michael Lewis:]

And that's exactly where I was going with regard to the higher dollar thesis in the petrochem plants, the healthcare industry, areas like that, that's really where I was focusing the attention of that question. So, my take away is that yes indeed that CAP spending does continue to improve those higher dollar areas in the commercial business could potentially benefit. Is that correct way to say?

[Earl Lewis:]

I think we saw it in Q1.

[Operator:]

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

[Jonathan Ho:]

And the first question I have for you is with regards to just updated thinking in terms of rate and GBOSS at this point. You guys gave a little bit of insight into what's happening there but just wanted to get your thoughts on sort of additional opportunities and maybe if there's been some additional color coming out of the OCO in terms of the BESS-C funding on rate?

[Bill Sundermeier:]

Hi Jonathan. Of course with the GBOSS order we know that they have more some additional systems to go in Afghanistan. Presently don't anticipate many other larger orders for them on the horizon. This was kind of a filling in for them. On the army side and we've done several different exercises and potential opportunities there. But nothing firm on the horizon as RFI is the best indicator that we have had. So far that they want additional units there was certainly some commentary that was presented in few days ago [by having] wanted additional 72 sites in Afghanistan but what we are hearing so far is that they are still trying to move equipment from Iraq to Afghanistan having difficulties doing so because of the growth infrastructure over there until that gets [solved] within their final requirements to clients, we don't anticipate any orders lately too that might happen in the second half.

[Jonathan Ho:]

And just a couple of questions for Andy. In terms of the synergies that you are seeing between commercial and thermography, can you, may be talk a little bit about some of the opportunities you see there, to leverage the two units?

[Andy Teich:]

Sure, Jonathan. The first one has been on the front end of business, so we've consolidated sales and marketing efforts globally between thermography and CVS and that's on a pretty significant initial top from that and that' s part of what drove our orders in Q1 as well. So the thermography organization had a more well-establish international sales capability particularly with all the international subsidiaries that were being underwritten in that business, so we've now injected the CBS product line into key to growth, that organizations have already seen some payoff from that. On the operation side, there are a couple of synergies there, certainly on the product development side we are working much more closely together on future product development spread, radiometry across all products, spread nexus networking technology across all products, those kinds of things, the calibration methodology used in thermography is the one that will be propagated into CVS as well and then the last thing I'll mention is that the thermography has got a nice capability in terms of producing our own objects for example that's something that we are going to spread across to CVS, has them producing objects and then do it for CVS consumption which we currently buy from external sources.

[Operator:]

And next question comes from the line of Tim Quillin.

[Tim Quillin:]

Steve, you might want to consider open up the bread and breakfast there because, may be a lot of people do want to drink that glass of wine on your…

[Steve Bailey:]

I expect to see you Tim.

[Tim Quillin:]

Well, I will try make and it I appreciate that and best of luck. And Bill, in term of the BETSS-C and GBOSS programs the RFI kind of may be give us a helpful clue with where they are heading on I guess that might rate equivalent program, but how about in terms of funding, are you gaining any sense of what you might see especially depending $30 billion sacramental?

[Bill Sundermeier:]

Sure, well, first sub doesn't it looks like it's getting approved until closer to Memorial Day, so we'll start seeing money flow. After that, start to seeing some money flowing for CERBERUS which is now handled by the RAID office which is now calling the great tactical systems and haven't quite made money than we had for the teller systems flowing and of the press, (inaudible) that is coming in effective in October, and that's fairly lined out in the budget, so we know what's going on there, hopefully some of that will end up coming for if you were [sparing] for additional unit, the best view I can give you now.

[Tim Quillin:]

Okay, that's fair enough. And then Andy, back at the end of 2008, you does said that 60% to 70% of CVS revenue could be traced back to military or government funded users, has that mix changed?

[Andrew Teich:]

We track at every quarter, actually Tim and the with some degree of fidelity and I looked at Q1 and it's still running right at that 60-40 split, so we have seen it move a little bit more towards the, more commercial or industrial type funded, and when I say that also that analysis is limited only to the CVS business at present. It is not including a Thermography revenue.

[Tim Quillin:]

Okay, and if I could just sneak in one more view, do you expect stable margins overall across the course this year some seasonality? Thanks.

[Andy Teich:]

I'm sorry. Did you ask me the question about the total company?

[Tim Quillin:]

Total company, yes.

[Andy Teich:]

No, with regards to our gross margins particularly don't change too much and I don't think that, yeah I mean within the (inaudible) we've always had Tim, there is no reason to believe that'll be any different.

[Operator:]

And your next question comes from the line of Rob (inaudible).

[Unidentified Analyst:]

Good morning, congratulations on a strong start to the year. Bill, do you have an updated IDIQ backlog figure?

[Bill Sundermeier:]

Sure do. At present IDIQ award level to $672 million and from that portion of that is $277 million.

[Operator:]

And your next question comes from the line of Paul Coster.

[Paul Coster:]

Yeah, I'm going to keep wishing Steve the best of luck, I'm going to direct to Tony who has an impossible act follow there, I just if I could turn Bill for a second you talked of planed mix changes, what did you mean by that please?

[Bill Sundermeier:]

Sure, well this year we are going to shipping a significantly less number of BETSS-C units and then basically back filling that with other opportunities that have come into the pipeline and so that mix shift will cause a margin change for us but as we mentioned in the call we still expect operating margins to hover near the level of Q1.

[Earl Lewis:]

You know Paul the international side of our business will increase as well as a percent.

[Paul Coster:]

And the margins for the international business, how do they differ?

[Earl Lewis:]

Better than the domestic margins.

[Paul Coster:]

So your remark Bill that the implication is that, at least as far as the domestic GS business is concerned the margins will decline a bit but you are offsetting that by improvement below the line, how would you do them?

[Bill Sundermeier:]

It's going to be offset by better margins from the international business with which we have met. We mentioned for several quarters now, has been very strong for us.

[Earl Lewis:]

Paul we are actually spending more money below the line right now on the, we really believe we have been understaffed in the selling marketing side I think there is more opportunities than we have touched historically and I think we have made a conscious decision this year to up that activity and you will see slightly higher market selling expenses coming out of government this year. We think it's a good investment.

[Operator:]

And next question comes from the line of Brian Gesuale.

[Brian Gesuale:]

Yes, good morning guys and Steve congratulation, it has been a pleasure working with you for last nine years or so. You've done a terrific job.

[Steve Bailey:]

Thanks Brian.

[Brian Gesuale:]

I wanted to get a question in on backlog. Last call you guys intimated that backlog could be flat or slightly down at the end year versus the beginning of the year. Wondering given that orders look a little healthier in the first quarter and given that you have seem to have a little bit more visibility in the Afghan surge, what your updated thoughts might be going forward on the yearend backlog number?

[Bill Sundermeier:]

Sure in Q2 we see of (Inaudible) moving out towards the modern day and Afghan Surge even though it was set on 3, June and plans and readiness and other things. So I intend to, suspect we'll drive down backlog in Q2 but the second half of the year will have quite a bit of hope for some of the major programs that we are working on. Plus some of the surge will kick in, in Q3 traditionally is a very strong quarter for us and end of the government fiscal year.

[Earl Lewis:]

Now that's about what I was going to say, I think Q2 should come down a little bit, Q3 I don't know whether it will be stable or up a little bit. That's our idea. And Q4 roughly flat.

[Brian Gesuale:]

Okay, terrific and then Earl if I could just ask you to follow up on your prepared remarks on the M&A market. How surprised would you be if you guys didn't do I thought somewhat of a meaningful acquisition by the end of the year?

[Earl Lewis:]

It is not coming to me. I think there is a good; there is a probability that other than our history that we will make an acquisition that is very good this year.

[Operator:]

And your next question comes from the line of Steve Leven.

[Steve Leven:]

Okay, sorry. Well you answered the M&A question, there was mentioned earlier about shortwave camera cores, could you flush that out a little bit? Where do you see the market growing and who are the end users and how much of it do you make inside, what things do you have to buy or that you might have to buy now that you plan to make later.

[Earl Lewis:]

That's great. We have Andy who is certainly going to answer that one.

[Andy Teich:]

Steve, this is something that we have watched for quite long time and we have been in the FLIR business for some time. Indigo has had the capability of manufacturing FLIR detector for many years but we really haven't invested much in the backend of the camera. So we had fairly large not very feature rich camera that really had grown non competitive prior to our acquired Indigo they were using those detectors primarily on the telecom business for DWD activity. Since then there has been a growing level of interest from the army on the use of FLIR detector's for the night vision and fuse transfer activity to include the Mantis program and we've taken an interest in that, we think that we have the ability to offer the same kind of value add in terms of innovation that we've done with our Tau, camera core and uncooled place in the FLIR space. So what we have done is it turns out that this quite a bit of expertise in this area and the acquisition that we made in Colorado Spring's, the Salvador Imaging company. When we initially acquired them we talked about EMCCD capabilities they have but they also have very good capability at high resolution visual in then FLIR. The detector that we're using at present is the detector that is our readout so its an Indigo readout which is I think very competitive from a feature standpoint readout in the markets and the current detector for using we're actually having a third party do the InGaAs piece of it, not because we are not capable of doing it. We are capable of it, but frankly we are so busy with InAsSb and vanadium oxide that we don't have the capacity to sort of divert for small volume of FLIR. But our intention is that once the FLIR business ramps up we will bring the [NDN] piece in house and do it ourselves. What we've done that's unique here is that that we basically made a Tau InGaAs camera. So it's got the very attractive characteristics of small size, weight, low power consumption, ease of integration with the Tau family and our goal there is, is to provide to our system OEMs and to our own internal capability the ability to choose various different Tau cameras. A Tau camera for long way, a Tau camera for FLIR, a Tau camera for low light color, those kinds of capabilities and we think that will be very attractive to both our internal customers and our OEMs, [UIB] and so on so forth.

[Steve Leven:]

One last question is this now mostly a special operations or Special Forces product that you see migrating into the regular military?

[Andy Teich:]

Well there certainly the leading edge of users of new technology in the US military but we've got a lot of OEM level interest in this technology sort of gimbals manufacturers like ourselves in both internal and external. So you'll see those sensors going into multi-sensor suited gimbals that will go out to people who will be on special operation forces.

[Operator:]

Our next question comes from the line of James Ricchiuti.

[James Ricchiuti:]

I wonder if you could talk Andy a little bit about demography business. The strength you are seeing in the US market, can you talk a little bit about where it's coming from in the end markets and whether you commented I think on the strength of the mid-range. Are you seeing it also at the high end of the product offering?

[Andy Teich:]

Yeas Jim we are actually on an earlier question that was posed really called to us as the increase of capital spending. So Arne has made comments in previous conference calls noting that the high end of the business, the GAAP finder business, our P-Series and to some extent our T-Series which is a mid ranged product has slowed down pretty considerably with the economic downturn. And as capital spending has responded, we've seen a pretty nice research in all three of those areas. So that's been a positive thing for us. We also made some changes to the T-Series line to make it more competitive. That's had a very favorable response during the year.

[James Ricchiuti:]

And you mentioned little bit softer I guess in Europe, the Asia Pacific being very strong. Can you comment about business specifically in China which is guess is now a fairly large market for you from a thermography standpoint?

[Andy Teich:]

Sure, on the EMEA business, two things there. One is the economic recovery is happening slower than the rest of the world. I think it's kind of to be expected that this sort of got the flu after the rest of the world too. The second thing is that, we made some fairly significant organizational changes in the EMEA region and that I think had a knock-on effect in terms of that that take a few months to roll through the system. But then I think it will be much better coming out of that. The Asia market continues to do very well and it's not just China. We've had very good response in Japan, in Korea. The only part the APAC is it did not perform well in Q1 but we're starting to see it recover now as Australia.

[Operator:]

And your next question comes from the line of Josephine Millward.

[Josephine Millward:]

I just want to confirm the marine GBOSS award. Is that included in your backlog, the government backlog at the end of the quarter?

[Steve Bailey:]

Yes it is.

[Josephine Millward:]

Okay. What about the SOCOM long range ground, the GMbass?

[Earl Lewis:]

Well that was not. Josephine I want to make sure you know though the GBOSS in the backlog was I think $19 million or something.

[Bill Sundermeier:]

$21 million.

[Earl Lewis:]

$21 million wasn’t the total of the award I believe.

[Bill Sundermeier:]

And now our GMbass is not.

[Earl Lewis:]

And our GMbass was not in.

[Josephine Millward:]

I think Bill you talked about opportunities in military vehicle. Do you see potential for this long range GMbass to increase in the second-half or grow overtime?

[Bill Sundermeier:]

We do see some requirements out there in the future but we're really going to feel these as we can in the 12 months and see where that takes us.

[Josephine Millward:]

I just have one follow-up question. Can you tell us what percentage of your government revenue was from international last year? And if you expect that mix to stay the same throughout this year?

[Earl Lewis:]

I think. No, we have total in total, though. In total is a good indication.

[Josephine Millward:]

Sorry?

[Earl Lewis:]

Bill will get that for you.

[Operator:]

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

[Michael Ciarmoli:]

Steve good luck and congratulations enjoy the vineyard. Bill I guess can you help me with may be a year-over-year, sort of a more apples-to-apples comparison of government systems. Can you give us how much was BETSS-C related revenue in Q1 of '09 versus Q1 of this year?

[Bill Sundermeier:]

I could but, it was fair bit less Mike.

[Andy Teich:]

Okay, quite a bit less. I mean that's right. That was less it was down by about half, right?

[Bill Sundermeier:]

That's correct.

[Michael Ciarmoli:]

So I am just trying to get a sense you guys are pretty good at presenting the market growth rates and I think you are looking for a 14% CAGR assuming with the anomaly that the good news and bad news around BETSS-C would seem that your core business is still growing at a pretty good clip if we normalize for the BETSS-C kind of headwind this year.

[Bill Sundermeier:]

That was true for sure.

[Michael Ciarmoli:]

And then may be just as it relates to the long range ground mobility loss and I saw some comments a couple of weeks ago from Under Secretary Ash Carter. I don't know if his comments are more just rhetoric but he was talking about a potential 20 fold increase in camera sensors both on a aerostat and mass mountain level. Does this order stent from that needed demand in Afghanistan and could there be truth to his statements? I mean are you guys seeing just more opportunities out there?

[Bill Sundermeier:]

Well Mr. Carter has certainly generated a lot of excitement in that area with his statements there. I think he is very enamored with aerostat, look at his testimony and certainly UAVs was also a large part of it. The 20 fold was definitely in reference to the aerostats and I think that what we are going to see is more aerostats that was a Lockheed award in Q1 for I think it was 17 for their PDDS program. Those do not have resonance there. They have a Canadian gimbals on there. We have through the [challenge] program which really started off the rate program 35 sensors that are for over 20 aerostats that are in theater. So and we see some other opportunities coming on to beyond other aerostat. So I think that that will increase it in aerostat portion isn't going to be as big for example is the towers. So just to the expense and then putting them over major cities as compared to the forward operating basis and as I mentioned earlier, we do still see that there are requirement numbers being generated for additional tower base systems. I am guiding the 20 fold work hour base systems. I think its more fill in for their identified forward operating basis which they want to ramp up to in Afghanistan.

[Michael Ciarmoli:]

I know last quarter you guys talked about on the nuclear side, the nuclear regulatory commission providing kind of a tailwind with their mandate, is there any update on that market? Did you see what were the kind of units like to that segment this quarter and what are your expectations going forward?

[Andy Teich:]

Well the requirement actually required the systems to be up and running by April of this year, we did see order flow in Q1 coming from that. We are actually going to see some order flow in Q2 coming from it as well for two reason one is that the requirement seems to be getting pushed to the right a little bit and the second is that there is a second area of these nuclear power points called OCA the Owner Controlled Area that is emerging as a requirement for coverage as well, so I think something that's going to be with us for most of the year.

[Operator:]

And your next question comes from the line of Ajit Pai.

[Ajit Pai:]

Two quick questions I think the first is the uses of cash, generating cash at a pretty rapid clip right now, you talked about the fact that you know initiating a dividend doesn't make that much sense, so could you sort of prioritize with us you know boost retiring some of these converts, what the use of cash would be share buybacks as if to further acquisitions and then on acquisitions itself strategically are you looking at further vertical integration new markets you've made some acquisitions you look at distribution could you also discuss your distribution strategy for your non-government system side. Lot of questions there, sorry about that.

[Andy Teich:]

As a book of course use of cash is very important to us, I mean when we do our numbers over the long run and you look at what the effects of how well we deploy our cash, it has a significant impact on the value of our stock over the next 10 years, we know that with those numbers in, we look at them, we realize we've got to deploy this cash in a way that's better for shareholders than just sitting on it, so we will deploy it, question is what's the mix historically our mix has been roughly half and half. It's been half share buyback and half acquisitions. Right now we've built up pretty good pools of cash and looks like we'll continue to do that. We've also done most of our backward integration already. In other words also both businesses, commercial and government are pretty well backward integrated. So the vast majority of the things that we need from backward integration, we already control. Going forward, we made one acquisition that was more in the distribution channel and that was expected.

[Ajit Pai:]

Expect.

[Earl Lewis:]

And that's worked out fairly well for us. So I think clearly, one of our strategies particularly the commercial side is to look at where we could expand into the distribution part of our business and where we think that will give us more entry into, in the markets. And there are some opportunity in there we're exploring today. In those area, I think there's some technology opportunities we maybe able to act. There's multiple sensors that can be used in multiple applications. So we're looking at some different businesses there. And I think there's some public knowledge as to what's for sale. So we'll look at some of those opportunities in there and are two or three now that are actively been shopped if you will. We needed to deploy our cash, we didn't do it the good way and hopefully by the end of this year, we will have had an acquisition at least, maybe two that are significant to the long range future of our company.

[Ajit Pai:]

Got it. And then just looking at the distribution strategy you've had recently and more the pricing strategy and the commercial vision system side. I mean on thermogrophy, you've talked price elasticity and creating new market, bringing down prices all the time and the commercial vision system side could you give us some color as to how you are looking at to the penetrating some new markets and the pricing on that market, you have demonstrated some very good operating margins over there, this quarter whether you also mentioned that you think those margins are sustainable. Does that mean that pricing over there is right and all you got to do is get distribution or you think there's, its more of a penetration gain through distribution or is still some price elasticity that can be got in there.

[Earl Lewis:]

Well, I'll just overview it and let Andy get into the detail. The price elasticity argument in the commercial vision business is just as strong as it is in Thermography. Somebody asked earlier on what are we're learning by merging these businesses and, you know, it's pretty clear they have the exact same ideas in mind in terms of just driving the price down. One of the best examples is the new first mate we've sold into the boating industry where we brought the price down significantly for many products that was available in the past and that's had a remarkable number of unit sales as a result. Andy you can surely elaborate more on this.

[Andy Teich:]

Sure, well there is two things Ajit, first you know you asked about the distribution strategy you know it really comes down to four things for us that one more is better if we want a lot of distribution. Two, we want them well trained and well equipped in terms of understanding the technology and the tools to sell it, we tend to have non-exclusive distributors and we want well the coverage on that, so those are the four main points we're working on the distribution side. On the price elasticity side, we believe these are very elastic markets and continue to bring prices down, Earl mentioned the first mate that's been a very successful product for us, we sold 2000 units in the first nine months of its introduction which we're pretty pleased with. And to support that though, on your point you know we don't see the gross margins declining so in order to support that we got to lower our cost and we're spending aggressively in the R&D side to do that to develop the technology that will continue to lower cost that the core sense of technology level.

[Earl Lewis:]

You know, just one last comment. In someway the commercial vision business, Andy is the older business. Is even more price elastic than the Thermography businesses because the potential buying universe is so much bigger and typically do not have the industrial background for example, so selling to a police force that you are going to have to have significantly lower prices to really penetrate that market.

[Ajit Pai:]

Right, but the ASP you are starting out with are also significantly lower right.

[Earl Lewis:]

Correct, that's right, yes.

[Operator:]

And there is a question from the line of Michael French.

[Michael French:]

The question is for Andy on the changes in Europe that are expected to lead to better results in the second half, if you can provide little color on what it is you are doing what's that magnitude financially could be of these changes?

[Andy Teich:]

Well couple of things, the leadership level individual to top of the organization in the EMEA group, the fellows have been running the organization for CVS and now have taken over for both CVS and Thermography. And he is quite an experienced guy, been with the company for more than 10 years and has worked both in Thermography and CVS in the past both markets quite well. In terms of the specific changes that we are making there. We actually reduced headcount there. We have some redundancy issues that we dealt with. So what actually in terms of Q1 had a negative impact and our expenses were up because there was some redundancy cost. Those will come out in subsequent quarters but he has streamlined the organization. I think he has clarified some lines with distribution between the way we handle direct sales and distribution sales specifically on the Tomography business and we are leveraging up combined sales force for Tomography and CVS there, in terms of the measure of that effect financially like I say it had a negative effect on expenses in Q1, which will roll through, yes I think it will also have a negative effect on orders because we know its kind of surgery there that we'll have to recover from. But moving forward, based on the results what I have seen from this individual on the past 10 years I expect good things and I don't know how good that will be but I would hope that we would be able to see the same kind of growth rates that we've experienced in the US market as the economy recovers there.

[Michael French:]

And so would these improvements be upside to the guidance that's out there now?

[Earl Lewis:]

We are constantly improving the business and when we give our guidance, we plan to improve the business. I think I'll just add one thing because I think the Far East will have a particularly positive impact on CVS because the gentleman that was running thermography in the Far East is now going to be responsible for both businesses and he has performed just absolutely fantastically in developing our business in the Far East.

[Operator:]

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

[Michael Lewis:]

Bill or Earn just a clarification, we were talking about shortwave infrared, now the army wants to move away from the green screen night vision. They want to move to more color and shortwave IR capabilities and something that's not really in your sweet spot and not really a core business is the helmet-mounted IR market. And with the army and SOCOM trying to go after these technologies embedded this shortwave infrared embedded into the goggles, do you think that this is an opportunity that we could expect to see clear move in to over the next say two to three years?

[Bill Sundermeier:]

Sure, I definitely think that that scenario is that we could move into, I know all the forces are exploring other options to I-square devices. I think that they are going to go away completely. Certainly moving into a lot of fused concepts moving forward and when you need an opportunity to see this Tau version of a shortwave it is the closest thing making up a very and lower power kind of application. And that's really what's driving these head-mounted and solider devices. We need to give them small light weight and low power. And we are the kind of company that could do that in the next few years.

[Michael Lewis:]

Yes, the fused capability is the prime-most important as well right?

[Bill Sundermeier:]

That is correct.

[Andy Teich:]

Our Pittsburgh acquisition has that in mind by the way.

[Operator:]

And there are no more questions at this time.

[Andy Teich:]

Okay well thank you all very much appreciate it and look forward to talking to you in another quarter.

[Operator:]

Ladies and gentlemen this thus concludes today conference call you may now disconnect.