FLIR Systems, Inc.
Q4 2010 Earnings Call Transcript

Published: 10 Feb 2011

[Operator:]

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the FLIR Systems Fourth Quarter and Full Year Results Conference Call. [Operator Instructions] I would now turn the call over to Wit Davis, Senior Vice President, General Counsel and Secretary. Sir, you may begin your conference.

[William Davis:]

Good afternoon, everyone. Before we begin this conference call, I need to remind you that, other than statements as to historical facts, 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 cover 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 welcome, everyone to FLIR's fourth quarter earnings call. 2010 was another successful year for FLIR. We had our 10th straight year of record revenue, operating income and EPS. Revenue grew 21% over 2009 to $1.4 billion. Earnings per share was $1.54, an increase of 6%, and EBITDA increased 9% to $422.8 million. The Commercial Systems division had a very successful 2010, again showing the ability to lower cost and prices and expand margin. Our Thermography segment return to double-digit revenue growth and yielded its highest operating margin since 2006, while our Commercial Vision Systems revenue grew 24% and achieved a record operating margin of 29%. Raymarine has proven to be an excellent addition, contributing $104 million of revenue and achieving profitability in both quarters. Government Systems performed successfully as well. Its position as a premier global provider of advanced imaging systems is one of the most attractive areas of government spending. Adding ICx to our government business has expanded our sensor systems capabilities with advanced chemical, biological, nuclear and explosive detection products, advanced radars and complementary thermal imaging capabilities. ICx contributed $46.1 million of revenue and $2.1 million in operating income in its first quarter with FLIR. Bill will explain a little later how we've begun to integrate ICx and how we reorganized the Government Systems division structure for 2011. Today, we announced our outlook for 2011. We are expecting the revenue to come in between $1.65 billion and $1.75 billion, an increase of 19% to 26% compared with last year. We expect earnings per fully diluted share to be in the range of $1.65 to $1.75, an increase of between 7% and 14% over 2010. Most of the increase, however, will be in the second half of the year. Our strategy in driving this expected growth is clear and consistent

[Andrew Teich:]

Thanks, Earl. Commercial Systems exhibited strong performance during the fourth quarter of 2010. Our Thermography segment achieved a quarterly revenue record of just over $100 million, an increase of 18% over the fourth quarter of 2009. Operating income also set a new quarterly high of $31 million or 31% of revenue. This represents a 33% increase over the fourth quarter of 2009 and our best operating margin performance since 2006. Thermography backlog ended the year at $22 million, essentially flat with the end of last quarter. Reductions in average sale price, driven by our ability to lower our cost of production, helped push Thermography unit volumes up approximately 49% during the fourth quarter versus the same period of 2009. Particular strength was seen in our value priced i5 and i7 Series cameras, where unit volumes more than doubled in comparison to fourth quarter 2009. Our T-Series line also experienced strong growth, and the unit volume's up by 60%. GF-Series optical gas imaging cameras continued to penetrate the petroleum and natural gas industry, which we believe will be further spurred by the U.S. Environmental Protection Agency's recently finalized greenhouse gas self-reporting guidelines, which requires approximately 2,800 oil and natural gas facilities to measure their emissions and requires the use of optical gas imaging for detecting gas leaks not easily accessible by plant personnel. Our Asia Pacific region grew revenue by nearly 40% compared to the fourth quarter of 2009 on strength in our China, Korea and Japan markets. And our Europe, Middle East and Africa region grew 11% over the prior year, the first time during the year that we exceeded 2009 numbers, particularly due to our successes in realigning the region's sales and distribution processes. We were successful in carrying out our Thermography strategy during the year, resulting in full year revenue growth of 11% over 2009 and our operating income reaching a new high of $89.7 million. 2011 will be a significant year for product introduction as we communicated previously. Already, this year, we've introduced the sub-$1,200 i3 camera, the feature-packed E-Series line of WiFi-enabled cameras and our new high-resolution, professional-grade T-Series cameras. Additionally, this past weekend, we introduced an iPhone app that will allow images, data and reports from our cameras to be quickly uploaded, analyzed and e-mailed. More than 1,000 downloads of this new app took place in the first four days on the iTunes store. Fourth quarter results in Commercial Vision Systems were strong. Revenues were up 35% over the prior year to $76.7 million. Operating income was $23 million or 30% of revenue, growing 76% over the fourth quarter of 2009. Order activity during the quarter was robust, with our Cores and Components business showing a 38% increase over Q4 2009. We received several large orders for both our Tau and Photon 640 units and are seeing growing demand in Asia. We also saw strength in the automotive market with Audi and BMW volumes improving. CVS finished the year with $114 million in backlog. Orders in our Security & Surveillance segment faced a tough comp over the fourth quarter of 2009 but performed well as we saw a rapid adoption of our 640x480 uncooled cameras. Our FLIR-branded maritime camera bookings were roughly flat during the quarter, but we continue to see our newer products take hold in the market to include the new Raymarine T-Series cameras. Raymarine posted $40 million in revenue and $3.9 million in operating income during the fourth quarter, representing its highest quarterly operating income since our acquisition of the business in May of 2010. We have improved Raymarine's operating margin by modifying inefficient aspects of the supply chain, rationalizing R&D spend and reducing G&A. The Raymarine-branded thermal cameras are generating interest in the market, and our ability to integrate thermal and our other instruments into the backbone of the vessel via our Nexus Marine Networking software positions Raymarine well for continued growth. Another recent acquisition, Advanced Imaging Systems, which houses our shortwave infrared camera business is seeing accelerating growth, with revenue up nearly 50% over the fourth quarter of 2009. Overall, Commercial Systems executed its strategy very well in 2010. We continued to lower our cost to produce advanced thermal imaging products, expanded our global distribution network and focused on generating strong volume demand for our existing products while innovating new and exciting products for 2011. We've successfully transitioned our Thermography sales platform in the EMEA region. We worked to increase the awareness of our technologies and saw a significant growth in our lower-priced products, such as our i-Series thermography cameras and our automotive sensors. And last, we introduced the Raymarine-branded thermal camera and built a dynamic instrumentation integration solution that is positioned well for success with our customers. Looking to 2011, we expect another year of robust growth at the top and bottom lines as we continue to drive the vision of infrared everywhere. So with that, I'll now -- I'll let Bill discuss the Government Systems Business.

[William Sundermeier:]

Thanks, Andy. The fourth quarter of 2010 represented sound execution for Government Systems. We continued to successfully operate through a quality global government budgetary environment and began the integration of our acquisition of ICx Technologies, which closed in early October. The Government Systems division reported fourth quarter revenue, excluding ICx, of $171.7 million, representing a 1% growth over 2009. Operating income for the quarter was $61 million and represents a 36% operating margin. Our margin declined in comparison to the fourth quarter of 2009 due primarily to changes in product mix. We finished 2010 with record revenues of $661.1 million, 1% growth over 2009 and an operating income of $251.8 million, a 38% operating margin. Government Systems finished the year with a backlog of $325 million. Given our tough comparables after our rate activity in 2009, we are very pleased with our 2010 performance and Q4 performance. During the fourth quarter, we booked several significant orders that showed we are capable of continuing to grow bookings and revenue in a challenging environment. Airborne application bookings were up markedly during the quarter, showing our strength in enabling militaries with persistent surveillance and reconnaissance systems. Specifically, we continued our strong performance in supporting the U.S. Army's MEDEVAC operations by bookings a $15.8 million order for our Star SAFIRE II stabilized multi-sensor systems that will be accompanied by a $4.6 million order for related service and sparing. We also booked a large order for UAV systems during Q4 worth approximately $9.7 million. Our successes in the international expansion of our customer base, sales efforts and service capabilities were key drivers for 2010. The percentage of Government Systems revenue generated from international customers continues to grow, while our reliance on the U.S. Military is declining. We expect international growth to continue as we saw sizable orders during the fourth quarter for a wide variety of our products. We saw a significant activity coming from South America, where over $7 million in orders were received for our HD gimbal systems. This is particularly important as it indicates our systems are the preferred HD thermal solution and the only one that is truly all HD and available for export. Our inaugural quarter for ICx saw revenues and operating income of $46.1 million and $2.1 million, respectively. The top line declined by 4% in comparison to ICx's previous fourth quarter, primarily due to our classification of seven of their legacy businesses as discontinued operations, given our attention to divest those businesses. Including these businesses, revenue grew 11%. ICx backlog ended the quarter at $62 million. During the quarter, ICx delivered over 300 vital explosive detection units to allies in the Middle East and sold advanced detection equipment to an MoD in Asia, which is a very positive sign that these developing markets are opening up and will have a growing demand for explosive detectors. Additionally, ICx won a significant contract during the fourth quarter from the DHS CBP to provide mobile surveillance towers to the U.S. southern border. This $102 million contract, of which $26 million hit ICx's backlog, shows the growing importance of integrated systems to our government customers as well as the value that ICx mobile platforms provide in protecting borders. As we continue to integrate ICx during 2011, we expect to strengthen the business's sales and distribution reach, cultivate product opportunities that exist in some of the development programs, convert the use of R&D from a source of revenue to a source of innovation, build upon their integrated solutions capabilities and reduce G&A spending. We have taken our first steps in many of these initiatives, including a workforce reduction and anticipate steady improvement in operations over the next few quarters. The addition of ICx has greatly expanded the product range, technological capabilities and customer base of FLIR. Pulling in ICx's leading threat detection sensor products and platform integration capabilities to our existing business, we have adopted a new reporting structure for 2011. The new Government Systems division will be comprised of three segments

[Earl Lewis:]

Okay. Thank you, Bill. Our 2010 results demonstrate that we continue to execute and leverage our core competencies. Volumes are increasing. Costs are decreasing. Awareness of thermal is growing and so are the addressable markets we serve. We have expanded our product range into adjacent sensor technologies, while our core infrared business continues to perform well. We've been successful in growing our distribution and investing to diversify our business. Our commercial operating model continues to allow us to meet the needs of a multitude of customers. While the U.S. government remains our largest customer, we operate much differently than a government contractor in that we design and manufacture products for volume and cost, develop products rapidly and innovatively. We are vertically integrated and provide superior customer service. We are successful in serving both off-the-shelf and highly configured product needs. As the applicability and awareness of advanced sensor systems that enable the gathering and analysis of critical information continues to grow, we believe we are uniquely positioned to benefit. And now Tony, our new CFO, will go through the financial performance in detail. Tony?

[Anthony Trunzo:]

Thanks, Earl. Fourth quarter consolidated revenue was $434.4 million, an increase of 39% from the fourth quarter of 2009. Excluding Raymarine and ICx Technologies, fourth quarter revenue was $348.3 million, an increase of 12% from Q4 of 2009. Fourth quarter Government Systems revenue increased 1%, while Thermography revenue rose by 18%, and Commercial Vision Systems was up by 35%. Both Thermography and CVS recorded their highest quarterly revenue ever in Q4. Raymarine contributed $40 million in Q4 revenue, and ICx revenue for the quarter was $46.1 million. International revenue was 47.1% for the Q4 total compared with 43.6% in the fourth quarter of 2009. Sales to the U.S. government represented 30.9% of total revenue in Q4, down from 38.3% of revenue in the fourth quarter of last year and the lowest percentage in five years. Consolidated gross margin was 53.4% for the fourth quarter. Excluding Raymarine and ICx, fourth quarter gross margin was 56.1% versus 56.5% in the fourth quarter of 2009. Q4 Government Systems operating income was $61 million compared with $68.8 million last year. Thermography reported operating income of $31 million, up 33% from last year and an operating margin of 31%, up nearly four percentage points. Commercial Vision Systems operating income was $23 million, an increase of 76% compared to the prior year's fourth quarter. And CVS's operating margin was 30%, up seven percentage points from the prior year. Raymarine closed the year with a solid Q4, recording operating income of $39 million and an operating margin of 10%. Earnings before interest, taxes, depreciation and amortization in the quarter were $124 million, up 21% from the prior year. For the full year 2010, consolidated revenue increased by 21% to $1.39 billion and was up 8%, excluding Raymarine and ICx. Government Systems 2010 revenue increased by 1% to $661 million, while Thermography revenue grew by 11% to $318 million, and Commercial Vision Systems rose 24% to $256.1 million. For the 7 1/2 months of 2010 under FLIR ownership, Raymarine recorded revenue of $104 million. International revenue in 2010 reported group represented 47.1% of the total compared with 41.4% from full year 2009, attributable to a significant increase in international sales from the Government Systems division. Sales to the U.S. government represented 34.2% of the total in 2010 versus 43.1% in 2009 and the lowest percentage since 2006. FLIR gross margin was 55.1%, and excluding the acquisitions in 2010, gross margin was 56.8% comparable to the 57.4% in 2009. 2010 operating income was $361 million, an increase of 4% from 2009. Government Systems 2010 operating income was $251.8 million, representing an operating margin of 38.1%. Thermography reported a 23% increase in operating profit for the full year of $89.7 million and segment operating increased 270 basis points to 28.2%. Commercial Vision Systems operating income in 2010 was $74 million, up 50% from 2009 on a five percentage point increase in the operating margin. We completed the acquisition of ICx on October 4. For the fourth quarter, ICx reported revenue from continuing operations of $46.1 million and operating income of $2.1 million. ICx income was reduced by intangible amortization and the inventory fair value adjustments of $5.2 million and onetime charges, related to our reduction in force, of an additional $1.4 million. We expect the four ICx businesses to improve their profitability substantially in 2011, particularly in the second half, when intangible amortization will be approximately $1.6 million per quarter and the inventory fair value adjustments will have flowed through the P&L. Earnings before interest, taxes, depreciation and amortization increased by 9% to $423 million in 2010. As we mentioned on the Q3 call, certain businesses acquired with ICx don't fit well strategically for FLIR. And accordingly, we've designated them for sale and reported them as discontinued operations. These businesses, including Transportation Solutions, collectively produced a loss of $487,000 in Q4. Cash flow from operations for the quarter was $45.5 million compared with $72.3 million in Q4 of last year. Operating cash flow was reduced by higher receivables balances due to a high level of shipments in Q4. We have, however, seen robust collections in January and expect strong Q1 cash flow. The largest impact to our balance sheet during the quarter was the acquisition of ICx, which reduced year end cash by a net $228 million and increased goodwill and intangibles by $174 million. As Bill indicated in his comments, we have reorganized the Government Systems division into three segments

[Earl Lewis:]

Thanks, Tony. And operator, we're ready for some questions.

[Operator:]

[Operator Instructions] Your first question comes from Jonathan Ho with William Blair.

[Jonathan Ho:]

Just wanted to start out with a quick question on the range of EPS that you're giving for 2011. What are some of the puts and takes, particularly around the operating margins, that could drive performance in one direction or another? Because there seems to be a larger range than you guys have given historically.

[Earl Lewis:]

Yes, just a tad. As a percent of our revenues, probably about the same or a percent of the total. We were $1.40 to $1.47 in 2008 Q4 and guidance of $1.48 to $1.53 in Q4 2009 of our guidance for this year. So, the sense is just a little bit bigger, I guess. Probably, the biggest area is Government Systems. I think that's coming off of the huge systems that we had and a little bit hard to, as Bill mentioned, figure out what our government's actually going to do. So I think, to answer your question, Jonathan, that's the one area where we probably have the most difficult time with this forecast. Above that, I'd say we're pretty comfortable with everything else in our forecast, but that probably is the one area we'll have to watch closely. That's your answer to your question completely.

[Jonathan Ho:]

Can you maybe give us a little bit more color around some of your expectations, specifically for ICx and Raymarine, in terms of revenue and margins for the full year? You guys have sort of given some high-level color on that, historically, but what are you looking for in terms of the specific contributors?

[Earl Lewis:]

We haven't given individual divisions. I think the one commitment we'll happily make is they'll get better. Clearly, we've got some work to do. Raymarine is well on its way. ICx, unfortunately, is going to give us some fairly good expenses, particularly like in Q1 and Q2, relative to some of the acquisition cost that we're going to have hit us, part of the reason I made the comment about Q1 and Q2 earlier. So we have a lot of work to do there, both businesses that we're convinced will get much better than they were from this time of the year last year.

[Jonathan Ho:]

Can you give us a sense of the spending pattern for Government? It looks like the budget probably won't be passed until after March at this point. I mean, would you expect that to maybe be a little bit of a gap again and then Q2 and Q3 would be accelerated catch-up, just given the limited amount of time that they have to spend?

[Earl Lewis:]

Correct. That's right on.

[Operator:]

Your next question comes from Brian Gesuale with Raymond James.

[Brian Gesuale:]

Wondering if you can give us a little bit of additional color on the back-end loading of the year that you alluded to. I think, typically, a 40-60 kind of earnings split is where we're at. I'm assuming it's a little bit more back-end loaded this year, particularly with some of the commercial exposure though, I guess, offset by some of the Raymarine in the first half of the year. Can you just maybe talk to that a bit?

[Earl Lewis:]

Well, we certainly have. But yes, the 60-40 probably not too far off. I don't think that's going to change too much. You're right. Raymarine is traditionally stronger in the first half, but they're still not generating a lot of EPS even though we expect our operating earnings will be good. The real horse is the total Government Systems part. And that's, as I just mentioned to Jonathan, we definitely think that's going to come in more in the second half than the first.

[Anthony Trunzo:]

Brian, GS has, I think from a margin standpoint, a tough comp in the first half of the year than it does in the second, simply because we had a significant amount of rain in the first half of last year, and we won't have any in the first half of this year. And as I mentioned in my comments, we're looking at $5.2 million a quarter and a combination of amortization of intangibles plus the flow-through of the write-off of the ICx inventory in both Q1 and Q2. That $3.5 million a quarter in Q1 and Q2 from the flow-through of the write-off goes away after that point, and we don't have that in the second half of the year.

[Brian Gesuale:]

Tony, did you mention, I might have missed it, what the organic component is? I think Earl said that most of the growth was going to come through acquisition and in the second half of the year. I may have caught that wrong, but can you help us on the organic component?

[Earl Lewis:]

Yes. I don't think I said that. Tony, you're were going to go ahead and comment?

[Anthony Trunzo:]

Yes. We haven't historically broken it down into chunks, but clearly, I think we'll see the -- I think the sort of ranking of the organizations in terms of their growth in 2010 is probably the same as the ranking in 2011. We'll see good growth in CVS and Thermography, which will, combined, be the new Commercial reporting segment. And the Build businesses is going to have a tougher comp still because of the RAID business in 2010.

[Operator:]

Your next question comes from Peter Arment with Gleacher & Company.

[Peter Arment:]

Tony, what are the total revenues, or if you can of the ICx divestitures, at least the ballpark?

[Anthony Trunzo:]

They were about $7 million in Q4, Peter, a little more than seven.

[Peter Arment:]

So is it fair to annualize that number?

[Anthony Trunzo:]

No. The annual number would be substantially less than that. They have some fairly significant shipments in Q4.

[Earl Lewis:]

About 28...it's around 20

[Peter Arment:]

So approximately 20?

[Earl Lewis:]

Yes. About 20 for this year.

[Peter Arment:]

And then, Andy, I guess I want to ask a question regarding the i3 camera. At the Analyst Day, you talked a lot about the i5 and directionally how much that has come down and what the spike in demand you had on that particular product line. I think the number was 150% increase in unit demand for that camera when you drop the price point under $2,000. Can you talk us through a little bit about what you're seeing for the i3?

[Andrew Teich:]

Well, it's only been on the market since the first of February, so we're only a few days into it. But I have to say I'm quite pleased with the results I've seen already. So I don't really want to quantify that because to some extent, there could be some bulk order placements coming in from our distribution channel. So I'd rather hold off until we see sell-through rates to comment on it. But I'm feeling pretty good about what we're going to see from it. And I think the notional fact that we've got a camera that's under $1,200 in the U.S. and 995 euros in the EMEA region really puts this tool. There are a lot of spot pyrometers that are sold in that price range and this is a significantly more powerful tool. So I think there is a tremendous opportunity there. We certainly know how all our sales people feel about it and our outside distributors. And I have to say they're probably more excited about this than many of our other products over the years.

[Operator:]

Your next question comes from Michael Lewis with Lazard Capital Markets.

[Michael Lewis:]

Earl, I wonder just kind of isolate GS for a minute. Was there any revenue or bookings that did not come in that you were planning for in the quarter?

[Earl Lewis:]

There always is. To try to answer your question, the way I think you mean it is there some big order that slipped right at the end of the quarter into Q1? No, I don't think so, Mike.

[Michael Lewis:]

So it's kind of steady state right there in the government service side. I'm going to just shift gears, I want to ask Tony if of these expenses that we're seeing here in fiscal year '11 as a result of the acquisitions, can you help us quantify the dollar amount? Also what the impact was to EPS? And more importantly, what won't show back up in 2012? Could you help us out there?

[Anthony Trunzo:]

Well, in Q4 we had $3.5 million -- in the purchase accounting, in the opening balance sheet, we had the write up, as you do pursuant to the rules, we had to write up ICx's inventory to its fair market value. Basically, what they're trying to do is purge out the profit and preventing purchasing any embedded profit. So we wrote up their inventory by $11-ish million, and we expect that the inventory that we wrote up will flow-through over the next three quarters. So we basically took that $11 million, and we're releasing it through cost of goods sold about $3.5 million per quarter. The first chunk of that came in Q4, the second chunk will come in Q1. The third chunk will come in Q2 and then there will not be any of that in the second half of next year or going forward. So it's $3.5 million in Q4 and the same for each of the first two quarters of next year. The amortization of the intangibles is currently running at about $1.6 million a quarter. And so the first few years, I forget when the shortestved piece after the inventory is, but for the first few years, we're going to run about that run rate or about $1.6 million a quarter. The $3.5 million is $0.014, something like that, $0.012 per share that hit in Q4 and will hit in Q1 and again in Q2.

[Earl Lewis:]

I made the comment in the script earnings per share of $1.54 was up 6%. EBITDA was up 9%. So we're clearly getting into the area where these amortizations become fairly significant, that was for last year.

[Operator:]

Your next question comes from Peter Skibitski with SunTrust.

[Peter Skibitski:]

I guess the first one is it looks like Thermography is really back on track and you called out Asia-Pacific in the release. Can you tell us what kind of year-- Europe has been a problem historically, can you tell us how things are going over there? And then maybe your expectation geographically going forward?

[Earl Lewis:]

Q4 was as we suggested it would be. Germany, which was the biggest probably I talked about was strong. I think our total was up from the year ago in all of Europe. So the fix, if you will was made, and I think we feel pretty good about it going forward.

[Peter Skibitski:]

And then in the new government organization, can you kind of at least tell us which will be the largest and which will be the smallest in 2011?

[Earl Lewis:]

The majority of the Detection busines going to be the small...I'll back it up the other way.

[William Sundermeier:]

Surveillance will be the largest. The Commission of Government Systems grew with the addition of radar capability and their additional imaging will continue to be the bulk of the new Government Systems business, that's the surveillance group.

[Operator:]

Your next question comes from Tim Quillin with Stephens.

[Timothy Quillin:]

So I wanted to dwell on the painful part of the business. At some point of that business, the book- to-bill is going to turn north of one, and I know you don't have the perfect crystal ball. But maybe if you can talk about when you think that book-to-bill can turn positive for you and when the year-over-year growth rate can reaccelerate? I know you expect it to be down a little bit in the first quarter.

[William Sundermeier:]

Well, certainly, Tim, with the resolution that we have, the continuing resolution continues to drag on. It's really difficult to see this quarter. And typically, as budgets finally get passed, it takes a while for the money to flow. My anticipation was since we're going to have a strong second half and it's going to happen more towards Q3. But if money can flow faster, maybe it will happen faster than that. But I don't have much clearer vision than that.

[Timothy Quillin:]

And then just a quick question for Tony in terms of the tax rate. What tax rate are you expecting for 2011, and where do you think you can drive the tax rate over the next couple of years?

[Anthony Trunzo:]

So the range for year that we use for our budget is between 30% and 33%. We should see some progress toward a lower tax rate in the second half of this year. And then looking forward, I think we have a significant opportunity to bring this down below 30% on a pretty consistent basis. Getting it much beyond that, we'll be looking out a couple of years. But certainly there are plenty of opportunities there. Takes a fair bit of time to get the structures in place, but you need to really accomplish the full benefit.

[Operator:]

Your next question comes from Noah Poponak with Goldman Sachs.

[Noah Poponak:]

With the reorganization and the acquisitions flaring in, in the Government business, there's clearly multiple moving pieces in the revenue line. I wonder if you could tell us simply if you expect the legacy core organic part of that business excluding RAID to be up or down in 2011 versus 2010?

[William Sundermeier:]

It will be up.

[Earl Lewis:]

Tim's comment about Bill, if you could get rid of RAID right now within our history, we would be looking at different business. I always said he's going to climb a hill. We've been talking about it for a while and then that hill continues to Q1 and Q2.

[Noah Poponak:]

I believe there was an RFI, not an RFP for BETTS-C and RAID-related product are we seeing coming the quarter? Can you walk us through what that was and what that might mean for you?

[William Sundermeier:]

They are certainly looking for additional products and certain capabilities is there and they're looking for new and they're looking for not only analog but HD capabilities. So they are out there looking as they should before they head into another procurement. So we will see what comes out of that. We've been exercised a few times over the last 12 months with internal requests and formal RFIs. Hopefully, that will turn to an RFP, and we'll have a good incumbent chance of running some program.

[Operator:]

Your next question comes from Jeremy Devaney with BB&T Capital.

[Jeremy Devaney:]

Looking at the financial planning decisions that you're making as you move ahead, am I to sense that you did perhaps as not as not many M&A opportunities on the table? You're initiating a dividend, you're making buyback more regular? Can you give us some view on how you're looking at the investing environment out there?

[Earl Lewis:]

As of right this minute, I would say that Andy's got his hands full with a lot of internal growth. I mean, business looks very strong, looks very profitable and it looks like it will be very good next year. And Raymarine has not been a difficult integration. Bill, on the other hand has got his hands full with ICx, and with slower than we would have hoped we're entering. So making an acquisition in either of those two camps, if you will, at least in the next three or four or five months probably isn't something we're going to want to do. Meanwhile, we anticipate we'll generate a lot of cash, and that cash just builds up on our balance sheet. And we'd like to do something with it that doesn't penalize our growth in any way, shape or form, but does give something more back to the shareholders during this just a little bit slower period that we expect in the future relative to our company's growth.

[Anthony Trunzo:]

Jeremy, this is Tony. I want to be clear about something, though. We didn't initiate the dividend or clarify the share repurchase program for the reason that you articulate. Looking out, acknowledging what we're facing right now in terms of some of the internal activities and opportunities that we have and also just sort of the overall M&A landscape, if you look longer term, we did these things really as a logical progression of our historical capital strategy. We've been buying back shares on and off for a long time. We've bought back over $400 million worth of our own stock over the last several years. Really what we're saying now is we're going to continue to that. We're being a little more committed to that. And the dividend is going to be, to do the math, it's about $37.5 million a year. It's just not a big chunk of our operating cash flow. So we're probably being a little more committed than we have been in the past to returning capital to shareholders. But it's not in any way inconsistent with the magnitude of what we've done before, really.

[Earl Lewis:]

And again, my comment on M&A is only that I don't expect we're going to be doing much in the short term. It's a little more formalized buyback and a little bit on the dividend side. We just think it's good business and good use of our capital.

[Jeremy Devaney:]

And then looking at the guidance for next year, particularly with GS and the impacts of the CR that are currently in place. I was wondering if you can give us some color on what you are baking into your expectations of the CR and passage for a full authorization? Do you expect the CR to be in place for the full year or just until March? How are you guys looking at it?

[William Sundermeier:]

As the earlier caller said, we're going to have to do something in the Q2 time frame and probably be a rush in Q2 and Q3 to spend that money. So we're kind of looking at it whether or not 2012 will start in October is another question. So we're going to see the shift and this money is going to start flowing towards the back end of the year. So that's kind of the best vision that we have is money flowing towards the second half of this year, that's why we feel the second half will be stronger.

[Operator:]

Your next question comes from Brian Ruttenbur with Morgan Keegan.

[Brian Ruttenbur:]

Just may have been addressed, but I'm trying to drill down a little bit more. Can you talk a little bit about backlog x G-BOSS and BETTS-C what it was at the end of the fourth quarter versus last year when you back it out?

[Anthony Trunzo:]

I don't know if I have that number handy, Brian, in terms of what the backlog because I think we ever disclosed specifically what our backlog was on G-BOSS and BETTS-C at the end of '09 for example or at the end of any other quarter. At the end of last year, at the end of 2010, there wasn't any. It's probably I'm guessing it was the end of last year was probably $30-ish million, something like that if I had guess?

[Brian Ruttenbur:]

What I'm trying to get to is your backlogs are down year-over-year, and I don't know if that's primarily because of the G-BOSS, BETTS-C stuff coming out of it or something else?

[William Sundermeier:]

Well, part of it is related to G-BOSS and BETTS-C.

[Brian Ruttenbur:]

Always just try to narrow down that. It was the majority, G-BOSS and BETTS-C or if there was something.

[Anthony Trunzo:]

I don't have the exact number, so I want to be careful about giving you proportionality. It came from both. But I don't have the proportion.

[Brian Ruttenbur:]

And what were the other factors, if you have any numbers or percentages around the other factors?

[Anthony Trunzo:]

We don't. And we really typically, in fact, historically and never gotten into that level of granularity with our backlog, I'm not sure we will go forward.

[Operator:]

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

[James Ricchiuti:]

I wonder if you could talk a little bit about the pipeline for orders at ICx? And then I've got a question for Andy on the commercial side of the business.

[William Sundermeier:]

I've waited for orders at ICx, it's fairly what we expected to be at the end of the year and looking at Q1, they have a very strong presence, and I think we're going to add to that with increased sale and distribution channel. So the pipeline there for both integrated systems as well as detection business is as we expect and it's continuing to flow positive as compared to last year. I feel pretty strong about their opportunities, both U.S. and particularly international.

[James Ricchiuti:]

You did more in the detection area that you see some activity?

[William Sundermeier:]

Detection is -- actually, probably more on integrated systems side. We're bullish about it with the [indiscernible] order and their capability being able to bid our products now on top of that. I see a lot of great opportunities for them. So I'm really bullish on that segment, although detection is coming on as well. So they're picking up orders.

[James Ricchiuti:]

And Andy, just wondering if you could talk a little bit about the opportunity you see on the gas imaging side just given the recent developments?

[Andrew Teich:]

Well, so the EPA ruling, there are two opportunities. One is the EPA ruling and the second is international sales. So we haven't pushed the latter that hard up until the last six months or so. So we're starting to make increased sales. The product is a State Department licensed product because of the technology behind it. So that makes things a little bit more difficult, but it's a thing we're very familiar with dealing with. On the EPA ruling, we're seeing increased sales there. The required use of the camera is only in cases where the target is difficult to get to, such as you couldn't use a handheld sniffer type of device. But there certainly a lot of applications were that's required. I wish I could quantify that for you, Jim. Other than the fact that I mentioned that the is statistics of 2,800 potential sites. There are application fee on that. There are application for the platforms and the petrochemical production facilities and even applications outside of gas imaging for that particular units that we've been selling into. I'm thinking to sum it up, we feel good about that segment. We've got solid product there and I think we'll get some growth from it.

[Operator:]

Your next question comes from Paul Coster with JPMorgan.

[Paul Coster:]

First, with the 2011 guidance, can you say how much is in there related to BETTS-C, G-BOSS from the fiscal '11 budget? Or is that something that could be a potential upside once the budget is finally approved?

[William Sundermeier:]

We're not anticipating any there.

[Earl Lewis:]

Just a quick second on how we try to do the forecast. We take all of the opportunities and then we waive them and then the sum total of all those opportunities is how we get to the forecast. I don't believe we have any. If it is, it's a very small number.

[Paul Coster:]

And then Tony, with the new segments in Government Systems, do you have that number for 4Q that you can share?

[Anthony Trunzo:]

We don't have 4Q broken out into those buckets part.

[Operator:]

Your next question comes from Steve Levenson with Stifel.

[Stephen Levenson:]

On the ICx contract win that you got for the portable towers, is the revenue you expect to get in 2011 more than what you had planned from the weighted guess what you might have gotten from SBI net, which is now canceled.

[William Sundermeier:]

Just in that--we had delivery orders for $26 million, again that revenue back-half loaded. We have to do some test systems and then get into material production, but it's a lot more than we would have ever received off SBI because of the total integrated truck solution.

[Earl Lewis:]

We were supplying cameras for Boeing , but we had nothing to forecast.

[Stephen Levenson:]

The second question I have is on the short wave cameras. You had some good growth there. Can you tell us if that was skewed more to commercial or government customers? And is that sort of growth something -- was the demand there that can be sustained going forward?

[Earl Lewis:]

It's all government. But there are commercial opportunities in that space that we're developing. So there will be a commercial component, but it will probably be 70-30 or something. There's this very strong demand from the military for that technology right now. And we have I think a very competitive solution.

[William Sundermeier:]

And certainly putting those cameras in our Government Systems end products are going to make a strong play for us in 2011.

[Operator:]

Your next question comes from Josephine Millward with The Benchmark Company.

[Josephine Millward:]

Earl, ICx had several technologies under evaluation by the GSA for explosive detection at the checkpoint. Can you give us an update on where they stand? I believe it was the -----

[Earl Lewis:]

You're right, but I can't. Maybe Bill can. I honestly don't know what the current status is. We can get that information certainly. But I don't have the at top of my head.

[Josephine Millward:]

Can you comment on how you see the unrest in Egypt might impact your government and commercial outlook in the region? I know you're very active in the Middle East. Do think this could cause near-term delays?

[Earl Lewis:]

Josephine, I don't think our government has the slightest idea what's going to happen in the Middle East. And for me to guess would be even worse. We don't do a lot of business in Egypt itself.

[Josephine Millward:]

I was referring to the region itself.

[Earl Lewis:]

I understand and of course the region itself is constantly under seems to me tremendous pressure. And we have had some good orders on the border and borders. I suspect that's going to continue. If there was serious escalations, it would help our business.

[Josephine Millward:]

Bill, do have an update on TSA with all the technology evaluation?

[William Sundermeier:]

It's kind of similar to the first letter. We can get a hold of calling them and getting an update there. But I haven't had any news from them about the TSA evaluation being finished and what the outcome was. They would have jumped on me if they were. So we'll try to get an update for you.

[Operator:]

Your next question comes from Michael Ciarmoli with KeyBanc Capital.

[Michael Ciarmoli:]

Just to dig in a little further. I'm assuming normalizing for the RAID business for the year you guys grew at a range of probably 20% to 25%. If I look and based on what you're saying looking out to '11, is there anything structurally going with the competitive landscape? If we did have a budget in place right now, would you still be seeing these pressures? And maybe if you could just help me out and help me understand if your core business, core government is growing at the market rate of growth for sort of infrared Government Systems below or slightly above?

[Earl Lewis:]

Taking out RAID, the business is growing, that's clear. Now superimposing that the budget constraint, that makes it a little bit weaker, I think.

[Michael Ciarmoli:]

Is it competition or pressure yourself...

[Earl Lewis:]

No, it's not competition. We do not believe it. And I always point to half our business is international as a company. We tend to talk about the Department of Defense an awful lot. So we have been growing that business, and I think that's been increased as a percent of our total on the order side and on the outlook side.

[William Sundermeier:]

We certainly anticipate growing faster than the budget.

[Operator:]

Your next question comes from Michael French with Morgan Joseph.

[Michael French:]

Bill, on the new structure seems to make a lot of sense, and you discussed previously how you intend to market the newly acquired capabilities from ICx. If you could perhaps provide some color on how the new structure will likely to pursue opportunities both in the U.S. and internationally?

[William Sundermeier:]

We have a great structure already in the legacy Government Systems. It's been very powerful, both the U.S. and internationally. And basically, what we're going to be doing is leveraging that capability, especially for integrated systems group and be able to generate leads and continue to sell more value, where we might get a camera lead that we turn into camera radar, software, power, mobile platform solution. So there's a lot of synergy in those groups. And then combined to that, take that knowledge that we have experience and growing international channel and apply that to the detection side of the business, which has had a fairly small channel that needs to be well developed. So we'll complement that. We're having meetings around the world and sharing with our current reps, the capabilities in seeing what their strengths are to be able to push all those products through the existing channel plus expanding upon that in different regions especially for the detection business into finding more qualified channel partners that can move those explosive radiation products. So some of it is leveraging our experience and the other part is taking advantage of the sales force that we have and pushing the integrated solutions capabilities through it. We see a lot of synergies happening already and expect a lot of them to be clear in 2011.

[Michael French:]

Just kind of a follow-on in terms of where the longer-term opportunities are going to be because there's some low hanging fruit on the Surveillance side out there still. But Detection, there's a long way to go around the world. And is that something, am I right about that? Is that over the longer term there's possibly at least internationally potentially more initial growth in that area that would cause you to focus on that or have higher expectations in that area?

[William Sundermeier:]

I do. There is definitely a focus there. Because it's just the channel itself was not very large, one person in all of Asia where these products are certainly popular. And as I've told the folks that I see, they have a lot of great, great products and we need to get out there and build a channel and tell the world about them. So I do anticipate the faster we can build that sale structure, the faster we'll get revenue and growth out of the Detection side of the business. I'm very optimistic about the potential there as we build the channel.

[Operator:]

Your final question is from Peter Skibitski with SunTrust.

[Peter Skibitski:]

Just to beat a dead horse on the budget. I'm just wondering if we do end up having a full year CR, can we still hit the bottom end of your guidance? Or I think in the past in April, maybe more towards the midpoint or high end?

[Anthony Trunzo:]

Pete, we just don't build our forecast that way. We build our forecast based on a big huge universe of opportunities. That spans not just the U.S. Government, but other U.S. opportunities as well as a huge chunk of international opportunities. And they have percentages tied to them that range from a 10 to 80. And we don't have a star next to the ones that are reliant on a budget versus a continuing resolution. So it's really difficult for us to answer that question because we just don't build our thinking that way.

[Peter Skibitski:]

Qualitatively though, don't you think that there'd be more pressure on your business as it goes to the full year, though?

[Anthony Trunzo:]

Probably. But at the same time, the areas that we are focused on with ISR and if you will with the way that we penetrate special forces. We know that those applications that they need for Afghanistan and for around the world are still in demand. And some of that purchased under continuing resolution, although it's going to be hard ending those dollars as the budget passes. So they're not going to go without some of these capabilities and we'll continue to shift our focus in other places too. I think international will be very strong this year, maybe stronger than we think it will.

[Anthony Trunzo:]

I think embedded in our sales guys factoring, if you will is particularly for fairly significant opportunity is their expectation as to where funding is likely to come from. So in a way, the answer to your question is already sort of embedded in our guidance in terms of the collective view if you will of our sales force, in terms of which of their opportunities are going to get funding or not. In a lot of points, we've said the Government Systems business isn't demand constrained in the U.S. in the last couple of years. It's been funding constrained. And I think that's probably true for 2011 as well.

[Operator:]

I will now turn the call back over to Mr. Davis for closing remarks.

[Earl Lewis:]

I just want to thank you all. I sensed a little bit of disappointment in our number being a little bit less than some of the consensus. But just a reminder, we've almost always been on the high side, and we hope to do that again this year. And I was really disappointed not to hear everyone congratulate Andy on the performance because it looks like that business is really starting to ramp up and produce some terrific results. And while Bill is going to struggle a little bit as we started the meeting. All in all, we think we'll have another good year this year, and we'll think that at the end of the year, we'll look back at it and we'll say, yup, that was a good year for FLIR again. And thank you all for listening in this morning, this afternoon. Goodbye.

[Operator:]

This concludes this conference call, you may now disconnect.