FLIR Systems, Inc.
Q1 2011 Earnings Call Transcript

Published: 29 Apr 2011

[William Davis:]

Good morning, 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. The 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:]

Yes, thank you, Wit, and good morning, everyone, and thank you for dialing in. In the first quarter, we earned $0.32 per share and recorded $373.5 million in revenue, which represented 30% growth over the first quarter of 2010. Our Commercial Systems division continued to grow and our Government Systems division performed admirably in face of some significant headwinds. During the quarter, we continued to translate net income into cash, generating $62.4 million in cash from operations, and finishing the quarter with a cash balance over $250 million. During the quarter, we paid our first regular quarterly dividend and we purchased over 200,000 shares. Commercial Systems revenue grew 51% over the first quarter of 2010, or 12% excluding Raymarine's results. In addition, they added significantly to their backlog. Raymarine's business continued to adopt our operating model and reached a new high in operating margin during the quarter. As we previously announced, we've combined our Thermography and Commercial Vision segments and now call them the business Thermal Vision and Measurement, TVM. This strategy has been very successful from an operational and distribution standpoint and the addition of Raymarine to the Commercial Systems division has furthered our strategy to extend thermal imaging to a wider audience of commercial users. Our Government Systems division experienced some challenges with tough comparables in the U.S. government budget delays during the first quarter, but the business continued to grow with revenues reaching $178.8 million. With our acquisition and continuing integration of ICx into our Government Systems division, we have created 3 segments that comprised that division, and we report operation results accordingly. As I've said before, we would try to give you an idea what ICx did. In stand-alone basis, it would have lost approximately $0.03 a share in Q1. Our first quarter results were in line with our internal expectations and we continue to expect the majority of this year's growth come during the second half of the year. Our new product introductions have been very well received and we expect to contribute significantly to our growth, both our new E-Series and T640 and our i3 thermography cameras revolutionize the standards for functionality and for price. More product introductions are scheduled throughout the year. We continue to see upside in our operations on our 2 recently acquired businesses and we see tremendous opportunity for our products as we execute on our strategy of delivering the most innovative sensor solutions to the most markets at the lowest possible cost. And now, I'm going to let our Presidents detail the results from their businesses, beginning with Andy, with our Commercial Systems division. Andy?

[Andrew Teich:]

Thanks, Earl. It's been over a year since we created our Commercial Systems division and I can say that the realignment has been a great success. To capitalize on efficiencies, gains in our sales and marketing efforts, expanded distribution relationships, leverage operation and R&D synergies and continued to execute on our strategies for growth. On a consolidated basis, revenues for the Commercial Systems division reached $194.6 million for the first quarter of 2011, an increase of 51% compared to the combined first quarter results of Thermography and CVS a year ago. Our Thermal Vision and Measurement segment, which is our Legacy Thermography and CVS business combined had first quarter revenue of $144.1 million, growing 12% over the prior year and bookings for the quarter were very strong with 33% growth over the first quarter of 2010. TVM operating income for the first quarter was $37.2 million, representing a 26% operating margin that was equal to our margin a year ago. This represents the best first quarter in terms of revenue and operating income in the history of our Legacy Thermography and CVS segments combined. During the quarter, we released several new products for our professional and point-and-shoot thermography markets, including a new E-Series line and WiFi-enabled cameras, our high resolution T620 and T640 17-micron detector base cameras and the revolutionary i3 camera, which carries a sub-$1,200 price tag. Our iPhone app, which greatly aids users with the reporting and analysis of Thermography findings has generated over 5,000 downloads since its launch. These product innovations help drive a nearly 60% increase in professional and point-and-shoot camera volumes over Q1 of 2010. Additionally, at the higher end of our thermography market, we are seeing strength in demand for our research and laboratory products, particularly internationally. We continue to see strength in our OEM markets with Cores and Components revenue growing nearly 40% over the first quarter of 2010. Bookings in that category were also very strong with significant activity in full components for both our Santa Barbara facility and our ATS subsidiary in Europe, this is the former CF organization. Maritime revenues grew over 30% during the first quarter as did bookings, which were driven by demand for our non-handheld products. Particular strength was seen in our high-end maritime systems with unit orders more than doubling versus the first quarter of 2010, primarily driven by commercial fishing customers. We continue to see strong demand at our Automotive business, where unit bookings grew over 40% in comparison to the same period of 2010. Personal Vision Systems posted nearly 20% revenue growth over the prior year and bookings grew over 23% during the quarter with the success of our A-Series product. Raymarine finished the quarter with $15.5 million in revenue and $7.4 million in operating income, again reaching a new high since our acquisition of the business. Sequential revenue growth of 26% over the fourth quarter of 2010 was driven by sales across nearly all product lines. Most notably, we're seeing growth in the penetration of thermal cameras in the recreational boating market. During the first quarter, we saw doubling of orders for our Raymarine branded thermal cameras over the fourth quarter of last year. As the Raymarine business heads into its seasonally best quarter, we are very optimistic about the business given their product pipeline, the progress we've made at integrating their operations into FLIR and the positive changes we've made to the sales channel. Commercial Systems total divisional backlog was $168 million at the end of the first quarter. The TVM segment backlog ended the quarter at $158 million, up $23 million over the fourth quarter of 2010. Partially driving this growth was the strong demand for our new E-Series and T-Series products that exceeded our initial forecast for production, as well as the significant activity in our Cores business during the quarter. Regionally, our TVM segment showed growth in both EMEA and Asia Pacific markets, driven particularly by strength in our FLIR branded maritime business and the successful reorganization of our thermography products sales platform in Europe. We remain optimistic on the outlook for Commercial Systems in 2011. Recent product introductions have been so successful that our backlog for Thermography cameras grew nearly 50% over the last 3 months and we continued this product introduction trend this week with the launch of QUARK, our revolutionary, ultra small thermal core. Quark utilizes our most innovative technology to achieve high-performance, low-power, a rich feature set and image resolution of up to 640x480 in a package about the size of a sugar cube. When analyzing our long-term horizon, we see a strong growth trajectory given the current low thermal penetration rates, our skill at meeting the critical needs of end-users and our ability to continually bring down costs. That concludes my summary of the Commercial Systems division, so I will now turn the call over to Bill to discuss Government Systems.

[William Sundermeier:]

Thank you, Andy. For the first quarter of 2011, overall Government Systems division revenue was $178.8 million, an increase of 13% compared to the first quarter of 2010. Operating income for the quarter was $47.4 million, representing an operating margin of 27%. These results include the acquired operations of ICx, which we added in the fourth quarter of last year. Excluding ICx's results for this first quarter of 2011, Government Systems first quarter revenue declined by 7% when compared to the first quarter of 2010, while operating margin was 36%. We're happy with the quarter's results given the comparables from last year, which included a significant amount of RAID related revenue. While we saw continued headwinds in the U.S. Government procurement, execution was strong during the quarter due to international bookings led by customers from the Middle East, Japan and Africa. Also our ability to forecast, order and provide excellent off-the-shelf products enabled us to manage our capacity efficiently and provide nearly immediate deliveries for orders within the quarter. Bookings for our legacy GS business were up sequentially over the fourth quarter of last year and we continue to see strength outside the U.S. We remain focused on integrating the ICx business and have successfully reorganized the Government Systems division into 3 business segments that will be better positioned to serve the specific markets. And we'll continue to innovate solutions that will go beyond their customer's technological, performance and cost expectations. Government Systems Surveillance segment which is our legacy Government Systems business, combined with the ICx surveillance business units posted revenue of $149.9 million, a decrease of 5% compared to the prior-year period of Legacy Government Systems. Our newly formed detection segment, which is the Chem/Bio, Explosives, Rad and Mass Spec business acquired with ICx had a first quarter revenue of $17.9 million and an operating loss of $3.9 million, largely due to an ICx acquisition related inventory charge. Integrated systems, our other new segment, is focused on building platform solutions that utilize multiple sensors and solutions. It generated $11.1 million in revenue and was breakeven from an operating income perspective. Excluding their share of acquisition-related inventory charges, Integrated Systems posted a 2% operating margin. We continue to integrate these new Detection and Integration Systems segments into the FLIR operating model, which includes reducing their dependence on government-funded R&D, streamlining processes and workflows and divesting the ICx businesses that are non-core to FLIR. I'm delighted that all the groups within Detection, Mass Spec, Chem/Bio, Radiation, Explosives, all met or exceeded their budgets in Q1. This is the first time the businesses have done so in their collective history under ICx or FLIR. I sincerely appreciate all their hard work in making the integration a success so far. To finish the quarter with an overall divisional backlog of $360 million, compared with $387 million at the end of 2010. Bookings and significant orders during the first 3 months of the year. Surveillance backlog ended the quarter at $294 million, which was down from $333 million at the end of 2010. In the U.S., the government operating under continuing resolution for all of the quarter impacted the velocity of orders received, but we won some significant business. Ground-based force protection activity was robust with nearly $27 million in orders from the U.S. for the quarter, including systems for tower and aerostat placement, mobile troop level cameras and vehicle mounted thermal imagers. Internationally, bookings nearly doubled in comparison to the fourth quarter of 2010, and we saw growth across all regions. The Middle East in particular was strong with several bookings for airborne and gimbal systems, including a $14 million order from the UAE for fixed wing surveillance applications. Additionally, we continued our very strong history in outfitting the Japanese Coast Guard with thermal surveillance systems by booking $9 million in orders during the quarter. Q1 backlog for Detection segment was unchanged for $20 million at the end of 2010. We had order activity across all product lines with particular strength in explosive detectors and radiation detectors. The Japan crisis has resulted in an uptick of inquiries around our radiation products, particularly from European and Asian markets. Also in Q1, the government awarded another $5.2 million for J2, a head of the potential government shutdown. The funding for J2 is part of the 2011 fiscal year budget and couldn't be spent due to the continuing resolutions. The program office deemed this program so important that they pulled funds from other sources to ensure that it would be continued. Strong demands for our technology, forthcoming product qualifications, potential awards that are in our sites for the second half of the year and new product introductions, such as our Fido Next handheld explosives detection unit, give us confidence in the outlook for the Detection business. Integrated Systems backlog ended the quarter at $46 million, increasing $12 million from the fourth quarter. We saw success in international markets as increasing demand exists for integrated multi-sensor protection solutions and wide-area surveillance systems. We anticipate shipments of mobile surveillance platforms under the Department of Homeland Security's MSE program to begin in the second half of the year now that the rate down protest has been denied by the GAO. Additionally, the upcoming release of our Cohesion and resolution software solutions is expected to further increase our success at penetrating the largest and most complicated surveillance projects. Incorporation of ICx systems capabilities with our advanced sensor products continues and there will be many new variations of mobile and fixed surveillance systems incorporating FLIR sensors coming in the future. We will face a difficult comparison with the second quarter of 2010, which contains significant deliveries under RAID and related programs. We anticipate a return to more normal market conditions in the U.S. in the second half of the year. As government budgets tighten, we still believe that ISR and CBRNE are very important priorities in the government's budget and that our businesses is well-positioned to win those opportunities with best value, leading-edge, off-the-shelf solutions. The first quarter exhibited the diversity in Government Systems distribution and product mix. We continue to see excellent opportunities in the market and our new airborne and handheld products are generating enthusiasm in the marketplace as well.Our prowess of force protection continues having built a strong presence in not only the U.S. market, but around the world for our border and troop protection systems are critical to maintaining public welfare and safety. The potential that exists with our Detection and Integrated Systems businesses is exciting and both are in the early stages of development. With core strength in providing cutting-edge, low-cost products and our ability to export them and provide unmatched customer service on a global basis, we continue to attract customers and win business. With that, I'll turn it back over to Earl.

[Earl Lewis:]

Thank you, Bill. And our first quarter results demonstrated both the strength and the resilience of our business model and provided us with confidence in our long-term growth ops. The development of our commercial products and markets suggest a very large runway for future growth. Our volume-driven strategy continues to prove out. While U.S. Government budget debate has impacted a portion of our business, we see this is a near-term. This near-term friction around government spending is really a long-term opportunity given FLIR's products are generally more cost-effective than our competitor's offerings. The products we manufacture for our government customers throughout the world are based on our unique commercial, internally-funded development process that inherently provides products with lower prices, less risks, high reliability and timely delivery. Our financial position remains strong with substantial cash and no debt. We are committed to returning value to our shareholders with our new dividend and share repurchase authorizations. We intend to return capital both directly and indirectly. Additionally, we continue to seek opportunities to deploy our capital to acquire other businesses and that can provide strategic from a technology product and distribution standpoint and help FLIR continue to provide the most technologically advanced and dependable solutions for protecting lives and saving energy. Based on our view for the remainder of the year, we are upping our revenue and narrowing our EPS outlook range for 2011. Revenue now is expected to be in the range of $1.7 billion to $1.75 billion for the year, and earnings per share between $1.70 and $1.75, compared with our prior range of $1.63 billion to $1.73 billion in revenue and $1.65 to $1.75 in EPS. I'll now pass the call to Tony Trunzo, our CFO, to go over the financial performance. Tony?

[Anthony Trunzo:]

Thanks, Earl. First quarter consolidated revenue was $373.5 million, an increase of 30% from the first quarter of 2010. Excluding the acquired Raymarine and ICx Technologies businesses, first quarter revenue was $291.8 million, an increase of 1.6% over the first quarter of 2010. Commercial Systems division first quarter revenue increased 51% year-over-year. The new TVM segment, which represents the combination of our Thermography and CVS businesses had first quarter revenue growth of 12% compared to the first quarter of 2010. Raymarine, our other segment under the Commercial Systems division contributed $50.5 million to consolidated first quarter revenue. Government Systems, which is now divided into 3 segments

[Earl Lewis:]

Good. And we look forward to answering any questions you have. Operator?

[Operator:]

[Operator Instructions] And your first question is from the line of Brian Ruttenbur from Morgan Keegan.

[Brian Ruttenbur:]

Thank you very much. A couple of quick questions. On your revenue distribution for the year, if you use the low end of your guidance range on revenue, you did about 22% of your revenue in the first quarter. Do you expect on the first half of the year roughly 45% and second half 55%, can you give us some kind of parameters there?

[Earl Lewis:]

Well, I don't have that in front of me. Tony, do you want to go into that detail or not?

[Anthony Trunzo:]

Brian, we generally don't. I mean clearly Q4 is going to be our strongest quarter as it always is. We have some headwinds in Q2 related to some of the acquisition charges that are going to affect operating income more than they're going to affect revenue. So we don't give quarterly guidance really for the revenue or the operating income line and when you look at this year, as I said, I think you'll see more skewed to the back of the year in terms of revenue, but probably not in terms of operating income, probably not in terms of revenue.

[Earl Lewis:]

Just a couple of quick comments on it though. Clearly, the backlog of increase in Andy's business is something we want to reduce, we don't want to run that business, it's a book-and-build business, so we'll try to reduce that in Q2. And the traditional second quarter for Raymarine is their largest quarter. So those are a couple of headwinds that say that Q2 should be a fairly strong quarter for us. Perhaps even more so than historically Q2 as a percent of our total revenue.

[Brian Ruttenbur:]

Okay, that's helpful. And then historically it's Q2 and Q4 that are your strongest, is that right in terms of revenue? With the seasonality?

[Anthony Trunzo:]

It's varied, Brian, between Q2 and Q3 historically. To Earl's point with Raymarine, you might see some more strength in Q2 relative to Q3 than you typically do.

[Earl Lewis:]

And with the backlog.

[Anthony Trunzo:]

And because of Andy's backlog, right.

[Brian Ruttenbur:]

And moving on down the income statement, just some other quick questions. In terms of gross margins, do you anticipate gross margins roughly in the same ballpark that you were in, in the first quarter, 52% and change throughout the year or on the quarter? Can you answer either one?

[Anthony Trunzo:]

I guess I have to sort of again comment that our guidance is really only on the earnings and revenue line, Brian. We've seen some changes to the business related to the consolidated business numbers because of the ICx and Raymarine acquisitions. They pulled the margins down. We're working hard to improve margins in both of those businesses. I don't think there's any bias, one way or another and from where we are now in either of our "historical" businesses.

[Brian Ruttenbur:]

Okay. And then last question, this one should be much easier. On R&D and SG&A, are these the levels that you're going to be at going forward or were there one-time events in here?

[Earl Lewis:]

No one-time events.

[Brian Ruttenbur:]

Okay, so these are the levels that you'll be at, give or take, going forward?

[Earl Lewis:]

Well that's an assumption. We'll probably increase a little bit as we go forward, yes.

[Operator:]

And your next question is from the line of Michael Lewis from Lazard Capital Markets.

[Michael Lewis:]

Thanks for taking my call. Earl or Andy, I was wondering as we walk through the rest of fiscal year '11, and if we focus on the new product releases that we would expect to see out of FLIR in the Commercial segment, where will the end markets be for those new introductions?

[Earl Lewis:]

Well, I like talking about product introductions after we've done them not before we've done them. We launched essentially 4 new products families in the Thermography segment in the spring and we've just completed our probably the largest trade show that we go to in the Cores and Component segment, where we launched the QUARK platform. So I think one can speculate about the other business segments that are left, but I don't want to talk about specific product introductions before we actually conduct them.

[Michael Lewis:]

Okay. Well then let me ask you a different way. Do you have a specific idea, by season, on introductions of products? Now that we're moving into summer, we'll be more heavily weighted on the Raymarine side, products like that. And as you move into, say, the fall, you might focus on industrial complex product introductions, things like that?

[Earl Lewis:]

Well let me just comment, because we're not going to give a clean answer on that. These divisions all have their own R&D and their own product development. So it isn't that we're planning one versus another. They're internally planning their own. Raymarine is working on a number of product introductions and even if they introduce them at the end of the summer, that's when they'll come out and even though that may not be the best buying time. Thermography introduced a slew of new products in Q1 of this year. It just happened that, that's when they came out. But those aren't really planned for season or they plan one against the other. Each one is individually working on their own.

[Operator:]

And your next question is from the line of Jeremy Devaney from BB&T Capital Markets.

[Jeremy Devaney:]

I was wondering if we just could go back and talk about the R&D expense for a second. I know we've previously talked about ICx having a fair bit of R&D capability and the 10% number in the quarter was a pretty good jump from what we saw last year. Should we think about the 10% level as a go-forward level? You'd previously talked about drawing it down a bit and managing it a little bit more. Any clarity on that?

[Earl Lewis:]

Sure. The 10% is an absolute number against lower revenue. That's the calculation, I think, you're making. And the revenue should be higher for ICx in total. I'm sorry did they follow that? I didn't mean to mislead you. It's the denominator that's wrong in the equation.

[Jeremy Devaney:]

Okay, so we should see it as a percent of sales lower in that going forward?

[Earl Lewis:]

Correct.

[Anthony Trunzo:]

Yes.

[Jeremy Devaney:]

And then Tony, could you please repeat the ICx revenue and ops more in the quarter for us?

[Anthony Trunzo:]

Sure. Let me just pull that up real quick, Jeremy. Let's see. So the -- Jeremy, let's take another question.

[Earl Lewis:]

Yes, there's like 4 pieces, so we've got to hunt around for it.

[Jeremy Devaney:]

If I can just speak more about ICx, if we look at the Integration business, this new segmentation that we have, it's pretty clear that the Detection business with ICx. Is the Integration business purely organic or is there a combination of capability from [ph] business and ICx in there?

[Anthony Trunzo:]

No, it's clearly -- there's nothing that is additive coming in from the legacy FLIR businesses. That's purely ICx, Jeremy.

[Earl Lewis:]

I believe the number I looked at last night for all of ICx is they lost almost $7 million. We could go dig it out and get it more accurate. But almost $6 million, I'm sorry, $6 million. The lower $6 million, I think it was.

[Operator:]

And your next question is from the line of Jonathan Ho from William Blair.

[Jonathan Ho:]

Can you maybe talk a little bit about the impact of the 2011 budget signing, and sort of what your expectations are for Government Systems bookings, now that we've seen that get signed?

[William Sundermeier:]

Sure, I'll take that Jonathan, Bill Sundermeier. Now that it's signed, there's certainly -- we anticipated a lot of flow happening although we've already heard that the amount of budget that's available, the procurement offices are saying they don't have people to adequately get all that funding out. So our priority's going to be to compete to get our programs level to the surface there, the procurement activity. But hopefully, we'll see a surge in the latter half of Q2 and Q3, as the government ends its fiscal year in getting those programs across that we hoped to get a long time ago.

[Jonathan Ho:]

As we look at the backlog for Government Systems, now that it's actually signed, are there programs that just immediately fall into the backlog?

[William Sundermeier:]

I wish it was that simple. There are certain programs and others funding in there for several different continuing programs, but I still think it's going to be a fight to get that funding to be procured. It's not going to be as simple as orders are going to start flying across the transom. It's going to be making sure that we have the priorities. So I'm hoping that Q2 is closer to a book-and-bill of 1 than we've seen, so let's hope that money will flow quickly.

[Operator:]

And your next question is from the line of Peter Skibitski from SunTrust.

[Peter Skibitski:]

Are you going to give us a full restatement at some point of the new reporting structure with the segment earnings anytime soon?

[Anthony Trunzo:]

In the queue, we'll report the segments that we just took you to.

[Peter Skibitski:]

Okay, I mean, like back through a couple of years and second, third, fourth quarters of last year?

[Anthony Trunzo:]

No. As we go through this year, we'll give you the same kind of disclosure we just did in terms of how the legacy divisions performed or the legacy segments performed relative to the new reporting. But we're not going to -- no, there's no requirement nor would we go back and modify the prior financials on that.

[Earl Lewis:]

It's Earl. I would try to explain this. Particularly, in the Thermography and the CVS merger, more and more of R&D is being shared, more and more of the distribution channels are being shared. For example, the entire Far East is handled by one distribution channel. Most of Europe and EMEA is handled by one distribution channel for both businesses. Much of the R&D is being worked on concurrently by both divisions. So you end up really after a period of time where the allocations almost don't make sense when to get to operating income. What we will try to do is differentiate for you on the order side, because there it's product based and we can give you that kind of directional guidance as best we can. When you get to operating income, it's going to be much more difficult than probably not very meaningful even.

[Anthony Trunzo:]

As each quarter rolls forward, it's going to get harder. To the earlier question about ICx, for Q1, it's actually fairly clear. But to Earl's point, it will get a little murkier. But I have the numbers that, I think, it was Jeremy asked about for the ICx Surveillance, Detection and Integrated Systems. I'll just read them off. Surveillance revenue, which is the ICx related revenue in our Surveillance segment was $2.1 million in Q1, and that part of the business had a loss in the quarter of $1.5 million. Detection revenue in Q1 was $17.9 million and had a loss of $3.9 million. In the Integrated Systems business, generated revenue of $11.1 million and was effectively breakeven for the quarter. And just so we're clear, the Detection and Integrated Systems numbers, those two numbers will get reported as segment data in our Q and in our filings going forward. And we'll do our best to try to carve out at least for the next couple of quarters the contributions that ICx businesses are making in the Surveillance business.

[Operator:]

And your next question is from the line of Tim Quillin from Stephens Inc.

[Timothy Quillin:]

In terms of the first quarter results, we make our estimates, but you don't give quarterly guidance. I'm just wondering if the first quarter EPS met your internal targets? And then how you thought about raising guidance with continued uncertainty in the government market?

[Anthony Trunzo:]

Well, actually, the government market is becoming more, in our opinion anyway, we feel better about the international side, we have probably a better handle on some ways although timing could be difficult than we had at the beginning of the year. The commercial side however, is much clearer given the change in backlog and the order entry we've seen so far. So the change in our revenue guidance wasn't very dramatic, frankly. The change in our EPS or narrowing the EPS number seemed reasonable, given what we expect the balance of the year to do.

[Timothy Quillin:]

And Earl did you say the first quarter EPS met your internal target?

[Earl Lewis:]

Yes, it did.

[Operator:]

And you next question is from the line of Brian Gesuale from Raymond James.

[Brian Gesuale:]

I wanted to ask a long-term question, Earl, if I may, on business mix. As we've looked at this, the Commercial business has been really strong between the legacy business and Raymarine's. It looks to have a very good runway for double-digit growth for the foreseeable future. The government trends are much more ambiguous, but we're starting to see the government as a percentage of the mix decline. And in your prepared remarks, you talked about the U.S. government at 29%, and the overall Government Systems business was less than 50%. As we go forward and we look at these headwinds where you have government backlog in '07 levels, troop reductions, budget uncertainty, is this something that we could see take the government component of the mix down to 1/3 of overall revenue? And then, I guess, is 10% growth really a good bogey to think about as you look at all these headwinds out there?

[Earl Lewis:]

Well, we're right in the process of doing a 5-year plan. And nothing has really changed in the clients -- so static, nothing has really changed in our thinking that the opportunities for the Commercial side of our business are greater than the opportunities for our Government business. And it would not surprise me in the long run to see a 1/3, 2/3, kind of relationship, I think that's possible.

[Brian Gesuale:]

Okay, terrific. Thanks very much. And then, I guess, just one follow-up on Raymarine. The results looked very strong in the quarter and I don't even think you've seen the full benefit of some of these product launches. Can you maybe just give us a little bit of color. I imagine that's tracking above expectations from when you guys initially purchased the property. Can you maybe just give us a little bit of magnitude in terms of how well it's doing relative to what you thought maybe a year ago?

[Earl Lewis:]

Sure. There's two sets of expectations. Tom Surran, who runs the business with mine. But mine are right where we are and Tom's, prior to these results were a little less. But no, it's doing real well. We're very, very happy with the results there. And I think the new products that Tom and his team are working on will really do as well. Very exciting business, frankly.

[Operator:]

And our next question is from the line of James Ricchiuti from Needham & Company.

[James Ricchiuti:]

A question just with respect to the Thermography business. I wonder if you could talk a little bit about how the i3 product is doing? And maybe if you could elaborate, just in terms of the distribution, how that's going for the product and curious, just given the backlog that you're showing in the commercial side of the business, are you experiencing any kind of component shortages or anything along those lines?

[Earl Lewis:]

Okay, So first talking about the i3. We're very pleased about the way the, what we call the iX-Series, so it's i3, i5, i7. The way that product line is functioning and we've been happy with the mix amongst those models because people do. The i3 is a door opener, and people do buy up in the line to some extent. There are some requirements, for example, in the residential business. In the U.S., there's an organization called RESNET that requires a specific level of resolution that is only achieved by an i7. So somebody might come in the door with an i3 and end up buying an i7, as an example. So the mix, we're been pretty happy with the mix. In terms of volumes, we've also been happy with the volumes since the i3 has been launched and keep in mind that the i3 was launched sort of midway through the quarter in the U.S. and a little bit later in the APAC and EMEA markets. So we haven't seen the full effect of that product launch on a quarterly basis. But that said, our bookings in the iX-Series represented about 3 quarters of the total shipments that were done in 2010. So it's quite a volume increase there, we're pleased about that. On the component shortage side, we've done a pretty good job of meeting the iX demand. So that has a fair amount of scalability to it. So I don't have any concern there. On the new products with regard to the E-Series and the new T-Series products, as we mentioned in the prepared comments, the product did do better than we expected on their initial launch. The market reception, particularly of the concept of having the WiFi-enabled communications to the Apple devices has been very well received. So the demand was a little higher and it stripped out our -- or it outstripped our production capability and we're working to overcome that. And it's probably going to take us all of Q2 and potentially if the demand continues the way that it's been going in the first weeks of the quarter, we may carry some backlog into Q3 there. We haven't had a problem like with Japan component supply, a little bit of a problem on some of the machine components in terms of getting our manufacturer supply chain to ramp up to the volume.

[James Ricchiuti:]

Andy, can you comment on where you're seeing the demand in particular for the higher-end cameras?

[Andrew Teich:]

It's still fairly broad-based, Jim. The two big hitters for us continue to be the building and the electrical predictive maintenance, which is manufacturing industry-kind of markets. Also when you get into the high-end category, we start talking about GasFindIR a little bit and GasFindIR did pretty well in Q1 as well. So those roll into the professional segment cameras that we call, but I can't point to one segment where the higher-end professional series cameras have been unusually strong.

[Operator:]

And your next question is from the line of Michael Ciarmoli from KeyBanc Capital Markets.

[Michael Ciarmoli:]

Thanks for taking my questions guys. If we can, just a follow-up on that last line of questioning, specifically with the GasFindIR, are you guys seeing any more uptake there, given the EPA's ruling? How do you think that will play out for the remainder of the year?

[Andrew Teich:]

Yes. We have seen an uptick there relative to the EPA ruling. And we think the GasFindIR is going to continue to do very well. We also had some supply constraints in that area. We build backlog and GasFindIRs in Q1. Some of that was licensing related, some of it was supply chain-related. We've taken some steps in the latter category to increase our production capacity, particularly on the integrated dual cooler assemblies. And we've ramped up the second line in Santa Barbara to support that volume, so we feel pretty good about that product line.

[Michael Ciarmoli:]

And maybe, Earl, you mentioned that you're doing your sort of five-year planning and I think the number was for operating margins, 26% excluding Raymarine and ICx. I mean is this the new normal for the company here? Can you get those margins back up to -- obviously rate played a big factor in driving those margins up. Is there anything else you have to do, maybe looking at the Government Systems business, or are you kind of comfortable with this 26% to 28% range?

[Earl Lewis:]

I think those are very good margins frankly. A lot will depend on how fast the Commercial business continues to grow. It's certainly a lot easier to have higher margins when you have higher growth. We do predict higher growth. So it could prove a little bit towards the end of the year, I believe.

[Operator:]

And our next question is from the line of Josephine Millward from The Benchmark.

[Josephine Millward:]

Congratulations on the positive ruling on the Raytheon protest.

[Earl Lewis:]

We were happy with that as well.

[Josephine Millward:]

Can you give us a sense of how much organic growth you're expecting from the Government division this year? Because if I look at the high-end of your guidance, you're implying, assuming the Government business is flat, you're implying almost 30% growth in non-defense for the year. Is that your target for the Commercial business?

[Earl Lewis:]

No. The Commercial business isn't targeted at 30% internal growth. I'd have to look at your numbers, Josephine. I don't have that at the tip of my finger. But the Commercial businesses are more like 20% organic or slightly less.

[Josephine Millward:]

Okay, but what about you were talking about the Government business, excluding ICx. Are you looking at relatively flat government, or somewhat down?

[Anthony Trunzo:]

Well, again, Josephine, as a reminder to all you guys, our guidance is revenue and earnings per share for the entire company. Any more granularity than that is really sort of directional. And you can pull the numbers apart and sort of test them for relevance compared to what we've done historically. We expect all our business to grow. I mean that's part of what we challenge people to do. But we also don't get into the detail of what our specific quarterly growth targets are for each individual business.

[Earl Lewis:]

But directionally, of course, the Government business we don't expect to grow as fast as the Commercial business this year. I mean that's sort of just the way it is this year.

[Operator:]

And your next question is from the line of Paul Coster from JPMorgan.

[Paul Coster:]

Thank you for taking my question. A couple of questions on CBRNE please, Bill, first of all, J2, when it was first announced by ICx, looked like it could potentially be a contract worth several hundred million. Can you confirm that, that's still your expectations and what kind of timing that program may take place over? And then related to CBRNE as well, I'm not sure if this is Bill or Andy's question, but given the issues we've had in Japan on global supply chain and also the explosive problems that were encountered in air cargo last year, are you seeing any pull-through demand? Are you changing your marketing strategy for that kind of global supply chain cargo screening application? Thank you.

[William Sundermeier:]

J2, of course, is still in the NRE phase and the production phase, so scheduled to be out in the 2012 timeframe. And, of course, it isn't IDIQ, see how much of that IDIQ that they want to deliver. But we still anticipate production deliveries out in the 2012 timeframe and beyond. Still seems to be a priority to them. And we anticipate in our models in the future that, that will be delivered.

[Earl Lewis:]

I think the total was $700 million, it's very large. It's like $700 million, not $200 million, Paul.

[William Sundermeier:]

And as far as pull-through we haven't seen any parts or shortages or anything like that in our businesses, but we are certainly going to become more and more focused, not only on radiation because of Japan, but airport and package screening is becoming a higher priority. There's some government regulations out there about how much baggage and cargo needs to be screened in the upcoming years. So that is a focus of ours in providing solutions for that kind of problem.

[Operator:]

And your next question is from the line of Michael French from Morgan Joseph.

[Michael French:]

I had a question about the dispositions from ICx. Perhaps you can provide a little more color on that in terms of the timing or the magnitude of these sales and based on the discussions you've had whether you would expect to book a gain.

[Earl Lewis:]

I don't think we'll book a gain.

[Anthony Trunzo:]

I don't know that you're going to see a significant P&L impact from these. The numbers are relatively modest in terms of what we expect to realize for the businesses. Certainly we wouldn't anticipate gains or losses to really be particularly significant either way.

[Earl Lewis:]

And we would hope to be through this year. I mean that's our target.

[Michael French:]

Okay, very well.Thank you.

[Operator:]

And you do have a follow-up question from Jonathan Ho from William Blair.

[Jonathan Ho:]

I just wanted to follow up back up around your Thermography segment. Can you talk a little bit about how your Home Depot trials have been going and maybe just broadly what your expectations are for that type of distribution?

[Andrew Teich:]

Yes. Sure, Jonathan. The trials have been going pretty well. The results are a little bit mix and I think it's somewhat dependent on how much the regional Home Depot rental sales manager buys into the concept. And we've recognized that variance and are applying some more focused training in the areas that have been a little weaker or the specific stores that have been a little weaker than others. The trial at this point is going on with roughly a dozen stores in the Massachusetts area. I think we achieved a hurdle there that Home Depot was looking for in terms of return on investment and as such, they've authorized the second phase of deployment, so we're going to be going in roughly 20 more stores in some of the hotter climates, parts of Florida and Arizona, to evaluate the performance of the program in hot climates. So ultimately, our goal there is just to take it out of the rental department and get it onto the shelves. So that's fundamentally what we're focused on.

[Jonathan Ho:]

Great. Thank you.

[Earl Lewis:]

I guess the next trial is in the South, isn't it?

[Andrew Teich:]

Yes.

[Earl Lewis:]

So that's kind of a different market, more on the "air-conditioning" side.

[Andrew Teich:]

Yes, the good thing about that is that it gives us a benefit seasonally because obviously the prior trial was driven by impending cold weather on the fall.

[Operator:]

And you have another follow-up question from Jeremy Devaney from BB&T Capital Markets.

[Jeremy Devaney:]

Thanks for taking the follow-up. Just real quickly guys, some cleanup. CapEx and IR&D in the quarter?

[Earl Lewis:]

Tony, that's for you.

[Anthony Trunzo:]

CapEx isn't that much this quarter. I don't have the number at my fingers.

[Earl Lewis:]

That would be $3 million CapEx.

[Jeremy Devaney:]

And IR&D?

[Anthony Trunzo:]

R&D, ICx had about $9 million to $10 million.

[Jeremy Devaney:]

Thank you.

[Operator:]

Your next question is from Peter Skibitski from SunTrust.

[Peter Skibitski:]

I was wondering if you could give a sense, in terms of the new product introduction, historically, how long it takes after you've introduced new products before the volumes get high enough to really kind of drive higher margin rates for you?

[Earl Lewis:]

We've had a philosophy that we would introduce products at high margin rates in general, and sometimes take the price down. But I would have to say we have very mixed results in that area in terms of the time to get higher margin. Very, very large expensive gimbals will take longer than an i3 for example.

[Peter Skibitski:]

Okay, interesting. And that maybe if I could just get one more in. Can you give us an overview of what's going on at DHS with regard to the southern border work in terms of the opportunity size for you there, and maybe timing?

[Earl Lewis:]

We think that's a huge opportunity. I recently understood that they have 17,000, is it Bill? People employed and they're going to go up to 21,000 or 22,000. You could technically make an argument that each one could have some kind of device or at least access to some sort of device that will allow them to see at night or see further during the day. We definitely view that as a good long term opportunity for FLIR and the northern border.

[Operator:]

And your next follow-up is from Tim Quillin from Stephens Inc.

[Timothy Quillin:]

Thank you. I appreciate you taking my question. It's just a real quick follow-up on modeling issues. But one is would you be able to give us the split of ICx's revenue in the fourth quarter between Surveillance, Detection and Integrated Systems? And then my second question is with regards to your tax rate expectations and how you might use ICx's NOLs through the course of this year and next? Thank you.

[Anthony Trunzo:]

Tim, we don't have that breakout for Q4 at our fingertips. I'm not sure if we can create that or not. I guess we probably could, but we didn't -- it wasn't our intention to report that way. And I don't think we have it. In terms of the tax rate, we were $31.5 million for the quarter, I think for the foreseeable couple of quarters, if the mix stays were it is, that's probably a reasonable estimate of what I think we'll probably be likely to see going forward. We will see NOL benefit from ICx, but that's not going to flow through the tax rate. We're going to see that coming through as incremental cash flow, so that's not going to affect the rate.

[Earl Lewis:]

Okay. Well, thank you, all, for calling in. We appreciate it. And we look forward to, we really do look forward to the second quarter conference call. And thanks again.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.