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FLIR Systems, Inc. (NASDAQ:FLIR)

Q4 2009 Earnings Call Transcript

February 11, 2010 11:00 am ET

Executives

Wit Davis – SVP, General Counsel and Secretary

Earl Lewis – Chairman, President and CEO

Andy Teich – President, Commercial Vision Systems

Arne Almerfors – EVP and President, Thermography

Bill Sundermeier – President, Government Systems

Steve Bailey – SVP, Finance and CFO

Tony Trunzo – SVP, Corporate Strategy and Development

Analysts

Peter Arment – American Technology Research

Tim Quillin – Stephens Inc.

Jonathan Ho – William Blair & Company

Brian Ruttenbur – Morgan Keegan & Company

Paul Coster – JP Morgan Securities

Jim Ricchiuti – Needham & Company

Steve Levenson – Stifel Nicolaus

Michael Ciarmoli – Boenning & Scattergood, Inc.

Josephine Millward – Dougherty & Co

Mike Lewis – BB&T Capital Markets

Jim Morgan [ph] – Morgan Joseph

Randy Cuiersen – Barren Capital

Operator

Good morning. My name is April, 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 2009 financial results conference call.

I will now turn the call over to Mr. Wit Davis, Senior Vice President, General Counsel and Secretary of FLIR Systems. Sir, you may begin.

Wit Davis

Good morning, everyone. Before we begin this conference call, I need to remind you that other than statements as to historical facts, the statements made on this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations.

Words such as expects, anticipates, intends, believes, estimates, and variations of such words and similar expressions are intended to identify such forward-looking statements. All of these statements are subject to risks and uncertainties that could cause actual results to differ materially.

Please refer to the press release we issued earlier today for a description of factors that could cause actual results to differ materially from those forecast. The forward-looking statements we make today speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

Let me now turn the call over to Earl Lewis, Chairman and CEO of FLIR Systems. Earl?

Earl Lewis

Thank you, Wit, and thank you all for joining us this morning. We are very pleased with our financial performance for all of 2009. FLIR recorded its ninth straight year of record revenue, operating income and earnings per share, and achieved the highest operating income margin in our company's history.

For all of 2009, revenue increased by 7% to $1.15 billion. We earned $1.45 per share, an increase of 13% compared to ‘08. We set a record for cash flow from operations, which reached $272 million or 118% of net income. The soft worldwide economy affected our Thermography business the most in 2009 as revenues declined by 13%. But through good expense management and strong gross margins, Thermography operating income rose by 3% for the year.

Our Commercial Vision Systems revenue grew by 14% in 2009 and operating profit rose by 32%. These businesses, which effectively January 1st have been combined into a new Commercial Systems division, are exceptionally well positioned, and we expect them to post very good growth in 2010.

Government Systems had another good year in 2009 with revenue up 15% and operating revenue up by 22%. We issued our initial outlook for 2010 this morning. For the full year, we currently expect net revenue in the range of $1.2 billion to $1.3 billion, and earnings per fully diluted share to be in the range of $1.48 to $1.53.

Good growth from Commercial Systems was stabilizing worldwide demand. Continued growth in Asia, and the impact of numerous new product introductions supported our 2009 view. Government Systems, which has grown in the compound rate of 36% for the past three years will slow in 2010, due largely to the anticipated decline in deliveries of the BETSS-C program and its related programs.

However, we expect the core Government Systems business to again perform well in 2010. With that we will have each of the company’s presidents talk, beginning with Arne Almerfors. Thank you Arne.

Arne Almerfors

Thank you Earl. Thermography revenue in Q4 was $84.8 million, a decrease of 4% from the fourth quarter of 2008, but up 21% from the third quarter, reflecting stabilizing demand as well as normal seasonal patterns. For all of 2009, revenue was $285.5 million, a decrease of 13% from 2008.

The revenue in both the US and Europe were down during 2009, reflecting the impact of the global recession. The revenue in the US increased 5% in the fourth quarter though, due to growth in the high-volume segment -- due to growth in the high-volume segment market. Asia-Pacific was the bright spot during the year as revenue grew over 75%. As a result of our multi-year infrastructure investment, Asia-Pacific had healthy growth during the year particularly in China, Japan and Korea.

Thermography operating margin in Q4 was 27%, up from 26% last year due to improved gross margins and cost controls. Q4 operating margin was the highest in two years, and despite lower revenue, operating income of $23.3 million was up 3% over 2008, highlighting our ability to manage the business effectively in a difficult economic environment.

From a market segment perspective, the building market continued to do well in the fourth quarter, and represents about 30% of revenue. The building market has been particularly strong in the US and Europe, where government regulations and incentives have helped drive demand. The electrical, mechanical market was about 30% of revenue was slow in the fourth quarter, reflecting continued depressed capital spending activity in the US and Europe.

The electrical, mechanical market is experiencing growth in Asia Pacific as infrastructure development drives demand. In addition, we experienced strong demand for cameras used to detect elevated body temperature in an effort to contain swine flu, particularly in the Asia-Pacific region.

In the high-volume segment, we recently reduced the street price of our low cost i5 camera to $1995 to further stimulate price elastic demand. We also introduced the i7 camera, the high-resolution variant of the same platform at $2995 price point. These changes resulted in a year-over-year in units of 80%. And we expect continued growth in this segment as the economy improves and distribution expands.

I will now turn the call over to Andy Teich, president of our newly formed Commercial Systems division.

Andy Teich

Thanks Arne. I'm excited about the combination of Thermography and Commercial Vision Systems divisions. There are many similarities between the two businesses, which can be leveraged to create value for FLIR. Both are pursuing commercial customers, both are exploiting the price elasticity in the markets, with lower cost uncooled products, and both utilize a third-party distribution model in their go-to-market strategy. I look forward to uniting the two divisions and building our global leadership position in the commercial infrared market.

Turning to CVS, the division had a terrific fourth quarter. Revenue was $57 million, an increase of 34% compared to the fourth quarter of a year ago and the fastest growth rate in nearly two years. Revenue for the full year 2009 was $206.3 million, an increase of 14% over the prior year. Backlog increased 10 million during the quarter to $103 million due to strong orders in US cores and components and security and surveillance markets.

Operating income for Q4 was $13 million, up 61% from the prior year and the second highest in CVS history. Operating margins were 23%, up 4 percentage points from the prior year due primarily to leveraging of operating costs. Operating income for all of 2009 was $49.3 million, an increase of 32% over the prior year.

Demand in the security and surveillance market was excellent around the world as worldwide orders were up over 3x from the third quarter. Orders for short-range cameras were up significantly as we trend towards more private industry funding. While we will continue to target large order programs through our network of integrators, the foundation of our security business is rapidly moving towards our higher-volume, lower-priced uncooled short and mid-range systems.

Bookings in the fourth quarter were particularly strong in the nuclear power industry, where new nuclear regulatory commission regulations require 24/7 surveillance by April of 2010. In addition, the new H-Series handheld thermal imager gained immediate acceptance and contributed to the growth.

In the maritime market, orders were flat with the prior year as strong growth in the US was offset by decrease in Europe. Unit volumes doubled in the US as the new First Mate handheld camera drove demand. For the year, worldwide orders were up 20%, reflecting healthy demand for a compelling new product segment in an otherwise soft market.

We see the maritime business is having great promise for the future, and we'll continue to focus on expanding distribution and working to establish a position in the maritime electronics industry. To that end, we recently added West Marine to our distribution network. West Marine is the largest nationwide mass retailer of maritime electronics products. They have 340 stores and two major catalogues.

We believe West Marine’s channel will be increasingly important as we work to become a major player in the marine electronics industry. Demand in our cores and components segment was up over 25% from the fourth quarter of the prior year. Orders were strong across our broad OEM customer base and included growth in a variety of commercial and military applications. Even the auto segment, which has been slow for most of the year, grew nicely during the fourth quarter. With the addition of Audi A8, and the Rolls Royce Ghost vehicles we expect higher volumes for our core [ph], resulting in lower component costs for our uncooled detectors, which support the cost target goals of products across FLIR.

In late December, we announced the acquisition of Directed Perception, a leading provider of handheld motion control systems for our commercial and military markets. The acquisition enhances and differentiates our handheld zoom camera systems for both commercial and military markets through lower cost, improved functionality and ease of use. We have renamed Directed Perception, FLIR Motion Control Systems, and I'm delighted to welcome their talented employees to our team.

Looking to 2010, we see strong performance for the combined Commercial Systems business, driven by a stabilizing economy, a refreshed product line in many markets and the leveraged efforts of our newly combined highly capable team.

That concludes my comments. Let me now turn the call over to Bill Sundermeier, President of the Government Systems division.

Bill Sundermeier

Thank you, Andy. 2009 was another outstanding year for Government Systems. We increased revenue 15% to a record $655 million, increased operating income by 22% to a record $286 million, and achieved operating margins of 44%.

Backlog declined 22% during 2009 to $433 million at year-end due to the high shipments for the BETSS-C program during the year. Excluding the impact of the BETSS-C program, net orders increased modestly in 2009 led by strong order growth internationally.

For the fourth quarter, revenue was $169.7 million, a decrease of 1% from the prior year. Q4 operating income of $68.8 million was down 7% primarily due to revenue mix and increases in R&D and marketing activities year-over-year. Operating margins of 41% remained very strong in the quarter. Q4 order activity was slower in the US, as anticipated, with the late approval of government budgets. International orders continued to grow, however, with more than half the orders received from overseas customers.

With the recent release of the 2010 supplemental [ph], the fiscal year 2011 US Defense budget proposal, and the Quadrennial Defense Review, we believe EO/IR capabilities will continue to be a priority. In Secretary Gates briefing on the budget, he highlighted the need to expand both intelligent surveillance and reconnaissance capability and special operations capability, both areas where FLIR has been a key supplier.

In addition to US Defense requirements, we also believe there is a growing opportunity with the Department of Homeland Security. FLIR has historically been a major supplier to both customs and border protection and the coastguard. With the budget request of 56 billion, an increase of over 20% from the prior year, we believe we will see more procurement activity from DHS going forward.

In the force protection area, the effort to transition the rate portion of BETSS-C into an army program-of-record continues, and we now expect the effort to be completed in time for the fiscal year 2012 budget cycle. The marines are also running a separate process to transition their GBOSS program to a program-of-record status, which we believe will also coincide with this fiscal year 2012 budget.

There may be opportunities with the army and the marines to provide force protection systems prior to the completion of the program-of-record process. But any orders are difficult to predict at this time. There have been ongoing dialogues with both the army and the marines and the corp to building our long-term relationships.

In addition to force production, another key area of growth for Government Systems is in the handheld and fixed base surveillance systems. Over the past several years, we have successfully leveraged our spiral development and vertical integration capabilities to develop an attractively priced line of handheld and fixed base systems that are gaining favor with the worldwide military community. With the recent acquisition of OmniTech we have further enhanced our capabilities in this area.

Looking into 2010, we believe Government Systems revenue will be flat to slightly up during the year based on the healthy level of beginning backlog and the current factored order forecast for the year. When the planning for the Afghanistan search is complete, we expect US DOD procurement activities to improve over the year. We also expect continued growth in our international markets. Operating margins will likely decline a few points as product mix changes, and we invest to support our customer and product expansion plans.

We remain very bullish on the long-term prospects for infrared systems in military applications, and are excited about 2010 and beyond. That concludes my comments. Let me turn the call back over to Earl.

Earl Lewis

Thanks Bill. Before we hear from Steve, I wanted to discuss our financial results in detail. I wanted to comment on our recent management changes. As we announced in December, Arne, president of our Thermography division, is going to retire effective June 1st. We have consequently consolidated Thermography and CVS into one new commercial division led by Andy Teich.

This is a tremendous opportunity for us to bring together two businesses that are essentially headed in the exact same direction. I'm very excited about the prospects for this new division. I want to also recognize the enormous contributions Arne has made to FLIR. For more than a decade he has been a critical part of our success, and he has left us with a tremendously healthy and well-positioned business. Thank you Arne, and best wishes from us all.

We also announced today that Steve Bailey, our Chief Financial Officer since 2000, intends to retire effectively June 1st. Steve will be replaced by Tony Trunzo, who is currently head of our corporate strategy. This transition has been very well planned, and I'm confident will go smoothly. With that Steve, can you update us on the financials for 2009?

Steve Bailey

Thank you Earl. Revenue for the fourth quarter of 2009 totaled $311.6 million, an increase of 3% from the same quarter last year. Revenue from Government Systems amounted to $169.7 million, a 1% decrease as compared to fourth quarter of 2008. Revenue from our Commercial Vision Systems division of $57 million increased 34% as compared to Q4 of 2008, and Thermography revenue of $84.8 million was a decrease of 4% over the fourth quarter of 2008.

Our international revenues for the quarter were 44% of total revenue, while revenues from US government sales accounted for 38% of the consolidated revenue during the period.

For 2009, revenue totaled $1147 million, an increase of 7% as compared to 2008. For the year, Government Systems revenue of $655.3 million was an increase of 15%, Thermography revenue of $285.5 million was a decrease of 13%, and revenues from Commercial Vision Systems of $206.3 million represents an increase of 14% as compared to 2008.

For 2009, international revenues were 41% of our total revenues, while revenues from US government sales accounted for 43%.

We closed the year with a backlog of $563 million, a 7% decline during the quarter. Our backlog has decreased 15% or $100 million over backlog at year-end 2008.

At year-end, division backlog amounted to Government Systems of $433 million, a decrease of 22% over 2008; Thermography backlog was $27 million, a 42% increase over last year; while Commercial Vision Systems backlog of $103 million was an increase of 13%.

Gross margins for the fourth quarter were 56.5% of revenue, as compared to 57.4% of revenue for the same quarter last year. The decrease in average gross margins during the quarter was primarily due to shift of product mix in both Government Systems and Commercial Vision Systems.

For the year, gross margins were 57.4% as compared to 56.3% in 2008 with margin improvement related to production and manufacturing efficiencies.

Research and development expenses of $24.4 million were 7.8% of revenues for the quarter as compared to $21.7 million or 7.2% of revenue for the fourth quarter of 2008. For the year, the company has incurred research and development expense of $91.3 million or 8% of revenue as compared to $90 million or 8.4% of revenue during 2008.

Selling, general, and administrative expenses for the quarter and the year were $67.7 million and $219.9 million respectively, were constant at 19.8% and 19.2% of revenue for the periods.

Earnings from operations for the fourth quarter totaled $89.9 million or 28.9% of revenue as compared to $88.1 million or 29.1% of revenue for the fourth quarter of 2008. Quarterly earnings from operations as provided by the operating divisions were $68.8 million from Government Systems, a 7% decrease; $13 million from Commercial Vision Systems, a 61% increase; and $23.3 million from Thermography, a 3% increase as compared to the fourth quarter of 2008.

Income from operations, corporate expenses were $15.2 million, a 9% decrease as compared to the fourth quarter of 2008. For 2009 full year, earnings from operations were $347.3 million or 30.3% of revenue, an increase of $62.8 million or 22% over 2008.

For the year, earnings from operations, Government Systems was $286.2 million, a 22% increase; Commercial Vision Systems $49.3 million, a 32% increase; and Thermography $72.9 million, an increase of 3% with corporate operating expense of $61.3 million, an increase of 7%.

Interest expense for the quarter and the year totaled $1.1 million and $6.9 million respectively and primarily relates to the interest cost and amortization transaction cost for our convertible notes.

During the quarter, the company earned $1.7 million of other income from a number of sources including $200,000 of currency gains, $400,000 of interest income, and $1.1 million of other investment income as compared to $11.6 million of quarterly income in 2008, which included $10.2 million of currency gains during that period of 2008.

For the full year 2009, other expenses amounted to a nominal $12,000 as currency losses of $3.9 million were offset with interest income of $1.7 million and other investment income of $2.1 million. This compared to 2008 other income of $20.2 million, which included currency gains of $12.9 million and interest income of $7.4 million.

Based on the mix of foreign and domestic income for the full year, the effective tax rate for the quarter was approximately 33.4% and 32.4% for the full year. The increase in the annual rate over the 30.8% reported in 2008 was primarily due to the change in geographic mix of earnings and higher state tax rates.

For the fourth quarter, net earnings were $60.3 million or $0.38 per diluted share as compared to earnings of $65 million or $0.41 per diluted share for the same quarter in 2008. For the full 2009, net earnings were $230.2 million or $1.45 per diluted share, an increase over 2008 net earnings of $200.9 million or $1.28 per diluted share.

We finished the year with cash on hand of $422 million as compared to Q3 quarter ending cash balance of $403.3 million, and a year-end 2008 cash balance of $289.4 million. During the fourth quarter, the cash increase of $18.7 million was primarily due to cash provided from operating activities of $72.3 million, cash generated from stock compensation programs of $12.2 million and cash provided by other investing activities of $4.2 million partially offset by business acquisitions of $60.4 million, capital expenditures of $7.4 million, and the negative impact of cash on the exchange rates of $2.4 million.

For the year, we had an increase in cash of $132.6 million. For 2009, we generated cash from operations of $271.8 million, cash from stock compensation programs of $31.2 million and from other investment of $7.7 million. Partially offsetting these amounts were cash used of $73.6 million for acquisitions, $73.2 million used for repurchase of common stock, capital expenditures of $41.9 million, and repayment of debt of approximately $2 million, and the positive impact of currency exchange rates increased cash by $12.1 million.

This concludes my summary for the fourth quarter and full-year fiscal results. Earl, I will turn the call back to you.

Earl Lewis

Well, thank you Steve, and April, we are now ready to take the first question.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Peter Arment.

Earl Lewis

Peter.

Peter Arment - American Technology Research

Thanks, congratulations on a challenging year. Earl, could you -- you just mentioned, regarding you just bought two buildings or buying two buildings. I guess you put out a release a week or so ago. Can you give us a little highlight there what is going on in terms of that expansion?

Earl Lewis

The seller put out -- I'm sorry Peter. I'm trying to catch up here. The seller put out an announcement on the factory we bought the building. Is that what…

Peter Arment - American Technology Research

I believe that is what it was.

Earl Lewis

And it is just the one in Santa Barbara?

Peter Arment - American Technology Research

Correct.

Earl Lewis

Okay. Yes, clearly right now we occupy I think it is four rental buildings. And this building that we purchased is currently fully leased for about 2 to 3 more years. We will be preparing it over that period of time, because it is actually empty, but being leased by, I think it is DuPont, and they will be paying us. We will gradually move into that building, and move out of the four different buildings that we occupy today.

Peter Arment - American Technology Research

Okay, and then -- okay, so it is not near-term. Then -- and just regarding the Thermography segment, you know the high-performance market has been down all year, as you expected, but when do you expect to see some traction there? Is it all macro related or is there something else going on such as kind of cannibalization?

Earl Lewis

No, it is not cannibalization. I think it is absolutely macro related, and you know, if you plot the delta in our growth rates, quarter-to-quarter, this quarter was by far the -- we were down 4% from a year ago. That is a significant change. So the ramp is clearly in the right direction here. And that has been kind of across-the-board now. So we look to that business to be pretty good next year. First of all it is a wrong comparison, and second it does appear that at least in the beginning of the year so far Thermography is rebounding.

Peter Arment - American Technology Research

That is great to hear, and just one final quick final one, and just about cash deployment, what are your thoughts about for 2010, you mentioned you have been selective in acquisitions, and in the past it seems like you have devoted about 40% of your free cash flow to acquisitions, and the balance for buybacks and other investments. How do we think about for 2010?

Earl Lewis

Well, I don't think there's anything wrong with the formula that we have been kind of working on in the past. So, I would suspect in terms of your, Peter your forecasting, I think that is probably as good a forecast as I could think of right now. As you know, acquisitions can be large, and they can be small and they can kind of come or they can kind of go. And they are very, very hard to predict. But in the general model, I guess I would use what we have done historically.

Peter Arment - American Technology Research

Okay. Thanks very much Earl.

Earl Lewis

Thank you.

Operator

And your next question comes from the line of Tim Quillin.

Earl Lewis

Good morning Tim.

Tim Quillin - Stephens Inc.

Good morning. Congratulations, first of all, to both Steve and Arne on a happy retirement, and I guess congratulations as well to Tony and Andy on new responsibilities. You know, first off on BETSS-C, I understand that maybe you don't have perfect visibility on either that or what the Marine Corps is doing, but the army is asking for, I guess close to $500 million in funding in the government fiscal ‘11 budget for BETSS-C, and then I think it is going to ask for something like $200 million in the pending Afghanistan supplemental appropriations. I mean, do you have a sense of what kind of content there might be, and maybe if you can talk about the rate component of that and any other content you might have as well?

Earl Lewis

Yeah, we will let Bill expand on this, and we do have some visibility, and we are not forecasting big effect of any of that on this year. So with that, Bill why don't you maybe go into some of the detail we do know.

Bill Sundermeier

Sure. Tim, there is actually $302 million in the 2010 OCONUS supplemental that is labeled for BETSS-C. We don't have very good resolution into that as of yet. That should start falling after Memorial Day. So I don't see any near-term spending from that, but that is something that let us say conservatively optimistic about to provide some opportunities for us.

There is also, you mentioned $486 million in the fiscal year 2011 budget, and I have the book in front of me here, there is $24.4 million for CERBERUS, which we are a player in. I realize that there are four components to BETSS-C, of which we play in, major player in two of those, the RAID towers and the Serbish [ph] program. So there is some potential there. The actual RAID line item is empty as it was in fiscal year ‘09. But some new line items have come on from BETSS-C system reset at 72.5 million and initial spares at 38.7 million.

So we are trying to gain more visibility into the portions of that that might be coming our way for both RAID replacements as well as CERBERUS systems. But don't have further detail, and of course that is FY ‘11 funding, which won’t flow until Q4 this year, starting in October. So we remain conservatively optimistic about what is our potential for this year, when it comes to the RAID program.

Tim Quillin - Stephens Inc.

And can you lay out your expectations, and I guess in much detail as you can, for RAID and similar programs in 2010. Is it below $50 million, and anything you get in addition to that is incremental to guidance, and then maybe if you could just talk about the international bookings, you have been seeing, which I think have been exceptionally strong in what you see going forward. Thank you.

Bill Sundermeier

We wouldn't want to speculate. We really haven't forecasted bookings. The best thing I can say is what I have been saying is making we think that there is opportunity there. It might provide upside, and really I have a conservative model this year. On the international side, we have seen a great year in 2010, and I think that that could repeat here in 2011. Our products as we continue to push over internationally, we are growing the organization and as we bring on our uncooled products as well, we could get further attraction internationally.

And also one of the things that was mentioned in the QDR, the Quadrennial review, is certainly the support of our foreign partners, and we see a lot of FMS activity going on for our partners who are, and our allies who are helping us out in the Middle East, and continue to receive that money flowing and should provide great business for us in 2010.

Tim Quillin - Stephens Inc.

Thank you.

Operator

And your next question comes from Jonathan Ho.

Jonathan Ho - William Blair & Company

Good morning guys.

Earl Lewis

Jonathan.

Jonathan Ho - William Blair & Company

Congratulations to all the folks on their future plans. Just wanted to ask a couple of quick questions, first with regard to the late signing of the defense budget, are you seeing a resumption in the contract activity now that it has been signed, and what are some of the sort of potential opportunities that are in the budget that you can point to as maybe opportunities?

Earl Lewis

Well, in the budget as it has been moving forward, we continue to see funding towards our core programs with (inaudible) funding, and certainly ISR funding that is happening. So those are very nice areas that continue to be strong growth potential for us. Really the major thing that we are focused on is the implementation of the Afghanistan surge, and that gets better defined over the next few months. Maybe that will provide more insight to what kind of things they are going to be needing over there from our special forces, as well as the force protection component.

So a lot of things -- there is business coming our way that is normal, but really this Afghan surge, and its definition is paramount to us in the next couple of months.

Jonathan Ho - William Blair & Company

Great, and can you talk a little bit about maybe expectations for backlog for -- I guess in terms of the trend for this year, and whether you expect to maybe end the year flat in terms of the backlog or whether you think it can sustain at current levels?

Earl Lewis

You know, don't want to speculate on that area. We have certainly -- this is going to be bookings dependent on this year, and hope to have a good solid bookings plan. And we have managed this business, we had the luxury for the last couple of years to really have a nice backlog and have the factories full at the beginning of every single quarter. But historically we have managed it with some portion of book-to-bill. And we have a very strong book-to-bill business. So even if backlog does decline, we have great potential within every quarter.

Jonathan Ho - William Blair & Company

Just a quick question for Andy, in terms of maybe some potential opportunities for cost savings and the commercial business as you look forward, can you maybe talk a little bit about what your plans are there?

Andy Teich

Well, Jonathan, I think it is all about volume in the uncooled business across the board as we mentioned in the prepared comments. We're seeing increased volumes for uncooled products, you know, the big driver there is automotive with the two new OEMs on board. Our Q4 bookings in the automotive sector were almost 2x what they were historically, which is what we would expect to see with a couple of new OEMs on board.

So that will pull our detector cost down across the board. We are also taking some actions to consolidate some of the manufacturing activities between CVS and Thermography, most notably in the area of lenses, for example, Arne makes all of its own lenses, and right now or up until now, I have bought all of my lenses externally for the CVS business. We will move those internally. So we will see a pickup there.

As we have done though, we will probably give some of that back to the market to continue to flex the price elasticity. We have seen very good elasticity in both CVS and Thermography businesses, as Arne mentioned with the price reduction on i5, very, very demonstrated price elasticity there. And I'm seeing it in the CVS business on products like the First Mate, our handheld thermal imager at 3k that we have got in the maritime market. We are seeing very, very good pickup rates there.

So, I think that our forecasts for the year are actually to have operating income be in line with where it has been historically.

Jonathan Ho - William Blair & Company

Great. Thank you.

Earl Lewis

(inaudible).

Jonathan Ho - William Blair & Company

Yes.

Earl Lewis

Jonathan, one quick comment. When you look at all of the different programs that Government Systems group is working on, it appears there are very much back-ended this year. Some of the larger programs we are bidding and working on, including RAID it appears, we are not going to have good visibility until Q3 or Q4. And that is a bit difficult for us. So to answer your question, it is crisply as we would like to -- but we can represent deals. There are some programs that are fairly good sized in nature that we will conclude hopefully in Q3 and Q4.

And I think that our problem this year in some ways is that we don't see a lot on the horizon in the short run in Q1 and Q2, and we see quite a bit in Q3 and Q4, including some RAID activity and others. So that is the basis of our thinking in putting together this budget. So, it is a plan based on what we know right now about the timing of various events. The best we can do.

Jonathan Ho - William Blair & Company

Thank you.

Operator

And your next question comes from the line of Brian Ruttenbur.

Brian Ruttenbur - Morgan Keegan & Company

Hi, thank you very much. Can you talk a little bit about the breakdown of the year, how the quarters are going to shake out throughout 2010?

Earl Lewis

In terms of revenue or profits?

Brian Ruttenbur - Morgan Keegan & Company

In terms of revenue and profitability, and if you don't mind, maybe just talk about how it is going to weighted throughout the year, and talk about how much Thermography is versus as a percentage of total revenue?

Earl Lewis

Thermography as a percentage of total revenue next year. I don't have that on the tip of my fingers. Maybe somebody can look it up while we're talking. You know, clearly we expect Q4 to be strong again. It always has been a Thermography business, we expect it will be again this year. I think, as I mentioned to you earlier, our commercial businesses are going to on quarter-over-quarter basis be better each quarter, something over last year.

We don't see any other trends I could point to relative to commercial compared quarter-by-quarter to last year.

Brian Ruttenbur - Morgan Keegan & Company

Maybe -- what I guess I am looking for is on a year-over-year basis, first quarter 2010 versus first quarter 2009, should we see a year-over-year increase of 7% to 10%? Kind of what your revenue guidance is, and it should be like that every single quarter?

Earl Lewis

Oh boy. I’d have to go back and look at it. Right now, I think in the Q1 was not a very strong quarter in that the year will build. But we're talking about pennies one way or the other, not significant changes.

Tony Trunzo

And Brian, we don't give it, it is Tony. As you know, we don't give explicit quarterly guidance. I mean, if things in a given quarter, as it unfolds are significant, we will comment on it. To give you a pretty good idea of how our business unfolds over a year, and where our strong forces are, and it will be similar to that.

Earl Lewis

Looking Q4 over Q4, if we didn't have the currency exchange, we would be announcing our Q4 this year beating Q4 last year, and nothing to do on operations, so to speak. Just too many variables to predict a couple of pennies one way or the other.

Brian Ruttenbur - Morgan Keegan & Company

Okay, and then maybe if I could follow up with R&D and SG&A in the quarter, in the fourth quarter, SG&A was a little bit higher than I was looking for as was R&D, should I be on a going forward basis, like first quarter and other things like that, should we be looking for a drop in fourth quarter levels as it is seasonally.

Earl Lewis

No.

Brian Ruttenbur - Morgan Keegan & Company

So we should be keeping SG&A and R&D at these levels?

Earl Lewis

In absolute terms I would say yes.

Brian Ruttenbur - Morgan Keegan & Company

Okay, but as a percentage it obviously changes.

Earl Lewis

Correct.

Brian Ruttenbur - Morgan Keegan & Company

Okay, and then last question and then I will shut up, I promise.

Earl Lewis

Got you.

Brian Ruttenbur - Morgan Keegan & Company

Can you talk a little bit about gross margin on the year 2010, what you are looking for?

Earl Lewis

A slight reduction over 2009.

Brian Ruttenbur - Morgan Keegan & Company

A slight meaning less than 0.5% or something like that?

Earl Lewis

Slight meaning slight.

Brian Ruttenbur - Morgan Keegan & Company

Okay.

Tony Trunzo

Brian, sorry to be typical about this, but our guidance is always revenue and earnings per share, and I think we're going to stick with that.

Brian Ruttenbur - Morgan Keegan & Company

Okay.

Earl Lewis

The mix again bounces around a point, so a point or two. So, it is kind of hard to give you that number. I mean, granted, we have a number in our model, but we know that has a variability of 1 or 2 points to it.

Brian Ruttenbur - Morgan Keegan & Company

Very good. Had to ask those questions. Thanks a lot.

Earl Lewis

It is all right. We forgive you. April…

Operator

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

Paul Coster - JP Morgan Securities

Yes, thank you. I've got a question for Andy, a question for Bill. Starting with Andy, you said that you show strength globally in the security and surveillance segment for CVS. Can you tell us what kind of customers you're selling this solution into, are they state or government or private, and also what kind of deal size you're seeing typically and is that changing with time?

Andy Teich

So Paul, I wish I had a more specific answer for you on security, but it's really it is everything. We did see the largest unit volume increase in our uncooled sector. So as we continue to push lower price, short to medium-range, uncooled products into the market, we're seeing the unit volumes there grow more significantly than we do on the long-range cooled side, but that said we had a strong quarter in the long-range business, and in terms of deal size, we are seeing everything from $11 million down to you know, sales of $3000.

So they vary. The thing that's growing, you know, I say our border business is continuing along at a pace in which it has historically. If I look at the segment that's really growing, it is industrial users picking up the use of this product. So it's everything from golf courses to information data centers to infrastructure, schools, universities, and that piece picked up pretty strongly in Q4 actually. So we're feeling good about that.

Paul Coster - JP Morgan Securities

What do you think the common thread is there? Is it a growing awareness, better distribution, you know, is there some reasons for the pickup?

Earl Lewis

Yes. You know, we basically, you know, we are pulling on two levers, which are price and awareness. So awareness is certainly growing in this market and helping us and with other players coming into the market, you know, we’ve partnered with Pelco, and there are other big security names that are getting into the business with thermal based products now. So that's driving awareness, and the other issue is the distribution. So we continue quarter after quarter to add to our dealer base, and at this point have more than 350 authorized distribution outlets for FLIR security products worldwide.

Steve Bailey

You know, Paul there is one other thing . I mean, we have significantly increased the size of the product offering, and there is significantly more new products this year than they were last, and I think you know, the combination of all three of those things, two you mentioned awareness and, you know, the need if you will, but also we really do have by far the most complete product line in the world for security cameras all the way from very -- inexpensive to very expensive, and these could be chained together because nothing, you have different requirements for different cameras. Some need to see hundred yards, some need to see a mile.

Paul Coster - JP Morgan Securities

All right. Got it. Well, let me turn to Bill. I've got sort of two-part question, transition to program-of-record status. That seems to take a long time, doesn't it? Why is it taking so long, and then perhaps more importantly, you know, is it a good thing or a bad thing from an investor perspective when these products get wrapped into such a program because the way I understand is the likelihood of you seeing purchases kind of increases, but the visibility into the purchases reduces dramatically, because it becomes a kind of book and ship type business. Am I wrong?

Earl Lewis

Well, take on the program-of-record why does it take so long. You know, I know, I know that we've really been focused on supplying the troops in theater, and that's really been a huge effort for both the Army and the Marine Corps to manage and now that it has been successful over multiple years. Typically that's when something does transition to program-of-record, and it was early this last year it was what portions have been successful of BETSS-C, if you will, that we do want to carry forward as a program-of-record.

So that was really considering down over this last year and finding out what was successful in Iraq, and here what they did want to carry forward from all the different things that we are fielding. So I think that they are on the right track now, and scaling these programs down to the products that they did find very useful, and some of the things that they would get -- is how mobile some platforms were versus others, things like that. So really the surge getting things there, finally to -- weaning it down to the items that they really want for the long run, and reflecting on the program-of-record is a good or bad as an investor.

You know, as things get put on the president's budget, very similar to what we are seeing here for the 2011 budget, you have multiple line items and they continue to get flushed up over years and maintenance programs, think we get a little more visibility into what happens and these programs will get scaled down to be a little bit more specific, versus the many different pieces that we'd see there. So there'll be some more insight and of course, as a program-of-record happens, we'll be more in tune with the program office and have better communications with them on a yearly basis about why they're putting in certain dollars in those budgets. So I think as an investor, it will give us more insight over the long run.

Paul Coster - JP Morgan Securities

Great. Thank you.

Operator

Your next question comes from the line of Jim Ricchiuti.

Earl Lewis

Jim.

Jim Ricchiuti - Needham & Company

Earl, can you say what the government systems business grew at last year, excluding BETSS-C from both '08 and '09?

Earl Lewis

We haven’t broken it out that way. We haven't broken that out. I know that we’ve said before that our core business continues to grow without BETSS-C and RAID, and let's believe that that --

Steve Bailey

You know, gentlemen I don't have the numbers handy but you know, clearly do you look at FLIR, this RAID program in 2010. This is a hole you got to fill and it's a hole, it's pretty, it's big, it's big, not an easy hole to fill. And we think we'll do that with what I would call the normal business of FLIR. That normal business continues to grow, and we think you know, high double digits for our commercial businesses and at least I think double digits for Bill's business. I don't have it right in front of me without rate, and I guess my plea to you all that looks at our company is to try to realize there is a bubble that we're going to go through, and we're trying to get through that as best we can.

Jim Ricchiuti - Needham & Company

Okay, now I understand. Arne, question for you. I wasn't sure if you mentioned some of the geographies in the tomography business. Did you say that Asia-Pacific, I believe you said it grew 35% for the year. What was the growth rate for the quarter?

Andy Teich

Actually the quarter was keeping the same pace as annual figure.

Jim Ricchiuti - Needham & Company

And then the US and Europe, it sounds like you saw a little pickup in the high-end segment of the US business in the quarter. Is that something that's continuing and any sign of some pickup in Europe?

Earl Lewis

I would say in the end of Q4 illustrates is more in US than in Europe, kind of a pickup in general. And in Europe still was exposed to the global assessment situation even in the Q4.

Jim Ricchiuti - Needham & Company

Okay, and then if I may just a question for Andy, as we think about the commercial business in 2010. Can you talk a little bit about the pipeline, the new product pipeline and to what extent you see that being a driver to the growth in the business.

Andy Teich

Yes, Jim it is significant for us. Earl mentioned that earlier on the commentary you know, for example in the securities sector, we launched 21 new products at (inaudible) in the fall last year, and are seeing very good reception from those products. We launched in every single sector that we are in, we launched new products in 2009, and you'll see us launch fewer new products in 2010, because these things tend to come in more like in a 18-month cycles.

But that said, you know, we're at the Miami Boat Show today launching a new product into the maritime segment, another variance of the M-series, and we've had very good success with these handheld products that we launched into the security sector, into the maritime sector, and that we're at the Consumer Electronics Show in January launching a handheld product into the outdoors market. So I think all of those are going to drive growth. I mean, the market likes new products, and these are innovative new products there at low price points. So I think the market is going to respond well to those.

Earl Lewis

The reception of that whole line of handheld products has been unbelievable. I mean, we had some handheld products before, but the new ones have just, we always share unit volume numbers, but the term order of magnitude is appropriate.

Jim Ricchiuti - Needham & Company

Perfect. Okay, thanks very much.

Operator

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

Steve Levenson – Stifel Nicolaus

Thanks. Good morning everybody.

Earl Lewis

Good morning.

Steve Levenson – Stifel Nicolaus

Just want to throw the good wishes to the guys who are changing seats. If you calculated it, could you provide us with the measure we can use for forecasting for the impact of each 5% shift in the dollar-euro exchange rate?

Earl Lewis

We probably could. Whether we would be that accurate in doing that, I don't know, but there is a number of variables including our own mix that would throw that number potentially off.

Steve Bailey

Steve, you know, --

Earl Lewis

We could take a directional shot at it.

Steve Bailey

Yes, I mean, there is a couple of things. First of all, it is not just dollars, euro. We've got a variety of currency pairs, and dollar Kronor is actually a bigger one, because of our manufacturing activities in Sweden, these guys have given me a number. I think we've got a total of like 18 currency pairs that we deal with.

Dollar- euro, kroner-euro, kroner-dollar, sterling-dollar, real-dollar all have measurable effects. So it is not, you know, in our case, the reason we haven't called that out on a frequent basis in our case, they tend to balance each other out at the EBIT line. The below the lines number tends to bounce around a lot, and in Q4 of last year we had a huge gain because there was enormous volatility in the quarter. We are working more aggressively to try to obtain that piece, and I think we probably will.

Steve Levenson – Stifel Nicolaus

Thanks. I may come back to you with a question about it. Now on Directed Perception, well it's small. What sort of edge do you think it gives you. How does it impact the build versus buy decision?

Earl Lewis

Significantly, it means that we're going to build instead of buy.

Steve Levenson – Stifel Nicolaus

Are there any variables [ph] involved here, anything particularly unusual?

Earl Lewis

Well, a couple of things there Steve. You know, the -- to an increasing extent, particularly in the security sector, when we sell a camera, it gets sold on a positioner, and we have been sourcing those positioners from multiple parties. So we've got some that we pull out of China, we've got some that we pull out of the US, we got some of that pulled out of Eastern Europe and there are different capacities and have different levels of fidelity and you know, speed and so forth.

The thing that is nice about Directed Perception, and what attracted us to them is that they have a very broad line of products. The US company, it is in California here, and they cover very small high-fidelity, low-cost pan and tilts all the way up to large, very rugged pan and tilts. It will take some time for us to get those products integrated together with our sensors, but ultimately I think you'll see a very large portion of our positioning business going through that facility.

Steve Levenson – Stifel Nicolaus

Great, thanks. And last item on reset work, how do you think the margins will be relative to your other general one?

Earl Lewis

I would say pretty much in line with our historical records and margins, and the RAID program, margins are slightly decreasing over time but in general as reset comes our way, we will sustain our margins.

Steve Levenson – Stifel Nicolaus

Great, thanks very much.

Operator

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

Michael Ciarmoli - Boenning & Scattergood, Inc.

Hi, good morning guys. Thanks for taking my questions. I guess Bill, I've got two quick ones first, can you disclose the ID/IQ backlog at the end of the year for Government Systems?

Bill Sundermeier

No way.

Earl Lewis

I don’t think we have calculated it yet.

Bill Sundermeier

We have not calculated yet.

Earl Lewis

(inaudible) I guess.

Bill Sundermeier

We'll get back to you.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Okay, and then just about can you give us the kind of level of service related revenues that GS realized in 2009 and maybe what the expectations are for 2010?

Bill Sundermeier

Yes, the service business continues to run about 10% of our base business, and expect that to continue, and perhaps grow as some of those program business continue to…

Earl Lewis

Technically it should grow a little bit when the top line isn't growing at the same rate than the percent increase a little bit.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Okay, that's fair. And then I guess Earl just, you know, after, you know, some belt tightening in 2009, you know, it looks like operating expenses are going to be up about 10% or so in 2010. Can you give us sort of, you know, what's happening there, where the spend is going in terms of, is it more R&D to get some new products, are you ramping up staff?

Earl Lewis

Well, we are going to hire. It's still a little debatable how much we're going to hire, but our plans are more employees, not less by the end of next year -- this year. And in two areas, primarily R&D and sales and marketing.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Okay.

Earl Lewis

Less in G&A.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Okay, and then just about maybe this one is for Bill, last one here, and then I'll jump off. You know, I know on the Analyst Day you talked about penetrating some new markets, you know, missile seekers were one of those areas. Anything happening in that market yet? Any of the R&D spend targeted towards those efforts?

Bill Sundermeier

Certainly R&D spend is in that space, but not actually reporting, and missile seekers yet. We're certainly working on soldier based products and vehicles solutions and those are beginning to get tractions for us.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Okay. Great. Thanks a lot guys.

Earl Lewis

Thank you.

Operator

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

Josephine Millward - Dougherty & Co

Good morning.

Earl Lewis

Congratulations on a new job.

Josephine Millward - Dougherty & Co

Thank you Earl. Bill, you alluded to new opportunities with Homeland Security on their new budget request. Can you give us a sense of how much your Government Business currently comes from the Department of Homeland Security, and where you see the new opportunities are with CBP and the Coast Guard.

Bill Sundermeier

Sure. Don’t have a particular breakout on how much, you know, is coming from DHS, but it's --

Josephine Millward - Dougherty & Co

Like less than 10% or 20% of your government business?

Earl Lewis

We are just thinking over here. I think it’s probably in the 20% range, but we can spend a little time, 10% to 20% range.

Bill Sundermeier

Yes, I'd more.

Josephine Millward - Dougherty & Co

Okay, that's what I thought.

Bill Sundermeier

And you know, as they continue to expand and focus on Homeland Security, you know, what this budget is about, continue to see strengthening of border capabilities, the drugs and addiction capability. So we had a good long-term relationship with CBP and their air force, if you will, and expect that to grow, and expect for more solutions to be added to Coast Guard capabilities. So in all those areas anticipate some growth.

Josephine Millward - Dougherty & Co

Do you anticipate your Homeland Security business to grow faster than your military business in the coming year?

Bill Sundermeier

You said there is any indicator that would grow faster, and with the additional money that is being put in the budget, maybe that will happen you know, as a percentage growth in the business, but I don't expect it to grow any faster than the core military business to be significant.

Josephine Millward - Dougherty & Co

And this might be a question for those Bill and Andy. I understand airports and ports are actively beefing up their perimeter security. Is this a market you guys are targeting and would it fall under your government division or commercial?

Andy Teich

It falls under commercial, and that's the business that we service through a network of integrators. We are absolutely targeting it aggressively and have seen good results. And I would say, if you were to look around the US today there is four or five airports now that have fairly sizable deployments on them, and we've got a very large percentage of those that are using FLIR product today.

Earl Lewis

I think it is a good market for us clearly, and it has been. Infrared makes tremendous sense for those applications and that's been recognized.

Josephine Millward - Dougherty & Co

Great. Thank you very much for that.

Operator

Your next question comes from the line of Mike Lewis.

Mike Lewis - BB&T Capital Markets

Hi, good morning everyone. Since we're over the one hour limit, I will be very brief here. Just Bill, if I could follow-up from Tim's question earlier in the Q, we have $486 million allocated to BETSS-C. We also see in the fiscal year '10 OCO, the addition of a few hundred million for the Afghan search. What about the portion of the BETSS-C program that's allocated to reset and retrofits? How large is that and has that already been incorporated to the numbers discussed?

Bill Sundermeier

The BETSS-C system reset was $72.5 million in the 2011 budget, and the retrofit was about $59.7 million. And I really think that that $59.7 million is going to be used for software upgrades and the inclusion of some integration that's going on with those systems. So kind of looking at the reset portion -- that reset portion could be used for any one of the four or all of the four areas of BETSS-C. So we are looking for more detail there.

Mike Lewis - BB&T Capital Markets

Okay, so it is about $130 million. Let me just shift gears here for one second, if we look at the EO/IR market for helicopters alone, have you assessed what you think FLIR’s market share of that area is at this time, and what is your outlook for the next 12 to 18 months, because helicopters have done significantly better in the budgets than what has been expected, and what is your thought there?

Bill Sundermeier

Yes, exactly and it actually does spell out increasing the helicopter capability in the near term, and I haven't calculated what our market share is but the things that are important for example are, the increase of Black Hawks, and as we mentioned last year, we had a won a program for putting our talents on Black Hawk so that (inaudible) that we're going to continue to see orders in the future to put our systems on the Black Hawk helicopters.

So that part of the business is strong for us, and it is great the helicopter is growing, and if we can try and look at what the total market penetration is on all US international helicopters, but we have very strong international partners with Agusta and Eurocopter, and are quite often on those platforms abroad. That will be a strengthening area for us this year.

Mike Lewis - BB&T Capital Markets

And so where are we going with this, is that we know where we are in the ground systems. With regard to some of the issues on next year’s revenue ramp, but don't you feel that the areas like helicopters, other airborne sensors will be able to accelerate moving into the next 12 to 18 months, and set aside some of these revenue shortfalls that we're going to witness off of programs like RAID and BETSS-C. That's kind what I want to address there.

Earl Lewis

Sure. You're right and those areas are very strong for us, and I do see some growth and we'll see how fast that growth is to counteract the BETSS-C decline or perhaps as the budget gets cleared, what would be much of a decline in BETSS-C we have to see. We've been very concerned about forecasting it.

Mike Lewis - BB&T Capital Markets

Okay, and then just one final question for Steve. Steve, should we be assuming about 20 or 25 basis points on cash interest on the P&L right now?

Steve Bailey

That's probably about right.

Mike Lewis - BB&T Capital Markets

Okay. Thank you sir, and good luck.

Steve Bailey

Thank you.

Operator

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

Earl Lewis

I think this is the last one, by the way. Yes, okay. Michael, go ahead. I'm sorry.

Jim Morgan - Morgan Joseph

Hi guys. It's actually Jim Morgan [ph] for Michael French.

Earl Lewis

Okay.

Jim Morgan - Morgan Joseph

Just given the late passage of fiscal 2010 budget, you guys said that the first quarter was weak, but it might be a less strong than the fourth quarter. Are you expecting to catch up or faster purchasing in the first quarter at all that you could see from the delayed passage of the budget?

Earl Lewis

I don't necessarily see a catch up in Q1. What -- maybe it'll happen in Q2, but the money is flowing slowly. I don't really think all are revolving around what's going to go on as the definition of surge. So you have a lot of things happening all in one time that money flowing in Q2, the 2010 OCO. I don't expect that to flow until Memorial Day. That could really -- we wouldn’t see that until Q3 flowing, and of course the 2011 budget that we have been talking about it won’t flow until you know, end of Q4.

Steve Bailey

It's just a general comment. A lot of focus in the call on US buying. Q4 better than half of our orders for government were international, and it just doesn't appear to me that in 2010 we're going to see a significant reduction in concern by international companies, and so I suspect that that part of our business will see some pretty good growth in this year. And the US government, which seems to be almost harder to project is still hoping in our mind as to what we expect from them this year.

Jim Morgan - Morgan Joseph

Okay, thanks, and as you are looking to fill the BETSS-C gap with growth from your other segments, would you guys be willing to break out the assumptions for BETSS-C in the guidance?

Earl Lewis

No, I don't think so. I think that's just a past, I understand why you are asking. That's a very legitimate question, but I think if we start doing it, we're going to end up doing it for a lot of things, and it's probably not going to do any of us any good by the time we're done.

Jim Morgan - Morgan Joseph

Okay, understood. And the way it is proposed the significant ISR spend increases for the fiscal 2011 budget, where do you guys see opportunities there?

Earl Lewis

As mentioned, in the helicopters, certainly being pushed up more programs mentioned in one of yesterday, and more ISR in the fixed wing aircraft, a little bit more in the UAV capability, and as Tier 2 continues to get defined. So lots of different opportunities in ISR and vehicles as well.

Steve Bailey

Vehicles just keep coming back.

Jim Morgan - Morgan Joseph

Okay, and then given, last question here. What's your use of cash and relating to M&A opportunities for next year-- for this year. More properties seem to be coming up for sale. Are you guys seeing more financing availability, and how do you see that environment?

Earl Lewis

Financing isn't an issue for us. We've got plenty of cash and an unused line of credit.

Steve Bailey

Number of opportunities -- I would suspect there will be more next year, this year rather they were last year. Just thinking out lead here, I think that we'll probably see more.

Operator

And your last question comes from the line of Randy Cuiersen.

Earl Lewis

Randy?

Randy Cuiersen – Barren Capital

Hi guys. I'll make it quick. Thanks for fitting me in. And congratulations Tony and Andy, and good luck for Arne and Steve. Hi on the -- I just want to kind of frame this, you know, on a kind of big picture context, you guys have basically reiterated your flats up, slightly up maybe, government guidance for next year embedded in your revenue guidance, and that implies I guess that the other businesses are going to grow, high teens, 20%-ish. Is that -- I mean is that the simple math that makes sense?

Earl Lewis

Yep.

Randy Cuiersen – Barren Capital

And I just -- in terms of your kind of visibility into the government without getting into program by program, but you know, typically at this time of the year when you're giving guidance, when you look at your historical bookings and you know, what's in kind of the till, so to speak for the next 12 months, are you -- you are kind of, you know, in line with what you've seen historically and is that what gives you so much confidence going forward that you're going to be able to hit those government targets?

Earl Lewis

So much confidence. I wish we had so much confidence when it came to the US Government plans this year. You know, we'd love to be a lot more bullish about it there.

Steve Bailey

You know, as I mentioned we are working on some fairly large programs that we will hear about towards the end of this year, and unfortunately we don't plan on those going out the door much, and that's true with even the you know, the 486 we've been talking about growth of the BETSS-C. That is just not going to go out the door in 2011. So I don't know what else to say on it, except we think the base business will expand. We'll probably end up taking it back probably down little bit this year, and that may or may not happen depending on what the sum of those major programs are -- we talked about booking towards the end of the year. So it's a kind of a tough one for us to forecast in a way that you can just put down on a piece of paper, and say this is look this company is going to be like at the end of the year this year.

Randy Cuiersen – Barren Capital

I guess you kind of answered in a way, because it basically says you're not dependent on a huge program win to make your flat guidance. It's just -- it's more blocking and tackling international sales and some individual programs that you kind of hope to get some traction on.

Earl Lewis

Yes, we have to do a good job filling the hole, and then we've done a good job with this business now for 10 years, and I think we'll do a good job.

Randy Cuiersen – Barren Capital

Great, and just two quick questions on your sales channel. First W.W. Grainger, how's that catalog adding to the Commercial Vision sales and --

Earl Lewis

Good. Andy.

Andy Teich

Well it gets primarily Thermography today and it's doing well. Arne mentioned that we have dropped price on our lowest price products from 3K to 2K, and we've seen more than a 3x increase in unit sales as a result of that. So we're seeing good price elasticity there. As it pertains to CVS, we are actually adding the CVS products to the Grainger catalog as well. So you'll see a pick up there, in fact CVS in general is getting into the catalog space based on Arne's lead in that area in several areas. So I mentioned West Marine, we're also working a deal with (inaudible), and Grainger.

Earl Lewis

We are focused on getting into commercial applications in the marketing selling side in the way like we've never done before, and we're just, you know, we backward integrate this company for years. Now we've got to push forward and more forward, integrate it more and more and more, and you know, that's our long-range strategy and we're moving to do that.

Randy Cuiersen – Barren Capital

You know, I think that's starting to hit home. And I think these, you know, the sales number kind of reflect that and on a similar note on Pelco, it sounds like you may be getting some traction there where it's been kind of a slow relationship to develop on the security side. Is that --

Earl Lewis

Yes, the Pelco business has continued to grow, and we've got others in that stake as well in the security industry, other fairly major brands that are also now selling thermal products with clear course on them.

Randy Cuiersen – Barren Capital

You know, Paul's question earlier was really hit the nail on the head, the awareness issue, and I hate to use the words, but the green issue, because infrared cameras do save energy and they save a lot of it than a lot of different applications and that seems to have a little bit of a bite to it and today is what people thinking frankly.

Earl Lewis

Yes, I mean, to put it in context, one of our uncooled cameras draws about 6 watts of power, and you compare that to a 300 watt or 500 watt light bulb, to light an area for a conventional camera. So the payback basically even though we are "higher price" than conventional cameras is there, and I think some of that analysis is starting to become clear to the market.

Operator

And there are no further questions at this time.

Earl Lewis

Thank you, April. And thank you all for listening to us. We appreciate it as always, and look forward to telling you how we are doing all year this year. Thanks again.

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Source: FLIR Systems, Inc. Q4 2009 Earnings Call Transcript
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