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Executives

Andrew C. Teich - President of Commercial Systems

Anthony L. Trunzo - Chief Financial Officer and Senior Vice President of Finance

Earl R. Lewis - Chairman, Chief Executive Officer and President

William W. Davis - Senior Vice President, Secretary and General Counsel

Sean Jordan -

Kevin Tucker -

Analysts

Noah Poponak - Goldman Sachs Group Inc., Research Division

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Jonathan Ho - William Blair & Company L.L.C., Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

Jeremy W. Devaney - BB&T Capital Markets, Research Division

FLIR Systems (FLIR) Q3 2011 Earnings Call October 20, 2011 11:00 AM ET

Operator

Good morning. My name is Tanisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the FLIR Systems Quarter 3 2011 Results Conference Call. [Operator Instructions] I will now turn the conference over to Wit Davis, Senior Vice President, General Counsel and Secretary. Thank you, sir. You may begin your conference.

William W. 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. Words such as expects, anticipates, believes, intends, 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 R. Lewis

Thank you, Wit, and thank you, everyone, for joining us this morning. In our third quarter, we introduced many new exciting products. We continued the integration of Raymarine and ICx. We reduced our cost structure. We issued our first investment-grade bonds, repurchased 4 million shares of our stock at an average price of a little over $25, made good progress on reducing our tax rate and acquired a promising new technology with Aerius Photonics.

Overall financial performance in the third quarter was strong. We recorded our highest gross margin in the year, delivered a record number of units, built a healthy order backlog. Our Government Systems division had very good order activity during the third quarter and had a strong book to bill. The Surveillance segment earned its highest operating margins since last year, and our Detection and Integrated Systems segments each turned profitable and increased their backlog. Revenue in our Thermal Vision and Thermal Measurement segments grew by more than 20% over the third quarter of last year.

I'm going to let Andy now talk about the details of the Commercial business, and then we'll go to Government Systems.

Andrew C. Teich

Thanks, Earl. The Commercial Systems division posted revenue growth of 16% over third quarter 2010 revenue of Thermography, CVS and Raymarine combined. The TVM segment grew revenue at 22% over the prior year, led by the strong growth in Thermography products. Raymarine had a top line decline of 4% during the third quarter and seasonally flows quarter and against a difficult comparison to the third quarter of 2010, where a backlog of shipments went out after we saw some significant supply chain issues shortly after our acquisition of the company.

On a bookings dollars basis, the TVM segment group saw a 10% increase over the third quarter of 2010. Our Thermography camera order book grew at nearly 20% when compared to third quarter of 2010, bolstered by a 75% increase in the high-volume camera bookings and over 35% increase in high-end R&D camera bookings. These gains were particularly offset by a year-over-year decrease in security products bookings. While our units booked in security grew at over 80%, dollars booked declined over 25% as the majority of demand during the quarter was for uncooled cameras versus last year's order book, which had a large amount of cool products largely from an international board of security order we received in the third quarter of 2010.

Our Cores and Components business saw over 40% growth in the number of units booked. But like our Security business, we saw a move toward more uncooled systems, which pushed the dollars booked to nearly flat compared to the third quarter of 2010.

FLIR branded maritime product bookings dollars grew over 20% year-over-year, as we saw a significant demand for handheld cameras and continued strength in our Voyager systems. The Americas region was particularly strong for our Maritime business, posting 54% bookings dollars growth over the third quarter of 2010.

While still a small part of the overall TVM business, Personal Vision Systems bookings grew well over 200% compared to last year. This growth was driven by the recent availability of products targeted towards the consumer segment, including our Scout PS and First Mate MS line of handheld cameras, which are priced starting at just under $2,000 and available at a growing number of online, and brick-and-mortar retailers.

Turning now to Raymarine. We saw a third quarter bookings dollars growth of 15% versus the third quarter of last year, an encouraging sign as we began taking orders for our new line of multifunction displays and instruments in the fourth quarter. These products are already garnering a lot of attention in the recreational boating world and have won several new product awards and are receiving interest from both OEMs and end users in the industry. Consumers, distributors and OEMs are drawn to these new products' industrial design, ease of use, processing speed and advanced features such as wireless connectivity to the Apple iOS devices, GPS functionality and available Bluetooth-enabled steering wheel mounted remote control. In fact, as of last week, we have over 2,000 units on order for our new e7 MFD.

In the maritime thermal camera space, bookings dollars across the whole company have grown at over 55% year-to-date versus the first 9 months of 2010. This compares favorably to the approximately 30% annual growth we were seeing with the FLIR Maritime business prior to the adding of the Raymarine channel.

We made progress during the quarter reducing the backlog that have been growing for our thermography cameras. The strong demand we saw for our new E-Series and P-Series cameras created the demand book that exceeded our expectations and caused a larger backlog than we feel is necessary in this business. The sourcing and production improvements that we made over the past few months are paying off as that backlog declined $3 million from the end of Q2 after having grown in each of the first 2 quarters of this year.

Also during the third quarter, we strengthened our Security & Surveillance business by adding a significant video analytics and IP video storage capabilities to our line of thermal security cameras. Through our partnership with VideoIQ, we've created the thermal analytics processor, the most effective and affordable off-the-shelf solution for IP-based parameter security system. This solution was designed for plug-and-play functionality for existing network infrastructures and is expected to advance the penetration of our F- and SR-Series cameras.

In the fourth quarter, we expect to begin shipments on our new Quark thermal core. There has been significant commercial and government interest in this product, which will revolutionize the key metrics that are driving the thermal camera industry, size, weight, power and costs.

We continue to see growing demand across many of our current markets as we bring new more affordable and more efficient cameras and technologies to the marketplace. Our efforts to enter new markets and bring in new customers has led us to believe the runway for the Commercial business is extending, and the growing uses and accessibility of infrared imaging makes us believe that our volumes will continue to accelerate.

That concludes my comments and summary of the Commercial Systems division. I'll now pass the line over to Sean Jordan, who is the VP of Finance for our Government Systems division, and is filling in for Bill Sundermeier while he's away at the Advanced Management Program at Harvard. Sean?

Sean Jordan

Thanks, Andy. The Government Systems division grew revenue during the third quarter 7% over the third quarter of 2010. We saw a strong bookings activity as we received orders from many of the offices and programs who experienced procurement delays over the past few quarters. We are seeing increased interest for our solutions across many governments and agencies with our competitive advantage being our ability to provide highly capable, rapidly obtainable products with prices and customer service that are unequaled by our competition.

We feel that our position within the U.S. government market has strengthened, as we continue to market our commercial operating model to a traditional government procurement infrastructure.

With that said, we are navigating through a U.S. defense budget. Environment continues to challenge our customer's decision -- decision-making. Global uncertainty and the current pressures led us to reevaluate our near-term view of the market. This process caused us to make changes to bring our cost base into alignment with current revenue. These initiatives are reflected in Government Systems' results for the third quarter and were one of the factors that helped increase Government Systems' operating margin nearly 9 percentage points to 34%, excluding onetime expenses over the second quarter of this year.

For the third quarter, Government Systems finished with a backlog of $374 million, up $55 million from the end of Q2. The Surveillance segment saw its highest order total for a quarter since Q3 2008 when our rate force protection tower systems activity was significant. Notably, we received $30 million orders under our new $52 million contract with the U.S. Navy to provide our Star SAFIRE HD family of gimbal systems for their persistent ground surveillance system initiatives. This win is significant in that it bolsters our presence in force protection, gave us a presence alongside a long-standing incumbent competitor and justifies our core belief that commercial model will win over the long term with government agencies.

Other major drivers of the surveillance order book this quarter were a $20 million order for the U.S. Army to -- opted its MEDEVAC helicopters with the thermal systems, a $4 million order for our handheld Recon thermal systems for the U.S. Department of Homeland Security, customs and border protection, a $6 million order for systems that support drug interdiction activities from a South American country, and a $6 million in-ship board systems to a European country.

During the quarter, we also won some very important program, IDIQ awards, which as a reminder, do not hit our backlog into an actual funded order is received, such as a $25 million award from the U.S. Special Operations Command for a block upgrade of fielded systems, 2 awards totaling $48 million for soldier-level firearm mounted night vision devices and a highly strategic win to equip unmanned aircraft systems with our latest gimbal technology.

We have made great strides in developing and marketing products for the UAV market, and this quarter was no exception. During the quarter, we showcased our latest Star SAFIRE 380-HD gimbal system on a test fight for a key U.S. Navy integrated situational awareness initiative and also completed several successful test fights for our smaller ultralightweight cobalt gimbal systems.

Our detection segment ended the third quarter with a $35 million increase in back -- with $35 million in backlog an increase of $13 million over the last quarter. We booked some important orders during the quarter, including an order for our new Stride radiation detection systems to an international airport customer and multiple international orders for our handheld radiation and explosive detectors.

Our sales pipeline in the U.S. has grown and have some highly attractive opportunities in our existing, as well as new markets. Additionally, we're beginning to see the benefits of integrated detection products into the broader FLIR international sales channel and are not done investing in our international business development teams and distributors.

Also notable during the quarter was Detection's operating margin, which came in at 9% or 14% if you exclude their share of restructuring charges. Detection benefited from a license sales for a Cohesion command and control integration software and the lack of inventory write-off charges that were related to our acquisition of ICx. We are continuing to see improvement in gross margins for many of our detection products. Integrated Systems finished the third quarter with a backlog of $45 million, down from $46 million at the end of the second quarter of this year.

In Q3, we saw a continued strike in the combat outpost surveillance and force protection systems, or COSFPS, program as well as the J2 development program. Both these programs appear to be growing priority in the U.S. government, and we're seeing continued order flow as result.

Internationally, we received a contract to revive our wide-area surveillance solution for the Doha International Airport. This award illustrates our belief that demand for airport surveillance systems is gaining momentum across the globe, and we feel we are positioned very well to take advantage of these opportunities as they arise. Additionally, we continue to expand our offerings in the security systems integration space, having expanded our solution set with the addition of integrated underwater sonar and GPS personal tracking to our suite.

The third quarter is historically a strong quarter for Government Systems from a bookings perspective, given it coincides with the U.S. government's fiscal year end. This year, however success appears to be driven less by the typical end-of-year spending push and more by the previous procurement delays coming to fruition. But we remain cautious regarding U.S. government procurement environment as budgetary uncertainty will continue into 2012. The order activity we saw in Q3 gives us confidence that our value proposition is intact, and when funding is available, our customers prefer our business model and products. Our international markets have faced fiscal and social challenges as well, particularly in the Middle East. But we believe that the order delays that have continued to the third quarter will soon cease. Our long-term view of our international markets remains unchanged, given the tremendous amount of Security & Surveillance necessary to protect orders, assets and most importantly, people in an asymmetric threat environment.

I will now pass the call over to our CFO, Tony Trunzo.

Anthony L. Trunzo

Thank you, Sean. Third quarter consolidated revenue is $371 million, up 12% from the third quarter of 2010. Excluding ICx Technologies, which we acquired on the first day of the fourth quarter of 2010, third quarter revenue was $331 million, essentially unchanged from Q3 of 2010.

Government Systems division revenue increased 7% to $175 million. Excluding ICx, third quarter Government Systems revenue declined by 17% compared to last year. Surveillance segment revenue in Q3 was $140 million. Protection segment revenue was $21.2 million, and Integrated Systems segment revenue was $13.9 million.

Commercial Systems revenue increased by 16% in Q3 to $196 million. The Thermal Vision and Measurement segment posted revenue of $161 million, an increase of 22% from last year, while Raymarine revenue of $35.4 million was 4% below the third quarter of last year. International revenue was 45% of the Q3 total, the same proportion as last year, while sales to the U.S. government represented 32% of total revenue in Q3 compared to 36% of revenue in the third quarter of last year.

Our consolidated gross margin was 54.4% for the quarter compared with 54.8% last Q3. Excluding ICx, consolidated gross margin was 55.7%, 1 percentage point better than the third quarter of 2010. Compared to Q2 of this year, gross margin improved by 2 percentage points in part due to the elimination of the flow-through of inventory write-offs associated with the ICx acquisition, which had negatively impacted the previous 3 quarters.

Commercial Systems operating income in the third quarter of 2011 was $44.3 million, up 9% compared with the prior year quarter. Thermal Vision and Measurement operating income was $47.2 million, up 18% from last year, while Raymarine posted an operating loss of $2.8 million compared with the operating income of $1 million last Q3. Included in the Raymarine operating loss this quarter was $900,000 in pretax costs associated with severance related to a restructuring of Raymarine's European sales operations, which will reduce cost materially going forward.

Q3 Government Systems operating income was $54.2 million, a decrease of 13% compared with the third quarter of 2010. Excluding $4.4 million in pretax cost to reduce staff and streamline operation, Government Systems operating income was $58.6 million this quarter.

The Surveillance segment reported operating income of $51.9 million in Q3. Excluding severance costs, Surveillance operating income was $55.2 million, and the operating margin was 39.5%, 1.4 percentage points better than Q3 of last year. Detection segment operating profit was $2 million or $3.1 million, excluding onetime items compared with a loss of $3 million in the second quarter. Integrated Systems produced operating income of $300,000 versus $200,000 last quarter.

Currency fluctuations during Q3 had a measurable effect on both revenue and expenses, especially in our Commercial business. TVM revenue growth in constant currency terms was 18%, while Raymarine revenue decreased 9% in constant currency.

Cost of goods sold was 1.6% higher, and operating expenses were 2.8% higher across the company due to currency effects. Earnings before interest, taxes, depreciation and amortization in the quarter were $101.2 million compared with $99.8 million in the third quarter of 2010. Excluding the onetime items, EBITDA for the quarter was $106.5 million, an increase of 7% compared to last year.

Third quarter earnings were $0.40 per diluted share and $0.43 per share, excluding the severance items. The effective tax rate for the quarter was 23.3% compared with 27.2% in the third quarter of last year. The tax rate in the quarter was reduced by 4 percentage points due to the net effect of onetime discrete items related to the release of tax reserves and certain other U.S. tax items. For the full year, we currently expect our tax rate, including these items, to be in the range of 28% to 30%.

Taking into account the net effect of onetime tax reserve release and the severance costs we've reported, Q3 earnings per share were $0.40. Cash flow from operations for the quarter was $45.9 million compared to $85.1 million last year and was negatively impacted by higher inventory and certain income and VAT tax items. Significant uses of cash during the quarter included $9.5 million in dividend, $100.6 million for the repurchase of stock, $24.8 million for acquisitions, net of cash acquired and $12.4 million in capital expenditures.

During the third quarter, we repurchased 4 million shares of our common stock at an average price of $25.15 per share, bringing our total repurchases for the year to 4,713,000 shares. We anticipate continued share repurchase activity albeit at a slower rate than in the third quarter. Year-to-date share repurchases reduced the average share count in Q3 by 1.2 million shares and did not affect reported earnings per share.

Also during the quarter, we successfully issued $250 million face value of 5-year senior unsecured notes at a very attractive interest rate of 3.75%. These notes, which were rated BBB- by Standard & Poor's and Baa3 by Moody's, are another step in our strategy to optimize our capital structure, improve return on equity and focus on creating value for our shareholders. The interest expense associated with these notes in Q3 was $1.1 million and will be approximately $2.5 million per quarter going forward.

That concludes my comments. Let me now turn the call back over to Earl.

Earl R. Lewis

Thanks, everyone. Third quarter was a solid quarter, good execution, continued progress. Commercial Systems continues to bring valuable thermal imaging solutions to the world through strong product design, cost-efficient manufacturing, expansion distribution and shrinking prices. The success of the Commercial Systems division has had an executed on these areas has given us a broad-based growth across many markets that we feel are still in very early stages of adoption. We continue to invest in product development, marketing and branding to bring our valuable solutions to an even broader base of customers. We are encouraged by the results in Government Systems this quarter and believe there's a lot of room for continued growth given the uniqueness of our model. We are cautiously optimistic that order activity will continue to show improvement during the next few quarters.

As we look into the final quarter of the year, we expect the global government procurement environment to continue to affect orders in our Government Systems division. Our commercial markets remained robust and are trending as expected. But we're also cautious about a possible economic slowdown. Therefore, we're reducing our revenue forecast by the year by $50 million to $1.55 billion to $1.6 billion and maintaining our full year outlook for earnings per share of $1.50 to $1.55, excluding the impact of the Q2 legal settlement, its related expenses and the onetime charges this quarter.

Over the longer term, we anticipate increased demand from all sides of our business, as we continue to introduce new products albeit lower prices. With that, we'll take questions from you. Thank you.

William W. Davis

Operator, I think we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Michael Lewis of Lazard Capital Markets.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Earl, I was wondering if -- you had very good margin in the quarter, 23% in Q3, but can we or should we expect to see this level to progress higher over the next few quarters? And also now that commercial is obviously ramping up more significantly, what type of seasonality should we expect in the margin profile from this area over the next year?

Earl R. Lewis

Okay. Let me try the second one first because on the first, I'm not sure what I'm going to say yet. The -- there is some seasonality, of course. Our Thermography business in CVS is always the strongest in Q4. It has been for 10, 12 years now. Raymarine, on the other hand, has always had very, very weak Q3 and a little bit stronger Q4 and very strong Q1 and Q2. So it is very seasonal. Perhaps we didn't point that out enough in our forecast last quarter. But with that said, that's about it. I don't see any other real seasonality in the Commercial business other than those 2 events. We were happy with the 23%. I would like to maintain that. I don't think we're going to increase it significantly over the next year. Do we think we can improve it? Yes, we'll always work to improve it, but I would not forecast at this point being 25% or 26%.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Okay, that's helpful. And then just one quick follow-up with Tony. Tony, could you go back over what your therm EBIT was in the quarter in dollars?

Anthony L. Trunzo

Sure. Thermography operating income was -- bear with me as I get back to that part of my script. You were asking for Thermography, Michael? No, I'm sorry. I have Thermal Vision and Measurement. We don't -- Thermography isn't a segment that we report anywhere.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

I meant TVM.

Anthony L. Trunzo

TVM? Let's see. Yes, TVM operating income was $47.2 million, up 18% from last year.

Operator

Your next question is from Jeremy Devaney of the BB&T Capital Markets.

Jeremy W. Devaney - BB&T Capital Markets, Research Division

Earl, can you comment on how you're seeing the EMEA business right now? There's still a lot of instability over there. Have you seen any uptick from the lows you saw earlier this year?

Earl R. Lewis

We saw an uptick and a downtick, I think is the best way to say it. Q3 wasn't as strong as we thought it would be. And it was getting better, Q1 and Q2 from last -- from the previous Q1 to Q2, but Q3 was down.

Jeremy W. Devaney - BB&T Capital Markets, Research Division

All right, fair enough. And then looking at the public safety market, you know with the recent headwinds we've seen in the Government Systems business on the funding side, have you seen any opportunities to expand your footprint within the public safety segment?

Earl R. Lewis

Oh, yes. Yes. That's 1/2 hour dissertation, but a lot of the ICx products, for example, will give us a great deal of strength there. And we are working on some programs that we've learned a long time ago. They're not announced but yes, there's some good potential there for growth.

Jeremy W. Devaney - BB&T Capital Markets, Research Division

All right. And if I can sneak one last one in. Recently, there's been discussions about AeroVironment switching over the Raven to a gimbal system. I know you have the core on that platform right now. Is there any chance that you're going to be able to remain the IR provider on the Raven system?

Earl R. Lewis

Yes. Go ahead, Andy, do you want to comment?

Andrew C. Teich

,

Yes. So Jeremy, we were to -- what you're referring to is the Raven B-upgrade, and we're actually on that from 2 perspectives because that gimbal has a thermal camera, a visual camera and a laser pointer. And we provide and have won the thermal camera contract with QUARK. And the laser pointer comes from Aerius Photonics, who we just acquired. So we're feeling good about that program.

Operator

Your next question is from Noah Poponak of Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

On Raymarine, can you talk about the broader boat market? And I know it's seasonal, but it was also down on a year-over-year, which is apples-to-apples basis. Can you just talk about how that broader market is feeling in the context of this choppier macro that we're all experiencing and what you see going forward?

Earl R. Lewis

It's simple that it's bad. I mean, there's not much. I mean that the new boat market, I've seen numbers same as down from last year, which was an awful year. So that's a suffering environment, there's no question. The real question is will it get better? Yes. But it's pretty hard to say when right now. The correlations when we bought Raymarine were between housing and boating. Housing market goes up, boating will go up. When the housing market goes down, boating will go down and guess which way the housing market's been going. So I don't see a lot of rule now. With that said, this quarter should have been our worst quarter from a seasonally adjusted, if you will, basis by far. So we expect we'll get better, and we've got some great new products coming out. We've invested an awful lot of money. And you saw that in the results that we're putting a lot more money into Raymarine now to develop out a number of their products that we think we'll have a very good market acceptance. So we're investing in it, and we're also disappointed by the market.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. Question on capital deployment. I think you guys had talked earlier in the year about a 0.5 million to 1 million share a quarter clip, did 4 million in the quarter -- can you talk about why you did that other than the obvious, and how you see yourself deploying capital over the next 12 months?

Earl R. Lewis

You get it, Noah. I mean, it's the obvious that you will. The price was at a price where we just couldn't resist ourselves. And we believe in the company, and being able to buy shares at $25 a share with the cost of what would that cost and with the capital we had available just was the right thing to do.

Anthony L. Trunzo

And Noah we had -- the strategy on share repurchase, you're right, has been to, and we articulated, sort of a target of 0.5 million shares to 1 million shares a quarter. But we'd also said that in the event that the stock took a negative turn, we would avail ourselves of the fact that we had a larger repurchase authorization than was going to be used by that 0.5 million shares to 1 million shares a quarter, and that's exactly what happened in Q3.

Earl R. Lewis

This has been a 10-year pattern with us frankly, Noah. When we see it as what we think is a bargain-based price, then we will put a lot of money into it.

Noah Poponak - Goldman Sachs Group Inc., Research Division

And thoughts on the most likely strategy over the next 12 months or so, given where the stock is and given what you see in the M&A market?

Earl R. Lewis

You mean the trade-off between both? Our strategy is the same. We will try to balance dividends with M&A, with share buyback. And we think that, that's the reasonable way to run the business to have some kind of balance. When one of those things gets way out of balance, we'll change that mix. To forecast what's going to happen in the M&A market is pretty hard, even to forecast what's going to happen to stock market is pretty hard. But structurally, our strategy is the same. We will try, given normal environment, to balance those 3 things.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Yes, I guess inherent to my question is the degree to which you see or do not see attractively priced attractive assets in the M&A market right now when you're looking.

Earl R. Lewis

Yes, that's always a good question. I'd say we don't see a lot of attractively priced M&A right now.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. And then just one quick one on the government side. If I am doing the math correctly, the adjusted surveillance margin is almost 40% a little under. Can you talk about the sustainability of that type of margin there?

Earl R. Lewis

It's a function of the orders. We can run that business with those kinds of margins as long as our orders hold up. They did very well, as you know, in Q3. We have good hopes for Q4, and we're on some programs that could have a very good payback in 2013, 2014. In between, there's a lot of uncertainty, I have to admit.

Anthony L. Trunzo

And Noah, the -- from an OpEx standpoint, that business did an absolutely outstanding job of managing costs and took $4 million to $5 million per quarter out of its structure, its cost structure this quarter. So going forward, the spending, the operating spending there is going to be lower, and that will help margins. As Earl said, the order book and, to a certain extent, mix is going to affect the gross margin in that business. And that's where it's -- the focus is going to be if we're going to be able to maintain those kinds of margins.

Earl R. Lewis

I have to comment, they did, as Tony mentioned, a terrific job of reacting to what happened to us in Q2. They immediately reacted to it. They adjusted their business model. They adjusted their spending and produced a fantastic result.

Operator

[Operator Instructions] Your next question is from Peter Skibitski of SunTrust.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

On the revenue guidance reduction, was that a combination of Raymarine and surveillance or kind of across the business?

Earl R. Lewis

I'd say it's across the business. We look at it every quarter. We look at what we think we're going to book, what we think we're going to ship and make a -- now, I will have to admit, I would rather have a little less revenue and a little more backlog going into Q1 next year in our Government business. We know we run our businesses much more efficiently when we do have that backlog. So we probably could have pushed out more if we really, really wanted to. But I don't think that would be in the shareholders' interests or employees' interest or anyone else's interest.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Well, that kind of follows into my next question. Government backlog was up pretty nicely. You're on 17% or so. So I mean, was it you were just kind of hoarding backlog essentially? Or was it the case that you just booked orders really late in the quarter and didn't have time to ship them?

Earl R. Lewis

Let me back up for a second. With a small backlog in Government Systems, we are very inefficient. We proved that in Q2 to a certain extent in terms of being able to forecast the output, in terms of being able to run the business. Building a backlog there is very important to us and pays off over the long run. So you pointed out rightly so. We probably could push very hard and take more down in Q4. It wouldn't be good for next year. So that's the decision we made.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

Got it.

Earl R. Lewis

And also we are a little concerned about what the economy is going to do. As somebody noted earlier, EMEA was not very strong. There's all kinds of questions as to what's going to happen that seems to me in the economy. And so our Commercial business, we decided to be a little conservative, and I think in there for Q4, our book and bill.

Peter J. Skibitski - SunTrust Robinson Humphrey, Inc., Research Division

I hear you. I hear you. Okay. Well, I just want to get an update also on sort of the Middle East, more so on the Government side, I guess, in terms of the delays you were experiencing from Saudi, from UAE, in Pakistan in particular as well. Has there been any kind of let up there in those delays or like still kind of status quo?

Earl R. Lewis

Well, there's always been delays in that part of the world, but Pakistan particularly has been difficult because the U.S. government don't allow us to ship there. So we have orders that we could ship, but they're just going to sit until we are allowed to. As far as the rest of the Middle East, orders there have always been difficult to forecast, and I don't think that's going to change, really particularly although we do have some good business that we expect we could close by the end of the year.

Operator

Your next question is from Jonathan Ho of William Blair.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Just to start out with the Cores and Components business. A little bit surprised to see that flat this quarter in terms of revenue. Can you maybe talk about what's happening in the competitive landscape in that area and also how QUARK could potentially, I guess, impact the results going forward?

Earl R. Lewis

Yes, sure. Andy?

Andrew C. Teich

Jonathan, this is Andy. The issue there is all about mix. So in this quarter, the orders actually for uncooled products were up in the cores segment. And in fact, I think we have a new high watermark about 20,000 system of cameras in total that were booked in CVS. So that -- from that metric, things went very well. We just had a mix issue on the cooled side and the consumers of cooled camera cores are driven by government business so that tended to be down a little bit. To your second question with regard to competition, we feel very good about our competitive position. We continue to win major platforms for the Cores and Components business. We spoke about Raven-B earlier as one example of that. And we believe, at this point, that we've got a fairly significant lead on the competition from a swap C standpoint, size, weight, power and cost standpoint. And that's manifesting itself in terms of the level of interest we have in QUARK. And the orders that we're seeing will be orders from there.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Got it. And can you maybe talk a little bit about the bookings activity that you're expecting in the fourth quarter? Was there sort of a pull-through into the third quarter as things kind of loosened up in terms of the contracting environment for GS? Or should we -- or is it just kind of too early to tell given the resolution?

Andrew C. Teich

Well, actually, our order slowed down fairly significantly at the end of Q3, mostly driven by what Earl was speaking about earlier. We had a fairly strong slowdown in both EMEA and APAC at the end of Q3. I don't expect at this point that, that's going to sustain, so we expect that the Q4 should be up as it is seasonally. And at this point, I don't have any particular concerns about Q4 executing in an inconsistent manner with our expectations.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Got it. And with regards -- if I can sneak one more in on the Government Systems side. Can you guys maybe talk a little bit about the run rate and where you think this business will kind of flatten out as we look at the, I guess, on a go-forward basis in terms of the revenue, and also where you think backlog could potentially be as we exit the year?

Earl R. Lewis

We're hoping it will be right about where it is now as we exit the year. That's our thinking. One-for-one in Q4 is what we're targeting. Per my previous comment, we'd like to keep a little backlog in GS just getting around it better that way. As far as next year, we'll have to do a lot of work before we can kind of tell you what we think is going to happen next year. But I certainly wouldn't put a rose-colored glasses on, so to speak, relative to the Government business in 2012. We'll concentrate on making sure our cost are in good shape and running the business profitably next year.

Operator

Your next question is from Jim Ricchiuti of Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

Andy, I just wanted to follow up on that comment. When you were talking about the orders slowing down toward the end of Q3, are you referring to the TVM orders in the EMEA region and Asia?

Earl R. Lewis

Exactly. Yes.

James Ricchiuti - Needham & Company, LLC, Research Division

And in terms of you think that could turn around, what are you basing that on? Just given the macro concerns out there, are you seeing something, hearing something from your channel?

Earl R. Lewis

So far, I think we've been pretty good so far this quarter. The comment was right at the end of Q3, we did see a slowdown. But that doesn't seem to be continuing, make sure we make that comment. I hope, we hope that was a blip. Should be the case, we'd have a strong Q4.

James Ricchiuti - Needham & Company, LLC, Research Division

So in terms of just the mix of revenues in Q4 between Commercial and Government Systems, it sounds like we could see it tilt a little bit more toward Commercial, which is normally the pattern you might expect?

Earl R. Lewis

Absolutely. Yes, absolutely.

Operator

Our next question is from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

I wonder if you could just shed a little bit more light on the UAV comments. Perhaps what percentage of the Government Systems surveillance business originates in UAV-related sales to date? And what percentage do you expect in the future? And what kind of growth rate around that segment? Is it, in other words, material?

Earl R. Lewis

Yes, we don't have that for you, today, Paul. Is it material? Yes. We also, in commercial, sell to the UAV market. For the discussions we're having a little -- we'll allowing about AeroVironment. In Government Systems, we are working on some of the larger programs. We hope that will be very material I'd say, as of now, for Government Systems, it's not material. Does it afford a good opportunity for us? Yes, we believe it does. And I also think it affords a very good opportunity for our commercial group. There's some other programs there that could be interesting. We can only have that segment as a segment at this point, Paul.

Paul Coster - JP Morgan Chase & Co, Research Division

Okay, got it. And then on the international side outside of Middle East, do you see large opportunities elsewhere? And can you provide any sort of color on magnitude, timeline and region for that matter?

Earl R. Lewis

Do I see any large opportunities? $50 million to $100 million, no, not right now.

Anthony L. Trunzo

Paul, I mean, if you look at our business strategy and you look at what's unfolding, ICx has a relatively small footprint internationally compared with what the rest of our GS business does. So there is significant upside opportunity there, we believe. Really, in the cooperative world, I'd say worldwide. You look at Andy's business, Asia Pacific has great opportunities. Latin America has great opportunities. There's -- We're a business that's 45% international today. And if you had us guess on it, I think that we would expect that, that percentage will be higher a few years from now than it is today. So I think if your question was international or sort of individual, big sort of block orders.

Earl R. Lewis

That's what I assumed it was.

Andrew C. Teich

That's -- then Earl's obviously -- he made that comment. But in terms of the global opportunity for our business, that growth ought to be even faster than what we're going to see in the U.S.

Operator

Your next question is from the line of Michael Ciarmoli of KeyBanc.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Earl, maybe if I could just follow up on Michael Lewis' first question on the margins. I guess 23% at the corporate level this quarter, removing the charges about 24%. Did I hear you correct saying you don't think that could really trend upwards towards a 25% to 26% level going forward?

Earl R. Lewis

I wouldn't forecast 26% and 25% right now.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Where is -- so you've got -- you've taken cost out of the Government business. Presumably, you're still working on expanding the ICx margins and Raymarine, what dynamic is happening that's not going to create some further expansion there? Maybe not yet, I mean, will there be some expansion and maybe not dramatic expansion?

Earl R. Lewis

No, the issue for me anyway right now is uncertainty about the order side. It all boils down to that.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

And is that presumably all in the Government business then?

Earl R. Lewis

Yes.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay. Okay. And then, second question just on the Government business, maybe just more of a positioning. It sounds like you guys are confident that your positioning with U.S. government customers is improving. But then, right to your point, you're concerned about the order flow. Are you just seeing -- are you feeling you're winning sort of maybe prototype business or some customer approval, but you're just not sure of when the orders would translate? Just help me with that.

Earl R. Lewis

Actually, we did very, very well in Q3. I mean, this is a concern not about our ability to produce good products to reduce our cost or anything else. It's a concern about what they're going to really spend on military and government in the next year. And that concern comes from the whole political environment that we're seeing. I mean, the automatic cut of huge amounts of billions of dollars out of the military programs of these senators and congressmen can't get together. We'd be foolish to build programs right or plans right now based on an expanding market. Even though when you look at our products, when you look at our penetration, when you look at the things we're bidding, they're all very positive. My concern, don't get me wrong, is I'm just not sure these people are going to be able to coordinate a reasonable approach to our economy.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Got you. That makes sense.

Earl R. Lewis

Macro concern, not a FLIR concern.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Are you -- can you afford...

Earl R. Lewis

And therefore, we're going to run FLIR as if we're cautious.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Got you. Are you concerned at all that even if changes occur, I mean, it seems like there's going to be a lot of force structure cuts. You guys have a lot of smaller soldier-level systems. Does that maybe even apply some more natural pressure on your business, as you'd maybe try and expand to other platforms?

Earl R. Lewis

I'm not sure I understood your question, to be honest.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Well, if -- I guess thinking about force structure cuts, probably the Army bears the brunt of that. I would think a lot of your products are tailored more towards smaller-level systems that would coincide with troop levels versus getting your products on some bigger platforms that might have some more stability.

Earl R. Lewis

I'm going to ask Kevin to answer that. Kevin runs our Surveillance group, and he's with us. And I think he's probably better capable of answering that than I am.

Kevin Tucker

Yes, there's the large political issues which we've talked about. And generally, you're seeing the decline in the U.S. defense procurements. What's the strength for us is both the increases that they are driving in the intelligence surveillance reconnaissance area, as well as funding into special operations forces, and actually pushing more capability to those individual platforms in the Army. The most critical individual platform is a soldier. So the winning of programs such as the softmod [ph], which we did is for us an expansion of our market share. So I don't see that we have a whole lot of current penetration in that area that's a -- I think it's a growth area for us. And our commercial model positions us very well so that.

Earl R. Lewis

Softmod [ph] is a huge win for FLIR by the way. I mean, we haven't talked about this too much, but that IDIQ is -- that's new for us in reality. New business for us and new markets that we've finally been penetrated. I mean, in a way, we've been trying to for a long, long time. Now we've got our foot in the door, if we can kick it open, we'll have some very good business there over the next couple of years. That's a big, good win. As Sean pointed out, that didn't do anything for our backlog in the short run. But over the long run, this totals I think $50 million of new business, As Kevin points out at the soldier level, which is another first I think for the most part for us.

Operator

Question is from Brian Ruttenbur of Morgan Keegan.

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

You talked about government system cuts. Can you talk about how many people, percentage of your force you've laid off or how have you make those cuts?

Earl R. Lewis

Very painfully. Very carefully.

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

Can you talk numbers?

Earl R. Lewis

Sure. We have all the numbers. I don't know whether they want to disclose them or not. I'm not sure we do. You mean, you saw the result relative to the total amount we spend.

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

So did that -- is that 10% cut in your -- government workforce?

Earl R. Lewis

Yes, approximately right.

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

Okay, great. I didn't know if the number is correlated directly or, say, you're paying out of the expenses.

Earl R. Lewis

Yes, because we did it very quickly at the end of Q2.

Andrew C. Teich

Almost all of the cost we took that we called out separately this quarter, almost all of that was severance, Brian.

Earl R. Lewis

He was talking about the expense run rate.

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

So the expenses going forward, taking Q3 and moving them forward in R&D and SG&A is -- from the third quarter level should be at this level or lower? Is that the way you look at it?

Earl R. Lewis

That's correct. In total, in GS, with one exception, there's always this vacation that hits you in Q3 if you order the balance sheet with. So that will affect a little bit. But fundamentally, we don't -- we certainly don't expect that to increase.

Brian W. Ruttenbur - Morgan Keegan & Company, Inc., Research Division

Okay. And then one other -- just follow-up. Mix of revenue kind of going forward, your perfect business model is 50-50 government versus -- can you just talk about those? Instead of me putting words in your mouth, can you state your perfect business model?

Earl R. Lewis

Yes, the perfect business model -- well, we don't know a perfect business model. What we have is a forecast. The forecast is the Commercial business will outgrow the Government business over the next 5 years. And so whether it's 60-40 or 70-30, I'm not going to speculate. But it clearly will be in that order of magnitude.

Operator

Your next question is from Josephine Millward of Benchmark.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Earl, I think that's a very strong validation of FLIR's technology. So you won some very important contracts this quarter and a hunting license related to integrated base defense. Since this is a relatively new market for FLIR, can you talk about the addressable market opportunity, and if you expect near-term requirements coming out of integrated base defense for the coming year?

Earl R. Lewis

You've been using a lot of words, I think I'll let Kevin answer that one. He can hear you better than I could I think.

Kevin Tucker

Hunting license has just been an excellent win for FLIR. That is a critical contract for us to have, and we are already seeing different agencies putting their requirements together and using that as an execution vehicle or targeting that as an execution vehicle. So that for us -- we appreciate your comment that was a very important strategic win for us.

Josephine Lin Millward - The Benchmark Company, LLC, Research Division

Can help us quantify that market and think about the long-term opportunities?

Kevin Tucker

Not with a perfect clarity, I think you can see where they've set the ceilings on that though. So from the government customer side, they had a specific reason to choose the numbers, which they did to put that contract for. I think definitely seeing it as a growth area is what they're looking at.

Operator

Your next question is from Michael French of Morgan Joseph.

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

First question is on the Marine Corps and the G-BOSS program, would you please provide us an update of where the Marines are and what you're expecting here?

Earl R. Lewis

Marine G-BOSS program right now is let's say a marginally in a sustainment role, which we're closely working with the Marine Corps program office. They are continuing to assess, making that a program of record and then future developments within that program of record reasonable to expect when they do that with the current department policy is that there'll be level of competition brought into it. At the same time, we're drawing down forces that are deployed, and a lot of those systems will be coming back. So in terms of what's going to happen in the future is a valid question for us.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Okay, and the political and financial uncertainties that we've been talking about with the CRs and what's going on with the super committee. Do you think those issues are having an impact here? Or is it really more operational tempo factors that are not quite...

Earl R. Lewis

Well, I think everything -- both is effective. I mean that the people that buy things are worried about what they'll have -- the money they'll have to buy things with, as you'd expect.

Kevin Tucker

I think there's definitely that layer of it, what they're supposed to do and with what they're supposed to do it but there's also a significant amount of turmoil in the U.S. and reduce into how they do it. The policy push us to do things more commercial approach led, the business will provide solutions, don't do our new DT&E projects is kind of the new dynamic for many of them. That benefits FLIR significantly, but there's a lot of people trying to figure out how you do that right now.

Earl R. Lewis

There's no doubt what they say would be very positive to FLIR. What they say they want to do would be right what we've been preaching for 10 years. So that side of it is wonderful. Now change takes a while in those parts of the world.

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

Very true. All right, and maybe you can find some comfort on looking what's going on a tactical radio side. They seem to be taking some solid steps in that direction.

Earl R. Lewis

Yes, right.

Michael K. French - Morgan Joseph TriArtisan LLC, Research Division

And a quick question for Tony. Can we have the D&A for the quarter, please?

Anthony L. Trunzo

Sure. I'll just get it for you. $17.6 million in the quarter.

Operator

Our next question is from Noah Poponak of Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

So you've made some positive comments on Government with the orders were better, and you've talked about some of the opportunities, and then you've made some more cautious comments, given the obvious environment. With everything you know today and assuming you don't make another acquisition there, do you think your government revenue is larger or smaller in '12 versus '11?

Earl R. Lewis

Oh, boy. Yes, we're still kind of putting that together, Noah. I have an opinion, but I'd rather not share the opinion right now. I'd like to see what the people responsible for generating it think first and then, we'll share it with you. My instincts said tell them -- give a number, but I'd rather wait.

Anthony L. Trunzo

Noah, one of the things that we've said that I think you're -- you said consistently for years. And I think you saw it in Q3, and I think it's reflected in our comments here is, and I think it's demonstrated. We -- when our customers have funding, we do exceptionally well. We are -- our traction with our customers and our traction with the opportunity suite that's available to us is very good in Government Systems. The challenge is for us, who's going to have funding and when. And during the quarter, that's what was demonstrated. There was funding, and the wins that you see that appear strategic, they are strategic. And they do demonstrate what is sometimes hard to see in an environment where your business is soft overall, which is that strategically the business is in a very good spot.

Earl R. Lewis

A lot of that happened to us in Q2. I mean, we -- right at the end of the quarter, the things we thought were going to happen just didn't happen. And in Q3, the things we thought were going to happen did happen. So sorting that out for next year is something we have to work on.

Noah Poponak - Goldman Sachs Group Inc., Research Division

That all makes a lot of sense and is fair. One other one on the chunky opportunity question you're asked before. At one point, there was some discussion of a very large few hundred million dollar opportunity with Saudi for handheld and border security. And I think you guys had said you were in discussions on that, but I mean, has that fizzled, or is that just something that doesn't have a lot of visibility at all?

Anthony L. Trunzo

That's still out there. That's still held up, and the fact that the U.S. government hasn't approved the FMS package yet. So the opportunity is still there, and we think it's something that we'll do well in once it's released. But the timing of that release is not predictable at this time.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Is it something that can happen in the next 12 months?

Anthony L. Trunzo

That will be up to our Congress and government, which it could. It definitely could. And I think there's forces that are pushing to, to make that happen.

Noah Poponak - Goldman Sachs Group Inc., Research Division

And how much of it could be for FLIR?

Anthony L. Trunzo

I don't have that on top of my head...

Earl R. Lewis

Definitely, it would make a difference.

Well, thank you. I think my kind of conclusion is that the company responds to problems in a good way, and I think we proved that in Q3, and we look forward to telling you how we did at the end of the year. Thanks, everybody, for calling in.

Operator

Thank you so much.

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