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FLIR Systems (NASDAQ:FLIR)

Q4 2011 Earnings Call

February 10, 2012 11:00 am ET

Executives

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

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

Andrew C. Teich - President of Commercial Systems

William A. Sundermeier - President of Government Systems Division

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

Tom Surran -

Analysts

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

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Timothy J. Quillin - Stephens Inc., Research Division

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

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

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

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

James Ricchiuti - Needham & Company, LLC, Research Division

Omear Khalid - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Delinah, 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 2011 Financial Results Conference Call. [Operator Instructions] Thank you. I'll now turn the call over to Senior Vice President, General Counsel, Mr. Wit Davis.

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, 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 R. Lewis

Yes. And thank you, Wit, and thank you everyone, for joining FLIR's fourth quarter earnings call. I'm encouraged by our fourth quarter results, especially our margin performance and pleased with our execution during the challenging 2011. Fourth quarter revenue was $405 million and earnings per diluted share was $0.48, an increase of 12% from 2010. We finished 2011 with $1.5 billion in revenue, representing 11% growth over 2010. And earnings per diluted share were $1.38, or $1.57 excluding litigation settlement and severance charges that occurred during the second and third quarter of '11.

During the fourth quarter, the Commercial Systems division and its TVM segment posted their highest operating margin ever. Raymarine made progress in its product development, introducing a first in a series of groundbreaking and award-winning products. We expect the investments we have made in that area will pay off in 2012 and beyond.

Government Systems' operating margins reached their highest level in over a year, demonstrating our ability to manage cost and deliver strong performance in a challenging environment. We are awarded some significant government business against incumbent competitors, demonstrating our continued competitive strength.

All of this is particularly encouraging. In addition, our unit volumes increased significantly, leveraging our commercial model that we will continue to drive down cost and expand our distribution and service networks. These efforts, combined with continued R&D investment in 2000 (sic) will continue through 2012. Focusing on these areas allows us to continuously prove our strong reputation for quality, innovation and trust.

Today we announced our outlook for 2012. We are expecting revenue between $1.55 billion and $1.65 billion for the full year and earnings per diluted share to be in the range of $1.60 to $1.70. This outlook is based on the bottom-up view of the markets in which we compete. The diversification of our business in terms of geographies, products and markets is truly unique and helps us keep an informed eye on the broad competitive landscapes and helps us weather economic disruptions. While external forces will always be part of doing business, we see our core strategies of providing the lowest price, highest quality and easiest to acquire imaging and threat-detection technologies growing significantly over the longer term.

Our goal is to provide returns to shareholders by building on our past success, continuing to innovate and spearheading the industry we compete in.

Let me now turn the call over to Andy Teich to go over some of the Commercial System division performance. Andy?

Andrew C. Teich

Thanks, Earl. The Commercial Systems division continued to execute during the fourth quarter of 2011. Overall division revenue was at $224.8 million with an operating margin of 28.1%. Our TVM segment recorded revenue of $189.5 million, growth of 7% over the then record fourth quarter of 2010.

TVM showed solid growth in unit volumes but had a difficult comparison to the fourth quarter of 2010 where we had significant high-end security product revenue. TVM operating margin was 33.4% in Q4, our highest quarterly operating margin in the history of TVM, including our predecessor, Thermography and CVS division.

Raymarine recorded a 12% drop in revenue but made significant progress in reducing future costs and developing exciting new products. Increased selling expense and higher R&D expenses related to our investment in new products, including our revolutionary new E-Series line of multifunction displays, affected operating income on the seasonally slow fourth quarter.

TVM bookings in the fourth quarter were strong on a unit volume basis but were down in dollars compared to a strong fourth quarter of 2010, due to variations in quarterly order rates for significant cores orders.

For the full year 2011, TVM bookings dollars grew at an 11% rate compared to 2010.

We saw particularly strong increases in units booked in our high-volume Thermography, Security & Surveillance, Maritime and Personal Vision Systems line. We are particularly excited about our Security & Surveillance business, which has grown units nearly 70% on a compound annual basis since the business' inception in 2006. And yet, we have just started to make headway with the key markets in the space.

Our Personal Vision Systems business saw continued success in the quarter, with the growing demand for our PS and TS handheld cameras. Fourth quarter dollar bookings grew nearly 200% year-over-year, as our retail and online distribution network expands and we're able to reach more consumers with these useful and increasingly more affordable products.

In the Thermography market, we continue to see strong bookings of our new E-series camera platform, which we introduced in the spring of 2011 and have recently launched the next generation of our popular entry-level IX series cameras to the market.

Overall, TVM unit volume bookings increased nearly 70% when compared to the fourth quarter of 2010. These unit increases are key part of our strategy to continually reduce cost and thus be able to reduce end-user prices.

Also, having increasing unit volume allows us to spread our fixed overhead costs across more sales, increasing our operating margin which reached an all-time high of 33.4% in the fourth quarter of 2011.

TVM's strongest geographic region in the quarter was our EMEA region, which grew fourth quarter bookings dollars 18% over the prior year and 16% for the full year of 2011. Over the last couple of quarters, I've mentioned the desire to reduce the order backlog in our TVM business, arising from the ramp up of new products and sourcing arrangements. We finished the year with $136.4 million of TVM backlog, almost identical to our beginning balance of $135.3 million.

Raymarine's performance was mixed during the quarter. The European economic and macro environment uncertainties negatively impacted Raymarine's EMEA region and, to a lesser extent, the Americas region, while the APAC region performed well and grew in bookings dollars. We're very encouraged by the positive response the market has had to our new e7 Multifunction Display, which features Wi-Fi integration with Apple iOS and android products, Hybrid Touch user interface and Bluetooth connectivity to allow for control of the display remotely.

In the coming week, we will be introducing new midsize 9- and 12-inch variants of this exciting E-Series platform. Additionally, we will be introducing an all-new broadband CHIRP depth finder and a new high-definition color radar product line. We believe each of these new products will be industry-leading in their respective categories and are ready to ship in the quarter.

Commercial Systems' strategy of expanding the size of our various market opportunities is working. While softness arose in some of our businesses during the latter part of 2011, we've grown volumes, continued to innovate new products and enhance our competitive position. Not only have our innovations revolutionized the markets that we serve, they are also designed to increase our profitability. While growing volumes and gaining market share is our mission, we will always do so with a focused eye on profitability.

Let me now pass the line over to the Bill Sundermeier to discuss the Government Systems division. Bill?

William A. Sundermeier

Thanks, Andy. Government Systems division had a mixed fourth quarter in what was a challenging 2011. Revenue for the quarter was down compared to last year but operating margins improved, reflecting good execution, favorable mix and a focus on reducing cost.

Bookings activity was slow during the quarter due to various macro events that caused further funding and procurement uncertainty for many of our customers. The U.S. Congressional budget super committee process, continuing budget and general economic uncertainty across Europe, the Arab spring and continued troop drawdowns all appeared to affect our customers

While we saw no major program losses, the results of these global trends was a return to delayed procurement and funding cloudiness after a fairly promising third quarter. Despite these procurement delays, divisional profitability was strong, spurred in large part by a 40.2% operating margin in Surveillance. That segment's best margin level in nearly 2 years.

Product mix and lower expenses were the driving factors in the increase when compared to the fourth quarter of 2010.

Overall, Government Systems backlog ended 2011 at $313.9 million, down $59.8 million from the third quarter. Order activity was subdued across each of our segments, driven by continuing budget trepidation. Surveillance backlog finished at $247.2 million.

Airborne solutions were particularly in demand internationally during the fourth quarter with a large order for gimbals in the UAE, a $6 million order for the Colombian Air Force and a $4 million order for our 9-inch gimbals from the Japanese defense force.

With a rich history now fitting the Japanese Coast Guard, we are very proud now to be a key vendor to their defense initiatives as well. We are pursuing some very large opportunities in new international markets, while we're successful in making progress in a fairly new market, Africa.

We made significant inroads with new customers here in the U.S. during the fourth quarter as well. We were awarded a large IDIQ opportunity for outfitting U.S. Military MRAP with onboard thermal sensor systems. The award for the VOSS program, or vehicle optic sensor system had little impact to the fourth quarter backlog, but our portion of the program has a ceiling of $334 million over a 5-year period. This win is notable in that it was competitively bid and we will now be placed side-by-side the long standing supplier on this program. Additionally, we are part of the winning team on the U.S. Air Force's A29 aircraft program, initially a 20 aircraft IDIQ, which represents an opportunity to demonstrate our capabilities with the U.S. Air Force, a customer that has not been a large part of our business in the past.

Testing by the VOSS team is ongoing and should continue through May with the first delivery order on the IDIQ expected to come in the second half of the year.

Our infrared products are also continuing their success with long-time U.S. customers for air, ground and troop applications as well. to receive the nearly $7 million order to outfit MEDEVAC helicopters for the Army and order for 10 of our Star 380 HD gimbals systems from the Navy for PGFS tower-based force protection initiative [ph] , and a nearly $4 million order for our handheld recon units for use by the U.S. Marine Saber [ph Light program.

Our Detection segment ended the fourth quarter with $25.1 million in backlog, a reduction of $10.2 million from the end of what was a very strong third quarter of 2011. We won significant multiyear business during the fourth quarter but did not show up in backlog. For example, Detections Chem-Bio business won a heavily competed $49 million program to supply the U.S. Army with enzyme-based chemical detection kits over a 5-year period. Several orders for our Fido detection handheld explosives detectors came in during the fourth quarter as is an order from a U.S. agency for 50 of our handheld identiFINDER 2 radiation detectors. And internationally, we shipped our first Mass Spectrometer to an Asian agency for use in environmental protection.

We continue to build out our international distribution channel in the Detection business and look to grow the percentage of international sales measurably in the coming year. Additionally, we intend 2012 to significantly reduce the amount of contract R&D in Detection and replace that business with much higher product revenue.

Our Integrated Systems segment finished 2011 with a backlog of $41.6 million, which was down slightly from the $44.8 million at the end of third quarter. We continue our work at the new Doha International Airport and won a networked wide-area surveillance project for the Palm Springs Airport.

A force protection solution Integrated Systems delivered 2 more, COSSPS [ph] systems for the Army during the fourth quarter and we completed our first factory acceptance test for a project for the Qatari Armed forces.

We expect 2012 to be a trough year for the government procurement as we remain cautious around the global budgetary environment given the funding delays that seems to be continuing in many of our markets. In 2011, we saw several significant programs that we're working toward not materialize. Witnessed several international deliveries held up due to payment and funding issues and we found money shifting between programs.

However, we are hearing from our customers that ISR and [indiscernible] are a priority. Our products value to price ratio remains the best in the industry, a particularly important factor as world budgets tighten. We saw some very encouraging trends in the recent months in getting aboard some large historically sole source program. We have successfully integrated ICx into our operations and they are now focused on increasing product revenue as strengthening our global sales infrastructure.

Our Integrated Systems business is beginning to gain traction as customers see the benefit of interconnected full-spectrum multi-threat solutions that are offered with the best technologies, the best services at the lowest prices. All of this adds up to a very well-positioned government business ready to gain market share and again see growth. That concludes my comments. And now, I'll let our CFO, Tony Trunzo, to talk about FLIR's financial performance during the quarter. Tony?

Anthony L. Trunzo

Thanks, Bill. Fourth quarter consolidated revenue was $405.2 million, 7% lower than the fourth quarter of 2010. International revenue was 49.3% of the Q4 total compared with 46.8% in the fourth quarter of 2010. Sales to the U.S. government represented 23.7% of the total revenue in Q4, down from 30.6% of revenue in the fourth quarter of last year.

Consolidated fourth quarter gross margin was 55.5%, an increase of 2.3 percentage points compared with the fourth quarter of last year and consolidated operating margin of 27.1% was 4.2 percentage points better than Q4 of 2010.

Surveillance segment operating income was $58.8 million, resulting in segment operating margin of 40.2%, 4.2 percentage points better than Q4 of last year. Favorable product mix and lower operating expenses, as a result of Q3 cost reduction efforts, contributed to the strong margin performance.

TVM segment's operating income of $63.2 million was up 17% from last year and resulted in an operating margin of 33.4%, 3 points higher than Q4 of last year and matching the highest ever for this business. TVM accounted for 51.4% of consolidated segment operating income in Q4, compared with 44.7% last year.

Raymarine was breakeven for the quarter, as expenses associated with the expansion of our sales platform and new product introduction affected cost in the quarter. Integrated Systems' segment operating income was $1.5 million, while the Detection segment reported an operating loss of $700,000.

Earnings before interest, taxes, depreciation and amortization in the quarter were $126 million, up 2% from the prior year.

For the full year 2011, consolidated revenue increased by 11% to $1.54 billion. TVM segment revenue increased by 15% to $616.3 million and represented 42.8% of total revenue for the year, while Raymarine contributed $171.5 million in revenue. Surveillance revenue was $577.6 million compared to $671.2 million in 2010. For the full year, Detection contributed $79.9 million in revenue while Integrated Systems reported revenue of $54.8 million.

International revenue represented 48% of the 2011 total, the highest proportion in at least 10 years while sales to the U.S. government represented 28.8% of the annual total versus 34.1% in 2010 and the lowest percentage since 2003.

Full year gross margin was 53.7% compared to 55% last year. Excluding Raymarine and ICx, 2011 gross margin was 57.4%, up 57 basis points from 2010.

TVM reported 2011 operating income of $194.7 million, up 19% for the year. And Raymarine segment operating income increased by 43% to $11.9 million. Surveillance segment operating income was $208.5 million in 2011 compared with $256.2 million in 2010, representing a full year operating margin of 36.1%.

Detection reported an operating loss of $5.6 million in 2011 while Integrated Systems posted operating income of $1.7 million. Excluding a litigation settlement and restructuring charges that totaled $44.3 million, 2011 EBITDA was $432.7 million.

Discontinued operations proved a loss, net of tax benefit of $700,000 in Q4 and a $1.2 million loss for the year. During Q4, we divested 2 of the 4 discontinued operations and adjusted the carrying value of the remaining 2 businesses. We expected to divest these remaining businesses earlier this year.

Cash provided by operations for the quarter was $116.2 million, easily the highest in our history. Quarterly cash flow was aided by reversal of prepaid VAT and other tax items from Q3. For the full year, cash provided by operations was 110% of net income. In 2011, we funded $42 million in capital expenditures, $38 million in dividend, $161 million of share repurchases and $27 million of acquisitions with internally generated cash flow and ended the year with a cash balance of $440.8 million. The year-over-year increase in cash of $247.7 million is equal to the net proceeds of our bond issuance in August and leaves us with ample flexibility to continue to invest in our business, return meaningful amounts of capital to shareholders both through share repurchase and dividend and make strategic acquisitions, all while maintaining our investment-grade credit profile.

During Q4, we repurchased 1.4 million shares of our stock at an average price of $25.51 per share. And for all of 2011, we repurchased 6.1 million shares of stock at an average price of $26.19 per share. We currently have more than 13 million shares remaining in our repurchase authorization which expires in February of 2013. During 2012, we expect to continue to actively repurchase shares with the actual amount of any repurchases dependent on the prevalent share price.

As Earl stated earlier, we announced our revenue and earnings per share outlook for 2012 today. We currently expect revenue for the year to be in the range of $1.55 billion to $1.65 billion and earnings per fully diluted share to be in the range of $1.60 to $1.70. This outlook assumes a modest decline in Government Systems revenue but continued growth in our commercial businesses, as well as improved operating margins at both Raymarine and at the acquired ICx businesses.

We currently expect first quarter 2012 earnings per share to be near the level of the first quarter of last year and for earnings performance to improve as we move through the year.

In addition, we announced the 17% increase in our quarterly dividend to $0.07 per share, reflecting our continued confidence in future growth. This increase still represents a modest payout ratio of approximately 17%. As we demonstrated last year, a dividend at this level enhances our capital return strategy while still providing ample funds for strategic growth. The first quarter dividend will be paid on March 9 to holders of record as of February 21.

That concludes the summary of our fourth quarter and annual financial results. Let me now turn the call back to Earl.

Earl R. Lewis

Yes. And operator, we're ready for our questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jeremy Devaney with BB&T Capital Markets.

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

First I wanted to take a look at the Raymarine segment. Last quarter, you noted that sales of Raymarine were worse than your expectations and performance this quarter and continues on that weak pattern. Can you comment on what specifically you need to do to get that business growing or provide color on your outlook for the segment?

Earl R. Lewis

Yes, actually, we can. The manager of that group is here, Tom Surran, and I'm happy to have him report on what he's doing and why.

Tom Surran

Probably the most important thing is to fix the product line. That's where we've done a lot of investment over the past 1.5 years. And those products are just starting to come out, and there'll be couple of announcements at the Miami boat show and we think, with those products, as Andy mentioned, are industry-leading in their respective categories. That's probably the most important thing. Obviously, the boating market hasn't fully recovered yet, but we think with those products, we'll still be able to do well even in the current market conditions.

Earl R. Lewis

The other point of question, of course, is it's a very cyclical business and we expect Q1 and Q2 to be very good. The initial acceptance of Tom's new products has been terrific. A number of awards and a lot of people are very excited about it. I think we'll see Raymarine do very well next year, even without a big increase in the boating industry --

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

All right, terrific. Moving back over to the Government System segment. You mentioned what the U.S. government sales were. Approximately how much of that was DoD? And also specifically, I was wondering if you could provide us some detail on the trends you're seeing in the DoJ, DHS, DBP [ph] end markets?

Earl R. Lewis

Sure, Bill will comment but just in general, most of -- well, the 24% in Q4, is that specifically -- or the 28% for the year. Or is your question more about the year or just Q4?

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

Just for the year, if we could see what the DoD portion of the U.S. government was, and what the trends that you're seeing in the non-DoD U.S., call it, sieve businesses?

Earl R. Lewis

Okay. Bill, you have an estimate on DoD breakout?

William A. Sundermeier

We talked for the whole company and less than 25% for our segment for the whole year, do we have that? We'll get that up, Earl, [indiscernible] and outlook -- 45? Yes. Of the U.S. government piece, the majority of that, Jeremy, is going to be DoD. What remains after that is going to be largely DHS. But the significant majority of it is DoD. We don't track those numbers. We could get them by pulling out customer by customer, but we don't really specifically track which piece ends up in DoD and which piece ends up at DHS. But those are the 2 main buckets.

Earl R. Lewis

However, looking going forward, DHS is clearly going to be a higher percentage of our business in 2012, given the borders and given some of our programs we're working on with DHS.

William A. Sundermeier

That they have been passed.

Earl R. Lewis

Yes. So we'll see that mix changing more towards DHS for sure.

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

All right, that's really helpful. And last question for you at I'll let you go here. Looking at the R&D, the R&D in the quarter was surprisingly low to me. Looking like it's down sort of 100 bps quarter-over-quarter and 150 bps versus Q1 and Q2 this year. Should we look for R&D next year to trend back up to 9.5% to 10% or are we expecting to stay below 9% here? Just your thoughts on that?

Earl R. Lewis

My recollection of our budget, it's a little over 9% for this year, but I can't -- somebody can confirm that while we're here.

Anthony L. Trunzo

Yes, let me get that number and I'll pop back in between questions.

Earl R. Lewis

There's no conscious effort to significantly reduce R&D, no. If that's the question.

Anthony L. Trunzo

[indiscernible] It's going to bounce around quarter-to-quarter at 100 basis points either way a quarter is not all that uncommon. There was a little bit more paid R&D in Q4 than we have seen in previous quarters, so that may have accounted for part of what you saw, Jeremy.

Earl R. Lewis

It reduces a little bit. We don't have a lot of paid R&D. In fact, we're trying to get less, but it will bounce around as Tony says.

Operator

Our next question comes from Peter Arment from Sterne Agee.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

I just want to follow-up on that R&D question. It's a pretty significant amount in general, the whole dollars that you're spending. Can you maybe just give a little more color how it's allocated in terms of -- are you seeing more opportunities to make investments in one area or another? Maybe just give us a little color.

Earl R. Lewis

We clearly significantly increased the ratio in Raymarine in this third and fourth quarters of last year in order to get into some new products into the market. So I think there our spending was significantly higher than the typical ratio between sales dollars and R&D. The balance of our business, I think, in Government is slightly less than Commercial, in general, not a lot, but a little bit. And overall, I guess, the question really relates to how do we go about allocating R&D, and that's done very much through a rack-and stack process where we through individual projects and draw a line at some point, normally around 8%, 9%, 10% depending on the division and stop investing in R&D at that point. It's a relatively simple process but everybody has a pet project, so to speak.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Yes No, I'm sure. And just, Bill, can you maybe comment a little bit on this -- seems like MRAP opportunity here is pretty significant, and I can remember back when you were precluded or at least not allowed to get involved. And I think the previous competition or you've always had a very good system here. Maybe you can give us a little color on that program?

William A. Sundermeier

Yes. We're very excited about the VOSS program. You might know, we provided similar systems to the Special Operating (sic) [Operations] Forces and they've really enjoyed our systems and that really helped us breakthrough on this program and we certainly have a pedigree there with special operators and we hope to pass that on directly to MRAP programs. And the ceiling on that is $334 million and we [indiscernible] competing very well in that space, so looking forward and starting to deliver on that program second half of this year.

Earl R. Lewis

Just out of curiosity, in Q4 of '08, R&D as a percent of revenue was 7.2%. In Q4 of '09, it was 7.8%. In Q4 of '10, it was 8.0%. In Q4 of '11, it was 8.6%.

Operator

Your next question comes from Tim Quillin from Stephens Incorporated.

Timothy J. Quillin - Stephens Inc., Research Division

I know you don't like to give guidance by segment, but could you just talk about maybe relative expectations in the Government and Commercial side? In other words, are you looking for growth on both sides of the business, or is Government expected to be down a little bit and tagging one more question into that, what does Europe look like on the Commercial side?

Earl R. Lewis

Okay, I'll let Andy answer the Europe. Commercial up and Government down in our plan for this year.

Andrew C. Teich

So Tim, the -- Europe has been dicey for us starting about midway through Q4, we saw kind of a market slowdown there. But that said, on a year-over-year comparison, the EMEA region for TVM was the strongest growth area for us for the quarter. The area that -- of EMEA that's been the most strongly affected is the most commercial of our businesses. So Raymarine was hit pretty hard in the EMEA region in Q4. So we're hoping that the Greek situation gets resolved and consumer confidence starts to build and can get on with decent growth rates there again.

Timothy J. Quillin - Stephens Inc., Research Division

And Tony, just a question on cash flows which was pretty strong in the fourth quarter, working capital has dinged you, I guess in both in 2010 and 2011. I'm wondering if that turns positive or is less negative in 2012? And if you had any estimates for us on CapEx and D&A as well?

Anthony L. Trunzo

I don't have a good -- we don't have a CapEx budget that we're in a position to share quite yet for the year, Tim.

Timothy J. Quillin - Stephens Inc., Research Division

It'll be up?

Anthony L. Trunzo

It will be up. Yes, we're going to more in the commercial side of the business. We've got some capital projects there that we're going to go after this year and we'll talk a little more about those as we roll through the year. In terms of operating cash flow, 110% of net income was the second best we've ever done in the year. We've been as high as I think 118% a couple years back. I think we'd like to see ourselves get back into that 120% of net income kind of area. I would anticipate overall that this year, working capital growth would not be very significant, given that we don't have a significant plan for increased revenue. And frankly, inventories are a little higher than we'd like to see them. There's a couple of areas we're going to be burning off inventory because turns have come down a little bit as we exited 2011. But overall, I would expect 2012 to be a pretty strong cash flow year. I think that we should be in good position to beat that 110% of net income we did this year. And ideally, get up closer to 120% of net income range.

Operator

Your next question comes from Jonathan Ho from William Blair.

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

Just taking a look at the growth in the Commercial segment, there is a bit of a drop off just in the core TVM segment. Can you maybe breakout by subregion or -- not subregion, subcomponent where some of the impacts to the TVM growth on a year-over-year basis?

Earl R. Lewis

Hey, Jonathan. So the biggest area that we were challenged in Q4 was in cores and components. But that business is a bit of a lumpy business because we have some large more military-oriented buyers there. They're buying cooled and uncooled cores from us, related to major program pursuit. The business overall was up in single-digit percentages, which is not atypical, fairly consistent with our budget actually, in terms of bookings, but it was down in Q4. And that had a fairly material impact. The one other area that was down and continues to be down is cooled long-range systems in the border program, the national border program. So that's been slower for us. It has been onset by very strong growth in uncooled security camera sales, and we talked about that in the prepared script. So the good news here is that the growth rate there is very strong, and I think that we can continue to sustain the slower volume behavior in those international border programs with the increase in uncooled security and more commercial and infrastructure-related projects.

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

Got it. And just a question for Bill. With regard to your comments around 2012, looking like there could potentially be a trough level, just given what we're seeing with the 2013 defense budget and some of the outlooks that are there. What gives you confidence that the 2012 numbers are where they -- are potentially the bottom and what's going to give you confidence that, that's going to be a growth business in 2013 and beyond?

William A. Sundermeier

As we look forward, there's -- we've been very strong in the airborne segment and even in our own traditional surveillance business, we have room to grow and land capabilities that we want to expand into. We've been talking about soldier solutions which actually did grow last year and it's just continuing very, very well within our segment. Also the Integrated Systems growth is doing very well. We're getting a lot of traction there and growing into an integrated solutions environment, that business anticipated to grow quite rapidly this year, and I see that going into 2013 as well. And Detection, their business is traditionally been almost 90% U.S. market, since we're just establishing our international sales force to be able to sell these around the world. And I see big growth potential there as well. So we're really hoping that our investments pay dividends into 2013.

Earl R. Lewis

One -- just a comment. While the revenue for the Surveillance group, which is of course the biggest drag on the growth side of this business, will be down this year compared to last year. We believe that orders actually will be up this year compared to last year, and that's from a very detailed review of every potential program that we know of. So that's kind of the thinking that this may be the trough.

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

Got it. And just one final question around the overall environment. You guys talked a little bit about the fourth quarter being impacted by the late timing of the budget and some of the challenges there. Since the budget's been signed, are you seeing that activity level pick back up or do you feel like there's just sort of a push out from '11 into '12 and optically the backlog could start to improve from here?

Anthony L. Trunzo

Q1 was up to a little bit of a slow start so I think we're anticipating that money start pulling more towards Q2.

Operator

Your next question comes from Michael Ciarmoli with KeyBanc Capital Markets.

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

Maybe one for Tony and Bill. Tony, just on the outlook for next year, the EPS, I'm assuming at these levels the buyback continues. I don't know if there's any change, material change in the tax rate, but I would think the operating margins would not trend down that much from the fourth quarter. Maybe -- can you give us some help on sort of bottom-line from margin perspective? I mean, you already saw major declines in Surveillance. It doesn't sound like it's going to be that much of a headwind next year. Is there reason to think the margins can't stay close to within 100 or 200 basis points of where you were in fourth quarter here?

William A. Sundermeier

In the Surveillance segment, the answer is probably no, Michael. The overall margins that we saw in Q4 and margins we saw in 2011 do appear to be sustainable for 2012. If you look at, I think Surveillance margins in 2011 overall, we're about 36%. If they come down from that, it will be a pretty small amount, and we talked about that business being a mid-30% operating margin business and I think that's still a pretty good assumption. This team has done a remarkable job of mitigating the decline in revenue in that business with terrific cost management and a really good job maintaining gross margins. And I think that's going to serve us well as that business kind of moves to stabilize. In terms of the -- below the operating margin, Pete, we expect that we'll continue to buy back shares this year, as I said. The exact amount we haven't decided internally, so not a lot to share there. It's going to continue to be opportunistic. We've got a big buyback authorization. At the current levels, I would doubt that you'll see us consume anywhere close to the entirety of that buyback, but I think will be continue to be active in buying back shares. And the tax rate will continue to come down a little bit. It came down last year and we're making some good progress on some planning activities. We'll whittle them down a little bit over the course of 2011 -- I'm sorry, 2012 as well.

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

Okay. And then Bill, just quickly, I guess it sounded like, Earl, you just said, orders will be strong this year. I mean, is the plan...

Earl R. Lewis

That -- I didn't use the word strong. I know I didn't.

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

Can the book-to-bill be greater than one and can you grow backlog and exit '12 with a higher backlog?

William A. Sundermeier

That's [indiscernible].

Anthony L. Trunzo

That's what the numbers look like right now.

Earl R. Lewis

And it's simple because these factories just aren't efficient without a backlog. So we have to get the backlog back up a little bit.

Operator

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

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

On the book-to-bill, Mike just asked the question I was asked about the expectations being above onetime since '12. But now that we have VOSS moving in, which was a great win, what should we be looking for with regard to concentration of VOSS in the 2012 period? I guess that's a question for Bill.

William A. Sundermeier

Sure. We mentioned in the script that [indiscernible] continued through May, and we wouldn't expect our first delivery of order until -- no earlier than June, but most likely we're anticipating it in the first part of Q3. So hopefully, we'll have some bookings and shipments at the end of this year, but the concentration is going to be towards the latter half of 2012.

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

Okay, so it's back-end weighted. And then, with the material increase in '13, off that contract, is this a 3-year contract, Bill?

William A. Sundermeier

5-year contract. $334 million ceiling.

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

Okay. And then actually on Detection, should we expect to see profitability in '12? And...

Earl R. Lewis

Yes.

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

We hope so. But what do you think the probable -- if you can give us some kind of probable margin range that you guys would expect to help us in the model, because the ceiling has been all over the place.

William A. Sundermeier

I think we wouldn't want to go there.

Anthony L. Trunzo

Yes. Mike, we're going to be careful about guiding to margin by segment. But if you look at the opportunities -- if you look at 2012, Bill's going to be challenged to grow operating income in the Surveillance segment, given that we expect the revenue now in that business to be down. Segment margins probably going to be down as well, or segment income is probably going to be down. The Detection and Integrated Systems key [indiscernible] are poised for substantially better performance in 2012 than they had in 2011. Not only will they be profitable, but I think we're looking for the totality of the ICx businesses to begin to generate a meaningful return on the investment that we made in 2012. And the same is true for Raymarine. On the Commercial Systems side, the TVM business has achieved some remarkable margin expansion given the growth and the cost reduction and price reduction strategies they pursued. So I think when you look at margin performance, you're going to see an expansion at Raymarine. And if probably not, in respect to the TVM business.

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

Okay, that's fair. And then, one more question. When we look at the Commercial business, it would have appear that we're going to see a back-end loaded year. How should we think about that with regard to would it be a 40-60 mix there, or am I off point with that assumption?

Anthony L. Trunzo

I don't think we want to get into more of the sort of quarterly outlook that what we just gave. I mean, we have some visibility in Q1 being reasonably comparable to Q1 of last year in terms of earnings per share. But I think going beyond that, in terms of what the rest of the year lines up as, we do expect op earnings performance to improve during the year, but I wouldn't really want to go beyond that.

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

Okay. Tony, just on tax rate, you it's going to be down a little bit. I was at 30%, should I go to 29% or is it even lower than that?

Anthony L. Trunzo

It will be lower than what it was this year.

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

Okay. And then do you actually have repos embedded in your EPS guidance?

Anthony L. Trunzo

A little bit.

Earl R. Lewis

Yes, not a lot.

Anthony L. Trunzo

We average it through the year, Jeremy, it's a tiny amount.

Operator

Your next question comes from Brian Ruttenbur with Morgan Keegan.

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

Good questions have already been asked. So the question I had was on SG&A in the fourth quarter. Did you guys pay cash bonuses? Why was there be such a dramatic drop? Because normally there's a big bubble at the year.

Earl R. Lewis

There's a little bit of cash bonuses that we over-accrued for in the first 3 quarters, so we didn't have as much of a cash bonus accrual in Q4.

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

And normally it's much, much higher in the fourth quarter? Is that...

Earl R. Lewis

Not much, much... that was one of the reasons, there was about 8 reasons that brought the SG&A down.

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

What were the other top 1 or 2?

Earl R. Lewis

Okay, let's see. The bonus accrual was one. The savings that Bill implemented basically in Q2 rolled through -- yes, that was in Q3, right after Q2, were -- and they have a little stick on [ph] next year.

Anthony L. Trunzo

Well we didn't have --last year, we had about $7 million in M&A expenses.

Earl R. Lewis

Yes, it was the other way around. Yes, it was the other way around. Yes. It was the M&A expense -- the year before, but we didn't have this year. And legal was down, I think.

Operator

And your next question comes from Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

Andy, question for you. I wasn't sure if you gave any kind of color on the TVM bookings in the Americas, in North America. You indicated that there's some choppiness in the EMEA, but what about North America? How that's holding up?

Earl R. Lewis

It was doing quite well through the first 3 quarters of the year, but in -- similar to the slowdown that we found in the EMEA region, things slowed down midway through Q4. So the bookings were softer, and particularly in premium segment of our product line. The volume products continued to do well. So I think it was just the economic overhang that just slowed things down towards the end of the quarter, as it were. We're hoping the fab resolves this year.

James Ricchiuti - Needham & Company, LLC, Research Division

Have you seen any change thus far in Q1? I know there's some seasonal issues but...

Earl R. Lewis

It's really too early to tell.

James Ricchiuti - Needham & Company, LLC, Research Division

Yes. And what about on the core components area? It sounds like the weakness was mostly military related. Any color just in general in the commercial portion of that?

Earl R. Lewis

The commercial portion of the cores business continues to execute to plan during Q4. So it really was timing of some military orders in Q4. The other area that we have softness in the cores business in Q4 was in APAC region, and we're taking steps organizationally to resolve that this year.

Operator

Your next question comes from Noah Poponak from Goldman Sachs.

Omear Khalid - Goldman Sachs Group Inc., Research Division

This is for Omear Khalid for Noah here. Just a couple of quick housekeeping questions. You guys answered most of them but going back to Michael's question earlier, is it true that you guys did not have any onetime items in the 4Q margin performance. Is that correct?

Earl R. Lewis

Yes. I mean there's always onetime items, but there's nothing that we call out as special.

Omear Khalid - Goldman Sachs Group Inc., Research Division

Okay. And maybe with regard to the backlog before '12, is there any color on timing, back end, front-end loaded or anything like that?

Anthony L. Trunzo

Well, bookings, I mean, we don't guide to bookings. As Bill stated, we had a little bit of a slow start, but I think overall, the bookings outlook is going to parallel with the revenue outlook for the year.

Omear Khalid - Goldman Sachs Group Inc., Research Division

Okay. And just finally, just again, the question was asked earlier and you responded, you said it was around $0.01 of buyback embedded, is that accurate for the full year?

Anthony L. Trunzo

No. I said a tiny amount.

Omear Khalid - Goldman Sachs Group Inc., Research Division

A tiny amount. And so is that going to be -- I mean can you quantify that a little bit for us or no?

Earl R. Lewis

You keep in mind though, we do plan to make fairly significant buybacks of shares. The effect on EPS is a small amount because of the way it's calculated, et cetera. But we're still going to be buying back a significant amount of shares, in my opinion anyway.

Anthony L. Trunzo

And no, I mean, I think beyond that, we're not really in a position to quantify because it's going to depend on the share price and what the opportunity is to buys shares when we consider it to be an attractive level.

Operator

And your final question comes from Jeremy Devaney from BB&T Capital Markets.

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

Dock an extra one in there. The revenue from acquisitions in the quarter, what did you see there?

Anthony L. Trunzo

I'm sorry, what is the question?

Earl R. Lewis

Say it again.

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

Revenue from acquisition.

Anthony L. Trunzo

In Q4?

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

Yes.

Anthony L. Trunzo

Oh, small.

Earl R. Lewis

Yes, very small.

Anthony L. Trunzo

Low single digit, millions.

Earl R. Lewis

Maybe at $2 million.

Anthony L. Trunzo

Because all we bought during the year was Tacktick, which is a little add-on to the Raymarine business and Arias [ph] , which was an add-on to Andy's business and the revenue of those businesses is pretty small.

Earl R. Lewis

Arias, I believe, was less than $2 million.

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

Looking at acquisition strictly...

Earl R. Lewis

It's $3 million.

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

$3 million? Right. Looking at acquisitions, as you move ahead, buybacks are an opportunity, obviously, to raise the dividend. We're still seeing cash [indiscernible] indicated can be approaching 120 million -- 120% of net. What are you thinking on cash uses? What are you seeing as M&A opportunities in commercial versus government? Any color on that?

Earl R. Lewis

No. No color on it right now. I'd say as of right today, as we sit here, we don't have a lot in the pipeline. But I'm not so certain that the second half won't see a pick up for us.

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

All right. Well I appreciate the detail.

Earl R. Lewis

That's not so much detail.

Anthony L. Trunzo

Can't give you much detail on that really, as you know. Operator, I guess we're done.

Operator

There are no further questions now, sir.

Earl R. Lewis

Well, thank you so much for attending the call. We look forward to talking to you again this spring.

Operator

This concludes today's conference call. You may now disconnect.

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