FLIR Systems (FLIR) Q4 2016 Results - Earnings Call Transcript

| About: FLIR Systems, (FLIR)

FLIR Systems, Inc. (NASDAQ:FLIR)

Q4 2016 Earnings Call

February 14, 2017 11:00 am ET

Executives

Todd M. DuChene - FLIR Systems, Inc.

Andrew C. Teich - FLIR Systems, Inc.

Amit Singhi - FLIR Systems, Inc.

Thomas A. Surran - FLIR Systems, Inc.

Analysts

Peter John Skibitski - Drexel Hamilton LLC

James Ricchiuti - Needham & Co. LLC

Michael Ciarmoli - SunTrust Robinson Humphrey, Inc.

Jeffrey Ted Kessler - Imperial Capital LLC

Josh Ward Sullivan - Seaport Global Securities LLC

Noah Poponak - Goldman Sachs & Co.

Operator

Ladies and gentlemen, greetings, and welcome to the FLIR Systems Fourth Quarter and Full Year 2016 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for today, Mr. Todd DuChene. Thank you. You may begin.

Todd M. DuChene - FLIR Systems, Inc.

Good morning, everyone. Please note that our earnings press release and presentation slides that will be referred to on this call are available under the Events & Presentations section of www.flir.com/investor. Before we begin this conference call, I need to remind you statements made on this call, other than historical facts, 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 anticipates, estimates, expects, intends, and believes and similar words and expressions are intended to identify 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.

We will be discussing our results for the quarter, primarily on an adjusted non-GAAP basis. We believe that non-GAAP information is useful because it can enhance the understanding of our core ongoing operating results and facilitate consistent comparison of results over time. A full reconciliation between GAAP and adjusted measures is in our press release this morning.

Let me turn the call over to Andy Teich, President and Chief Executive Officer of FLIR Systems. Andy?

Andrew C. Teich - FLIR Systems, Inc.

Thanks, Todd, and thank you for joining us for FLIR's fourth quarter 2016 earnings call. With Todd and me today is our CFO, Amit Singhi; COO, Tom Surran; Chief Marketing Officer, Travis Merrill; SVP of Product Strategy, Jeff Frank; and SVP of Corporate Development and Investor Relations, Shane Harrison.

I'll start to review the quarter with slide 3 of the presentation. This morning, we reported fourth quarter revenue of $475 million, an increase of 8% over the prior year and a 2% increase on an organic basis. Commercial products revenue grew 13% over the fourth quarter of 2015 and government products grew 3%. Driving the commercial products were strength in Lepton camera cores, growth in our Maritime segment and the addition of our newly acquired businesses. On the government products side, increased military camera core deliveries from our OEM business helped to drive the growth.

Adjusted gross profit and adjusted operating profit grew 6% and 5% respectively in comparison to the prior year. Adjusted earnings per share for the quarter were $0.52, which represents 4% growth versus fourth quarter 2015 adjusted EPS of $0.50.

As Todd mentioned and as stated in the press release this morning, beginning this quarter, we will present adjusted profitability metrics along with our GAAP results. This is to provide a view of our core ongoing operating results and to facilitate better comparisons of our results over time. You can see reconciliations from GAAP profits to adjusted profits in the press release. And we've provided an eight-quarter historical reconciliation in the appendix to the quarter results presentation slides.

Under the previous method of reporting guidance and reporting adjusted earnings per diluted share, fourth quarter historical-method earnings per share were $0.48 compared to $0.47 in the fourth quarter of 2015. Operating cash flow for the quarter was $97 million or 158% of our GAAP net income in the quarter and was 24% higher than the prior year, driven primarily by improvements in our inventory levels where we reduced the balance by nearly $60 million during the year, excluding the addition of inventory from the acquired businesses.

Total company 12-month backlog finished the quarter at $592 million, down 8% since the end of the third quarter as we work through Surveillance and Detection backlog during the fourth quarter. Since our last call, we've introduced several new products. At CES in Las Vegas, we introduced two new FLIR ONE smartphone attachments, the third generation FLIR ONE and FLIR ONE Pro.

We also launched at CES two new consumer and commercial drone cameras, the FLIR Duo and Duo R, which feature Lepton and an HD visible camera for airborne situational awareness and data collection. Last, we introduced the new C3 pocket Wi-Fi-enabled thermal camera for contractors, building inspectors and trades people.

During the fourth quarter, we completed our acquisition of Point Grey Research, which has become our Integrated Imaging Solutions line of business within the OEM & Emerging segment. Also during the quarter, we acquired Prox Dynamics, a summary of which you will see on slide 4. Based just outside of Oslo, Norway, Prox Dynamics is a leading innovator in the world of nano-drone systems. They're highly differentiated Black Hornet to personal reconnaissance system as the unique solution for getting multiple sensors into the air from military and paramilitary surveillance and reconnaissance.

This extremely covert drone weighs less than about three sheets of paper and as a man portable hand launchable system that features our Lepton micro thermal camera, a visible spectrum camera, advanced low power rotor technology and proprietary software for flight control, stabilization, and encrypted communications.

Now, part of our Surveillance segment, we are excited to have the talented Prox team join us and continue to develop highly advanced and differentiated aerial sensing solutions that enable a significant advantage in situational awareness and mission planning for our customers.

Slide 5 shows the summary of our full year 2016 where we saw year-over-year revenue growth of 7% to $1.7 billion. On an organic basis, 2016 revenue growth was 3% as our Surveillance segment returned to organic growth for the first time since 2012 and our OEM & Emerging segment grew over 20% organically. Offsetting this growth for revenue declines from the Instruments segment, which saw soft demand for the midrange plant predictive maintenance and building products as well as the decline in our Security segment, which was primarily due to a decline in our retail security business.

Adjusted operating profit was flat compared to 2015 as we saw margin compression in the Instruments and Security businesses. We expect both of these segments to return to organic growth and improve their profitability in 2017, as Instruments refreshes its mid-range product line and Security introduces new products and expand its enterprise business. Cash generation improved significantly in 2016 with full-year operating cash flow growing 13% over 2015 to $312 million, driven by better utilization of working capital.

On slide 6, you'll see our outlook for 2017. We expect full year 2017 revenue to be in the range of $1.78 – I'm sorry, in the range of $1.78 billion and $1.83 billion and adjusted EPS to be in the range of $1.81 to $1.91. This outlook represents a revenue growth rate of between 7% and 10% and an adjusted EPS growth rate of between 7% and 13% over our 2016 results. We announced today a 25% increase to our quarterly dividend to $0.15 per share. This growth represents an increase in our targeted payout ratio as a percent of our adjusted net income to roughly 33% from 28% in 2016.

The dividend will be payable on March 10 to shareholders of record as of March – February 24. Additionally, our board has authorized a new share repurchase program under which we can repurchase up to 15 million shares over the next two years. This is the same level of authorization we had over the last two years where we repurchased a total of 6.3 million shares.

I'll now ask Amit to review the fourth quarter and full year 2016 financial results. Amit?

Amit Singhi - FLIR Systems, Inc.

Thanks, Andy. Good morning.

On slide 7, you'll see our fourth quarter financial results. Consolidated revenue was $475 million, an 8% increase compared to the fourth quarter of 2015. OEM & Emerging, Security, Maritime, and Surveillance segments grew 55%, 7%, 6%, and 5% respectively. Instruments and Detection segments declined 3% and 6% respectively.

Geographically, revenue increased in all regions, except Middle East and Africa. Sales to the U.S. government increased versus last year to about $118 million, representing about 25% of total revenue. Consolidated fourth quarter adjusted gross margin was 47%, a 115 basis points lower than last year, primarily due to segment and product mix changes and higher manufacturing variances and period costs.

Our adjusted operating margin for the quarter was 22%, 79 basis points lower than last year, primarily driven by the lower gross margin. Other expenses were up year-over-year as a result of foreign exchange transaction losses, and higher interest expense. Adjusted net income for the fourth quarter of 2016 totaled $71.9 million or $0.52 per fully diluted share, compared to $69.6 million or $0.50 per fully diluted share last year, increases of 3% and 4% respectively.

Our cash flow from operations for the quarter increased 24% from year-ago levels to $97.1 million or 158% of GAAP net income or 135% of adjusted net income. Our days sales outstanding and days inventory on hand improved year-over-year, driving an improved cash conversion cycle. Our two acquisitions in the fourth quarter, Point Grey and Prox Dynamics, resulted in a net cash outflow from investing activities of $376.8 million.

Our capital expenditures for the quarter were $8.3 million, significantly reduced from the higher levels a year-ago when we were in the midst of consolidating our manufacturing facilities in Santa Barbara. During the quarter, we did not repurchase any shares and returned $16.4 million to shareholders through the payment of dividend. We closed the fourth quarter with cash of $361 million. On slide 8, you will see our full-year financial results. Consolidated revenue was $1.66 billion, a 7% increase over prior year.

OEM & Emerging, Detection, Surveillance, Security and Maritime segments grew 31%, 8%, 6%, 6% and 4% respectively. Instruments segment declined 3%. Geographically, revenue increased in all regions except Europe, which was down slightly. Sales to the U.S. government increased versus last year to about $416 million, representing about 25% of total revenue. Consolidated full-year adjusted gross margin was 47%, 176 basis points lower than last year primarily due to product mix changes and manufacturing cost variances in certain areas.

Our adjusted operating margin for the year was 20%, a 134 basis points lower than last year, primarily driven by the lower gross margin. Adjusted 2016 net income totaled $233.9 million or $1.69 per fully diluted share compared to $232.8 million or $1.65 per fully diluted share.

Under the previous method of reporting and providing guidance for adjusted EPS, which excluded the impact of discrete tax items, minority investment gains and losses, restructuring charges, SkyWatch remediation charges and the impact of fourth quarter 2016 acquisitions. Fourth quarter historical method EPS were $0.48 compared to historical-method earnings per share of $0.47 in the fourth quarter of 2015.

Full year 2016 earnings per share under the previous method were at $1.56 equal to adjusted EPS for 2015. A reconciliation table summarizing these adjustments is included in the earnings release published earlier today under the heading GAAP to non-GAAP Reconciliation as previously guided.

Our cash flow from operations for 2016 increased 13% from year-ago levels to $312.3 million or 187% of GAAP net income. Our days sales outstanding and days inventory on hand improved year-over-year driving an improved cash conversion cycle. In addition to Point Grey and Prox, our net acquisition related cash outflows included purchases of Armasight and ISD in the second quarter.

Our total capital expenditures in 2016 were $35.9 million or 2.2% of revenue, significantly reduced from the higher levels a year ago. During the year, we repurchased about 2.1 million shares for $66 million compared to about 4.2 million shares in 2015 for $123 million. We also paid dividends of $65.9 million or $0.12 a quarter.

Our total debt increased by $158.5 million in 2016 as a result of refinancing our five-year notes and upsizing to $425 million from $250 million. This was done to implement our previously communicated capital strategy to increase our gross leverage ratio and liquidity while maintaining our investment grade rating and using our interest rate and cost of capital.

This concludes the summary of our financial results. Let me now turn the call over to Tom Surran to cover our operational results. Tom?

Thomas A. Surran - FLIR Systems, Inc.

Thank you, Amit. Slide 9 is a summary of the fourth quarter results by segment. Four of our six segments showed solid growth year-over-year with Instruments and Detection declining 3% and 6% respectively. Segment level adjusted operating profit was up 3% as we saw 8% overall revenue growth, but at a lower margin.

Moving to slide 10 to cover the Surveillance segment. Fourth quarter revenue for Surveillance was $158.5 million, up 5% over the fourth quarter of 2015. The addition of the unmanned aerial systems line of business with the acquisition of Prox Dynamics as well as continued success of our Outdoor & Tactical Systems line of business drove the growth. This was offset by year-over-year decline in our integrated systems products due to significant Cerberus and U.S. border-related MSC activity in the prior year.

Adjusted operating profit for Surveillance segment was $47.6 million, down 5% versus the prior year due to higher operating expenses. Surveillance backlog declined $35 million from the end of Q3 to $328 million, but it's up 6% from one year ago.

Surveillance segment book-to-bill ratio was 0.7 times in the fourth quarter, slowed by lower order flow from U.S., Asia and Middle Eastern customers. In January, at the SHOT show in Las Vegas, Surveillance's Outdoor & Tactical Systems line of business introduced a broad array of new thermal scopes for hunting and outdoor enthusiasts, based on our new powerful thermal camera core, Boson.

New variants of our Helios, Prometheus Q14 thermal imagers and new variants of our thermal weapon and clip-on sights were introduced at the show. With Boson technology inside, customers will get market-leading image quality, long battery life and unmatched size-to-weight performance.

On slide 11, you will see a summary of the Instruments segment. Revenue declined 3% as compared to the fourth quarter of 2015 to $96 million, which includes a negative impact of 60 basis points from foreign exchange.

Growth from Fire, Optical Gas and FLIR Test & Measurement products was more than offset by reduced revenue in the mid-range of our plant predictive maintenance and building product line, as customer await the upcoming release of our new middle-range products in Q1 of this year. Unit volumes delivered during the quarter were up 49% versus the fourth quarter of 2015.

Instruments adjusted operating profit in the fourth quarter declined 10% from the prior year to $31.5 million or 33% of revenue. Negative product mix and manufacturing variances relative to the prior year drove lower gross margins in the quarter, while operating expenses were down only slightly. In January, Instruments introduced the C3 pocket-sized thermal camera for home inspectors, real estate professionals, general contractors and other trades people. The C3 builds off of a highly successful C2 camera to now include Wi-Fi connectivity, higher thermal sensitivity and an advanced user interface.

Also in January, Instruments introduced our first intrinsically safe optical gas imager, the GFx320. Adding an intrinsically safe version of this technology which has proven extremely valuable for the oil and gas production and transmission industries offers advanced safety and product resilience for customers that work in potentially explosive environments, broadening the applicability of this technology.

On slide 12, you will see the Security segment results. Security's fourth quarter revenue was $73.1 million, up 7% compared to last year's fourth quarter. This growth was due to strong results from our long range thermal cameras, enterprise cloud security solutions and Lorex's e-commerce business. Security adjusted operating margin was 12% in the quarter, slightly below the prior year and nearly 400 basis points ahead of Q3 in 2016.

Our cost improvement initiatives and improving profitability from our enterprise line of products helped drive this improvement. During the fourth quarter, the Security segment launched a new network video recorder that is aimed at small and medium-size businesses. The new Meridian NVR incorporates Power over Ethernet switching for operation of up to 24 cameras. As FLIR's united video management software preloaded supports dual monitor usage and has a modernized web interface.

These features enable turnkey integration out-of-the-box, a feature that is becoming more and more important to security system integrators and users. The results for the OEM & Emerging segment are shown on slide 13, reaching the third sequential all-time organic high OEM & Emerging fourth quarter revenue was $76.1 million increasing 55% over last year.

The creation of OEMs intelligent imaging solutions line of business from the acquisition of Point Grey helped drive growth in the quarter as did continued strength in military-grade thermal camera cores and Lepton cores. OEM & Emerging adjusted operating profit was $18.1 million, more than double the prior year where we saw significant amount of cost related to the move into our new fabrication facility. Adjusted operating margin of 24% in the fourth quarter of 2016 was negatively impacted by inventory charges.

On slide 14, you'll see several new OEM & Emerging products that have been introduced into our last call. First, as Andy mentioned, we rolled out two new variants of our FLIR ONE smartphone accessory at the CES show. The third-generation FLIR ONEs have a new form factor and each feature MSX to emboss visible image video details on top of thermal video, as well as our new patent pending OneFit adjustable height connector. This feature allows a better fit for iPhone and Android users that have protective cases on their iPhone – on their phones.

The Pro version also features a ruggedized design and a more powerful set of imaging and measurement features including our new VividIR image processing algorithm that yield superior thermal imagery. Also launched at CES were the FLIR Duo and Duo R hybrid cameras for commercial and consumer drones. The Duo camera features both a thermal and visible camera and a commonly used action camera form factor, MSX image processing technology and real-time remote control of functions including switching between visible and thermal imaging streams.

Turning to slide 15, Maritime segment revenues were $38.3 million, representing a 6% growth versus prior year. We saw growth in nearly every category above with thermal cameras being particularly strong with 16% year-over-year growth. Maritime adjusted operating income was $2.1 million in the quarter and was 52% higher than the fourth quarter of 2015. Higher product volumes helped overhead absorption and reduced period costs drove the 165 basis point improvement in adjusted operating margin.

We have recently been informed that we have been selected for a $50 million contract to provide marine electronic systems under the U.S. Coast Guard's Scalable Integrated Navigation System 2 or SINS-2 program. Under this five-year indefinite delivery and indefinite quantity contract that includes an additional five-year option, our Maritime signal will provide electronic systems that will be standard fit on over 2,000 U.S. Coast Guard vessels ranging from small class boats to large cutter class vessels. The systems include Raymarine multifunction navigation displays, radars, sonars, remote instrument displays and autopilots.

And last week, we introduced the new Raymarine brand identity to the Maritime market. This rollout includes a redesign of the Raymarine brand including a new logo, icon and tagline to be used in all marketing activities and throughout its product lines. Both the new brand design and tagline, Simply Superior, signify FLIR's commitment to technology leadership and ease of use in the marine electronics market.

Our Detection segment results are summarized on slide 16. Detection's fourth quarter revenue was down 6% year-over-year to $32.7 million. The prior year saw a significant amount of DR-SKO shipments, which created a difficult comparison for this year's fourth quarter. Excluding DR-SKO activity, Detection revenue was up 20% driven by very strong quarter for radiation products with the U.S. Domestic Nuclear Detection Office. Adjusted operating margin was equal to the prior year at 30%. Detection finished 2016 with $57 million of backlog declining $11 million since Q3. We expect to receive another order from the U.S. Department of Defense for more DR-SKO deliveries in Q1 of 2017 and we expect the order size to be similar to what we have seen in previous orders.

On the new products front, Detection recently introduced the Griffin G465 mobile gas chromatograph mass spectrometer. The Griffin G465 is designed to be taken in the field to test vapors, liquids and solid samples for harmful chemical threats. Featuring a heated sample intake a survey mode and an intuitive color-coding user interface, the Griffin G465 enables better decisions in complex environments.

That concludes my summary of the segments' fourth quarter. I'll now pass the call back to Andy.

Andrew C. Teich - FLIR Systems, Inc.

Thanks, Tom. We're pleased with the growth we saw in the business both organically and from the acquisitions we've made during the year. While we reached our highest level of quarterly operating cash flow since 2013 and saw sequential growth and profitability, margins did not meet our expectations. We will be working diligently in 2017 to improve margins in all of our businesses. When we look at the full year, we're encouraged by our ability to control operating costs to help offset pressure we saw in the decline in adjusted gross margins. We're excited about the four companies we acquired during the year, which provides strategic paths into new markets and deeper penetration into existing ones.

Our revenue from U.S. government increased meaningfully over 2015, the first time that part of our business is growing since 2009. And the improvements we're seeing in working capital help improve our cash flow, which enables acquisitions, organic investments in growth, and the increased dividend we announced today.

The guidance we presented for 2017, assumes a stronger U.S. dollar, a slightly higher effective tax rate of 25% and only modest growth in our government businesses as we expect continued budget uncertainty, particularly in the U.S. We are encouraged by our backlog levels and 2017 is set up to be a meaningful year for new product rollouts. And we expect 2017 adjusted growth and operating margins to improve over 2016 as we introduce new products, invest in manufacturing yield improvements and continue to integrate our recent acquisition and control our cost.

Before we turn to the Q&A, I want to take a moment to discuss the other announcement we've made this morning. As you've likely seen, we're beginning a leadership transition at FLIR. After more than 33 years including the last four years as President and CEO, I have decided it's time for me to retire once a permanent successor is named. Having pioneered several new markets, developed dozens of new products and shipped more than a 0.5 million thermal cameras in 2016, I am proud of what FLIR and this talented team has accomplished. FLIR continues to be a leader in the infrared industry. This has afforded us the opportunity to expand our capabilities well beyond the thermal spectrum. With these additional technologies, we're closer than ever to reaching our vision of being the world's sixth sense.

Now is the right time for me and for the company to begin this transition. I know that our next CEO and the rest of the outstanding leadership team will continue to build on the important progress that we've made. Looking ahead as part of our succession planning process, the board will conduct a comprehensive search for my successor. The board has retained a leading executive search firm to assist in the process.

As I mentioned, I will continue to serve as President and CEO and as a board member until a successor is named. During the transition period, I will continue to work closely with my colleagues, on the board and the management team to ensure a seamless transition. In short, it will be business as usual, and we'll continue to focus on serving our customers, and executing our strategic plan to deliver shareholder value.

With that, let's now open the floor for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. Our first question comes from the line of Pete Skibitski from Drexel Hamilton. Please go ahead.

Peter John Skibitski - Drexel Hamilton LLC

Good morning, guys. Great cash flow quarter. Andy, I was wondering if there is anything more you can add. You haven't been CEO that long, I don't think you've been in your mid-50s yet and there is a lot of exciting things going on at the company for sure, I think. Can you explain why you'd want to retire now versus maybe closer to a more normal retirement age?

Andrew C. Teich - FLIR Systems, Inc.

Yeah, Pete. I know that this has been a common question this morning. And I'm actually a little older than you think. But in any case, this is really driven by two things. I mean, the major driving factor here is a personal decision. I'm a couple of years away from becoming an empty nester. I've got two kids left that are about ready to finish high school and head off to college. And for those of you that have known me, I have had a singular focus for the last 33 years. I've been incredibly dedicated to this business and its vision for growth and I've enjoyed every day of that. But it literally has been every single day, it's been a 24/7, 365 effort from me and that's had – it affects on my personal life.

And I've come to a point where I want to change that focus and I feel like the company is in a position where it's the right time to make that change. I feel like we've built the strongest foundation, a very capable management team and I feel very good about the outlook for 2017 which was strongly bolstered by what we feel is a very strong teams of new product introductions that are going to come this year. And the combination of the businesses that we've acquired in the last 18 months, I think, the setup is right, and the timing is right and well, it's an extremely difficult decision for me. I feel pretty good about it.

Peter John Skibitski - Drexel Hamilton LLC

That's pretty valid reasons. I wish you the best of luck there, Andy. Let me just follow up with a couple brief ones and I'll get back in queue. 2017, the top line growth looks pretty good. I was wondering if you could talk about what the organic growth you are assuming is for 2017.

And then just on Prox and Point Grey, not a lot of details there, but I think safe to say the purchase prices were not smallest, the multiples there and so I was just wondering if you can give us a sense of what gave you guys the comfort level to pay what you did for those two deals?

Andrew C. Teich - FLIR Systems, Inc.

Sure. So, Pete, let me hit the first question on the organic growth. So, you're going to see about a third of our organic growth is going to come from organic growth and two-thirds of it from the recent acquisitions. Relative to those two recent acquisitions, the – I feel very good about what we paid for these companies, these are two awesome companies, very rich technology, excellent teams, employee groups, and technical teams of these companies and great opportunity for FLIR and for the injection of thermal.

If I look at Point Grey Research, what we're now calling Integrated Imaging Solutions, we've been looking at and participating in the machine vision and automation part of our business for some time now. And I think we're at a point where both the market acceptance level, the cost and capability of our sensors and the advancement of machine vision and intelligent imaging systems is right to bring the combination of FLIR's capability, both from a thermal standpoint and from a company go-to-market strategy together with a company like Point Grey Research.

They are at an inflection point, I would say, for growth. The adoption of visible imaging into machine vision applications is going very rapidly. And then the other applications that they're involved in, in intelligent imaging to include retail analytics types of cameras is also at an inflection point for growth.

Moving over to Prox, we have been, as a company, all about getting sensors in the right place at the right time to provide situational awareness and decision support for our military and industrial customers. At the end of the day, that's what Prox Dynamics is all about. They have a very unique and highly differentiated platform to get sensors in the air in an extremely covert way. Their sensor, of course, is completely unique in terms of its size and weight and covertness. They were one of our first customers for Lepton. They have integrated Lepton and a visible camera into a truly remarkable lightweight helicopter that can fly very long distances for significant periods of time in a very covert way and provide really a true game-changing capability for war fighters and law enforcement professionals out there. I am also incredibly impressed with this team and it's a natural fit for FLIR. Our brands on top of that remarkable product, I think, is really going to drive good growth.

Peter John Skibitski - Drexel Hamilton LLC

Great. Thanks, Andy.

Operator

Thank you. Our next question comes from the line of Jim Ricchiuti from Needham and Company. Please go ahead.

James Ricchiuti - Needham & Co. LLC

Thank you. Andy, I just want to wish you the best as you go and move on to this new chapter, but just moving to my questions, the sequential decline in adjusted gross margins, wanted to go a little further into that, was that mainly in the Instruments business and how should we think about the potential for that to turn around? You're obviously answering a sequentially weaker quarter, seasonally it's a weaker quarter in Q1. So I'm just trying to get a sense as to how we might think about the outlook for gross margins?

Andrew C. Teich - FLIR Systems, Inc.

Jim, thank you for the well wishes and I'm going to hit the top level of this and then I'm going to pass it over to Tom Surran to talk a little bit more about some of the details on what we're – how we're going to address this. The declines we saw both in instruments and OEM, and there different reasons for each of those. I think they're both very much one-time in nature and they're both issues that we have plans to address.

And so the – some of the issues that we saw in OEM were as a result of our inventory improvement initiatives and then in the process of working the inventory in the OEM group, we had some excess and obsolete and scrap that was higher than normal and that also affected factory absorption. Also in the Instruments business we also saw some E&O scrap and absorption issues that that we feel will flush through the system. Tom, why don't you just talk a little bit more about some of the things we're going to be doing there?

Thomas A. Surran - FLIR Systems, Inc.

Yeah. I think, as you look forward, there is three things that will actually contribute to our gross margin improvement and operating margin improvement overall. The first is the acquired entities, they all have very strong gross margins higher than the current average gross margin of the organic businesses. So that will make a contribution.

Second, as we look at our existing businesses, we'll be introducing new products that have very strong gross margins, and we expect them to make a significant contribution over this next year. And finally, it's kind of the blocking and tackling of the gross margin. This is where you get your hands dirty. And it's working all the details and the execution that the operations of the business including the materials to how you apply the labor and the overhead. So through those three things that's why we're expecting an improvement in gross margin in 2017.

James Ricchiuti - Needham & Co. LLC

And I know you guys don't give quarterly guidance. But just as we think of that, the margin outlook in Q1, is this something, Tom, we should view this as gradually improving as we go through the year? Obviously, the back half of the year is a stronger year for revenue. So presumably that would help your margins more so?

Thomas A. Surran - FLIR Systems, Inc.

Jim, absolutely. This is going to be a continuous process that we're going to be focused on. And so it will not be a singular pop, it will be something that will continue to improve as we progress through the year.

James Ricchiuti - Needham & Co. LLC

Okay. And then, just one final question from me. You've had a number of, I think, I guess five quarters of sequential growth in backlog prior to this decline that you saw in Q4. I'm just wondering, just given what you're seeing out there, hearing out there, how should we think about the government business in 2017 just in terms of the pipeline?

Andrew C. Teich - FLIR Systems, Inc.

Jim, this is Andy again. I want to first just add one other comment to the gross margin issue relative to how this will play out over the year. We have a lot of new products that are going to get launched in the first half of the year. The good news for that is it's going to drive growth. They're replacing older product lines that are ready for a product cycle refresh, and we've built a very good base of entry level customers, particularly in the Instruments business with low cost Lepton products, some percentage of those are going to look for higher capability, and we're going to fulfill that need with new products.

That said, early production on new products, you tend to have a little bit lower gross margin as you power up the learning curves and the production of new products. So, as a result of that, we'll see that gross margin improvement ramp throughout the year.

To your question about backlog, how we're feeling about the government business, I'll say something that I say at every call, is just that it is a bit unpredictable. We don't have a super clear crystal ball on this business. But the other thing I've said on many other calls is that we're extremely well-positioned. Our CDMQ model, our vertical integration, the competitive nature of the products that we have out there today position us really well for a change in demand in that business.

If I look at the backlog decline that we saw in Q4, it's all related to our government oriented business, and a little bit in Maritime, which is typical for Q4. But the majority of that is in Surveillance and in Detection. And those were cyclical businesses. They're just lumpy businesses. The Detection business, we mentioned that we're expecting a large order in the DR-SKO program. Candidly, we were expecting that in Q4, looks like it's going to happen this quarter, we're pretty confident about that.

And then also on Surveillance, it's just a bit of a lumpy business. We saw a little bit more softness in the Middle East in the second half of 2016. We do see cyclicality in that business type, oil prices and I think that's what we saw. The demand level there continues to be very high. And I think for obvious reasons in terms of what's going on in the region and I think with the recent increases in oil prices, we should see that snap back to performance and we'll see the backlog come back up as a result.

James Ricchiuti - Needham & Co. LLC

Okay, thanks. Thanks very much.

Andrew C. Teich - FLIR Systems, Inc.

Pleasure.

Operator

Thank you. Our next question comes from the line of Michael Ciarmoli from SunTrust. Please go ahead.

Michael Ciarmoli - SunTrust Robinson Humphrey, Inc.

Hey, good morning, guys. Thanks for taking the questions and good luck, Andy, going forward, definitely been a pleasure working with you. Did acquisitions contribute meaningfully to the backlog at the end of the fourth quarter?

Andrew C. Teich - FLIR Systems, Inc.

Yeah. Hi, Mike, thanks for the well wishes. You were breaking up a little bit, but I think you were asking about acquisitions related to change in the backlog. It was a little over $15 million most of that going into OEM. The backlog coming in from Prox was pretty low, low single digit millions.

Michael Ciarmoli - SunTrust Robinson Humphrey, Inc.

Got it, that's helpful. And then just looking into 2017 (41:13-41:24) keeping the business under pressure out there?

Andrew C. Teich - FLIR Systems, Inc.

So, I didn't catch enough of that one to be able to answer it. It sounded like there was a question about the organic growth, but you're really breaking up a lot.

Michael Ciarmoli - SunTrust Robinson Humphrey, Inc.

Yeah. Sorry, Andy. I was just asking about the 3% organic growth next year, if there's any specific headwinds or maybe if you can give any color, what would be stronger or weaker into 2017?

Andrew C. Teich - FLIR Systems, Inc.

Yeah. So, there are kind of two things that I would think about here. Number one is there is an FX headwind, so we have in our planning about 1.5% of FX headwind on organic growth side, so that's factored in. So if you add that to the growth number, I think it brings it up. So as a result of that, we're still above GDP growth and I would say it's growth above what most industrial tech companies are doing, and we're fairly conservative on what we're thinking about the government business as I mentioned in the prepared comments. So, it's yet to see with the budget uncertainty and the change of administration how that's going to play out. My thinking is it's biased to the upside, but we'll have to see how it plays out.

Michael Ciarmoli - SunTrust Robinson Humphrey, Inc.

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Jeff Kessler from Imperial Capital. Please go ahead.

Jeffrey Ted Kessler - Imperial Capital LLC

Andy, I just want to say, having worked with you and you were at the divisional level at these trade show, it's been great working with you and I hope for all the best for you in the future.

Andrew C. Teich - FLIR Systems, Inc.

Thanks, Jeff.

Jeffrey Ted Kessler - Imperial Capital LLC

One of the things that I noticed was that your R&D spending was up about 20% in the quarter and as a percentage of revenue it was up nearly a 100 basis points and probably took on a couple cents away shares – cents away from earnings for whatever it's worth. What is that R&D going into why the increase as a percentage of revenue? And what are you going to expect out of it?

Andrew C. Teich - FLIR Systems, Inc.

Sure, Jeff. Without question, the biggest driver to that is acquisitions. So that's a majority of the change in spending there because we're picking up the incremental R&D spend from four acquisitions that we've made during the year. The other piece of that though is, we've got a lot of new products coming in the first half of the year, and typically, as you get to the finish line with new products, the spending goes up and we've seen that in Security, we saw it in Instruments as well, and a little bit in OEM. So we'll – and actually probably a piece of it in Maritime as well. So I think, you'll be pleased with what you see that comes from that additional spending, we've got a lot coming on the new product front, which I'm pretty optimistic about.

Jeffrey Ted Kessler - Imperial Capital LLC

Okay. Can you describe either the size or the timing of the DR-SKO relative to the last when you had?

Andrew C. Teich - FLIR Systems, Inc.

Sure. So the timing on it we expect to see something this quarter. As I'd mentioned, it actually slipped out of Q4. We were expecting in Q4, but due to some budget delays it's very likely that we'll move into this quarter. And the size of the orders would likely be in the same kind of zip code that we've had orders in the past, which is in the $50-ish million range.

Jeffrey Ted Kessler - Imperial Capital LLC

And when I say timing I'm talking about period of time over which you expect to have this satisfied?

Thomas A. Surran - FLIR Systems, Inc.

So this is Tom, Jeff.

Jeffrey Ted Kessler - Imperial Capital LLC

Yes.

Thomas A. Surran - FLIR Systems, Inc.

So, you're asking about the deliveries on – the rate of deliveries basically.

Jeffrey Ted Kessler - Imperial Capital LLC

Yeah, rate of deliveries.

Thomas A. Surran - FLIR Systems, Inc.

Yeah, it's very similar to the level of the bookings we're talking about. So, there's a bit of a stagger between them. We're trying to maintain that.

Jeffrey Ted Kessler - Imperial Capital LLC

Right.

Thomas A. Surran - FLIR Systems, Inc.

But you're looking at something in that the range between $15 million to $20 million per quarter.

Jeffrey Ted Kessler - Imperial Capital LLC

Okay. And I apologize for my voice. Can you go into a little bit about – with regard to what new products – the Boson sensor is going to be going into, given that it seems to be a very good compromise between very tiny and, let's call it, large. And the question really is not about that you've had out there, you've been talking about it now for a little over a year, year and a half. And what products are we going to see it going to. And will it be going into some – will it be integrated into some of the stuff that you've gotten through acquisition as well?

Andrew C. Teich - FLIR Systems, Inc.

Yeah, it's a good question, Jeff. Fundamentally, the Boson has six key aspects to it and that's cost, size, weight, power, resolution, and processing power. And those have always been things that we have driven when we come out with a successive generation core. What's really new about Boson though is the processing power piece that it has this embedded, Myriad 2 processor that gives us a tremendous level of signal processing and artificial intelligence processing capability inside the core. And that's going to manifest its way in terms of enabling our mantra of intelligent imaging in these cores.

You're going to see Boson across pretty much every one of our product lines perhaps, every one of our segments perhaps with the exception of Detection for the time being. So, Surveillance, Instruments, Security, OEM, Maritime, will all be having products that will have Boson at their hearts. It will be the broadest deployment of core technology that we've ever done at the company as it's been a very strong mantra to leverage our research and development investments on a single common platform so that we can get products to market faster and leverage technologies that we develop on the software side across multiple segments.

Jeffrey Ted Kessler - Imperial Capital LLC

Okay. One final question, you got a lot out of working capital efficiency this year with regard to your cash flow. How can we view the cash flow that you generated this year, which was a fairly high amount against the investment that you're going to be making into a lot of these new products that are coming out next year to drive revenue? Where is that cash flow going to be deployed and will the levels – can you talk about – do you have some idea of where that cash flow level maybe over the course of next year, or we're going to have to wait for the fourth quarter of next year to see how the hockey stick works?

Andrew C. Teich - FLIR Systems, Inc.

Well, overall, we expect total cash flow for 2017 to be higher than 2016, but not to the same level that you saw from 2015 to 2016 most likely. And the reason for that is that we'll probably have higher capital spending in 2017 than we had in 2016, it was kind of a light year for us. That said, the current investments that we're planning to make are included in that thinking. Our R&D spending for 2017, as a percent of revenue, will be roughly consistent with what you saw in 2016. We don't expect big changes there.

Jeffrey Ted Kessler - Imperial Capital LLC

Okay, great. And that's it, thank you very much. And again good luck, Andy, we'll be talking.

Andrew C. Teich - FLIR Systems, Inc.

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Josh Sullivan from Seaport Global. Please go ahead.

Josh Ward Sullivan - Seaport Global Securities LLC

Good morning.

Andrew C. Teich - FLIR Systems, Inc.

Good morning.

Josh Ward Sullivan - Seaport Global Securities LLC

Just looking at the Prox Dynamics, Black Hornet, I know the marines and army have put the hornet through some testing. Are there any specific near term funding opportunities we should be keeping an eye for?

Andrew C. Teich - FLIR Systems, Inc.

There are no programs of record that have been defined yet today. There are some thoughts of programs that are yet to come. And we're involved in those evaluations and we expect to see some more formal competitions and procurement processes that will come out of that. The Prox has done quite well with those products – with those entities to date and it has also done well with several foreign entities. I think it's a total of 30 different foreign MODs and MOIs that are using the product today. So we feel like we're really well positioned and given the products uniqueness there really is no competition – direct competition for that product. I think the real game changer relative to Prox's future is the overlay of the FLIR brand, credibility and sales organization that comes from our organization, I think, it's really going to give that product a shot in the arm in terms of its credibility into the markets.

Josh Ward Sullivan - Seaport Global Securities LLC

Okay, thanks. And then just one on Point Grey and the machine vision market. And I know you said that the market set an inflection point here. Can you talk about where infrared penetration might be right now? And then where you see it going as things progress?

Andrew C. Teich - FLIR Systems, Inc.

Yeah, the comments on the inflection point is really related to the utilization of thermal imaging technology, and machine vision applications. We've had an automation segment for over a decade and it's been growing steadily. The issue though is as we're not a machine vision and automation company today. We will be now that we have Point Grey Research as part of the team. There are unique characteristics to cameras that are used in that space. Unique interfaces, unique timing of the signals and packaging even and the Point Grey team knows this extremely well.

So we can bring that knowledge of the marketplace, the customer applications, the required interfaces and functionality of the products and combine that with the expertise, and manufacturing cost efficiencies that we have in the thermal space. If you think about machine vision application, thermal imaging brings some very interesting capabilities that can't be done with visible imagers. The obvious one are being able to see in total darkness, but less obvious level things like being able to see through factory of obscureness; steam, smoke, dust, there are many situations where those things inhibit the use of visible cameras.

And then of course, we have the ability to accurately measure temperature remotely to look at thermal patterns of products. And there are a lot of applications where knowing the actual temperature or being able to determine the uniformity of the temperature or look for specific thermal patterns associated with sealing or welding or other processes, machining processes, is important to maintaining product quality. And those are the kinds of applications that we're going to go after. We've been doing that for a while in our own automation segment and we feel now the time is right to inject that technology into a more capable organization that can take it to the next level.

Operator

Thank you. Our next question is a follow-up from the line of Pete Skibitski from Drexel Hamilton. Please go ahead.

Peter John Skibitski - Drexel Hamilton LLC

Yeah, few follow-ups, guys. I guess first, Andy, on the President Trump's southern border initiative, are you guys seeing anything – any RFIs, any RFPs out there yet or is it too early?

Andrew C. Teich - FLIR Systems, Inc.

Too early. Yeah, we haven't seen anything formally yet. I feel pretty good about it, irrespective of how and ultimately get executed whether it's a physical wall or the use of technology. The reality is that the Border Patrol Mission revolves around situational awareness and that's what we do. So whether it'd be ground base systems, pole mounted systems, vehicle mounted systems, systems on UAVs or systems on manned aircraft or systems on marine vessels, we do it all, Board of Control likes us, we've got a very good reputation and track record with CBP.

And I think no matter what ends up going on, if there is more money being spent on the border, I think it's reasonable to think that thermal imaging and FLIR will be a part of that. We're also ramping up our business relative to our radar capabilities and have developed some really good quality ground base radar that I think also could be considered as a augment or whatever final decision has taken for border security.

Peter John Skibitski - Drexel Hamilton LLC

Got it, got it. Great. And then one for either you or Amit, are you guys assuming any share repurchases in year 2017 EPS guidance and just was wondering explicitly what level of CapEx you're expecting next year also?

Amit Singhi - FLIR Systems, Inc.

So, we – in the guidance that we've provided, there is not much share repurchase assumed in that. In terms of CapEx, this year was unusually low, a full year was 2.2% of net revenue. Our general guidance has been in the 3% to 4% if you look at the last few years. Next year, we expect it to be in that range of 3% to 4%, not the unusually low 2.2% that we saw this year.

Peter John Skibitski - Drexel Hamilton LLC

Okay, okay. And then, Amit, can you quantify the inventory charge, OEM in the quarter and I don't know maybe what product line it related to?

Amit Singhi - FLIR Systems, Inc.

We don't get into that level of specificity around specifics by segment, but that was a key contributor to the gross margin impact that we had and it was in the OEM segment, there was a little bit in the Instrument segment as well. But we don't give more texture around that.

Peter John Skibitski - Drexel Hamilton LLC

Okay, okay. And I promise my last one here. On the accounting, I think in the past you factored – you haven't factored out amortization of acquired intangibles in your adjusted EPS and I believe it sounds like you're going to now going forward. So...

Amit Singhi - FLIR Systems, Inc.

Can you repeat?

Peter John Skibitski - Drexel Hamilton LLC

Okay. So, can you give us a sense of maybe what you're expecting that level to be acquiring intangibles in 2017 and I don't know if there is any legacy purchase accounting that will flow over 2017 as well and ...

Amit Singhi - FLIR Systems, Inc.

Yeah. So a few – so you're absolutely right. What we have in terms of what we're going to provide now in the non-GAAP measures and we've defined exactly what the principles are and what those line items are in the attachments that we've provided. But acquisition related activity, one-time costs and/or the intangible amortization and inventory step-ups are going to be the adjustment that we're going to make, just because as you know, those are lumpy and the calendarization could vary depending on the level of the acquisitions. This year we had probably around $20 million or so related to that, and next year is going to be higher than that both for the inventory step-up, and the amortization of intangibles together.

Peter John Skibitski - Drexel Hamilton LLC

Okay. Okay. And maybe on the purchase accounting, maybe more first half weighted, I would assume?

Amit Singhi - FLIR Systems, Inc.

Next year, yes.

Peter John Skibitski - Drexel Hamilton LLC

Okay. Okay. Great. Thanks very much, guys.

Andrew C. Teich - FLIR Systems, Inc.

You're welcome.

Operator

Thank you. Our next question comes from the line of Noah Poponak from Goldman Sachs. Please go ahead.

Noah Poponak - Goldman Sachs & Co.

Hello, everyone.

Andrew C. Teich - FLIR Systems, Inc.

Hey, Noah.

Amit Singhi - FLIR Systems, Inc.

Hello.

Noah Poponak - Goldman Sachs & Co.

Andy, my best wishes as well to you in your retirement.

Andrew C. Teich - FLIR Systems, Inc.

Thanks. Appreciate it.

Noah Poponak - Goldman Sachs & Co.

If I were to look at the rank order of the segments growth rates in 2016, which grew the fastest and which grew the slowest, which of those changes it's positioned significantly in 2017 versus 2016?

Andrew C. Teich - FLIR Systems, Inc.

Well, I don't have the rank order in front of me. But if I sort of think about what our expectations for the business going forward, we expect the OEM & Emerging segment to continue to do well, it's core business, the launch of Boson, traction that we're getting from Lepton is all positive. The emerging pieces of that business, FLIR ONE, the traffic business, those are both, we expect to continue to do well with new product launches.

And also, of course, the addition of Integrated Imaging Solutions, the Point Grey Research business, as I mentioned in the previous comments, I think they're all going to drive that good growth in that business. We've been pretty conservative about our expectations relative to surveillance I'd say that one is kind of a wildcard for us.

I do expect, good things to come from Prox, but we'll look at how that ultimately plays out. Detection and Maritime, those are both businesses we expect to grow next year as well. We've got a strong cadence of new products that are coming in the Maritime segment, we've got the Miami Boat Show that kicks off this week, and we'll have some product announcements later in the week, talking about what we're doing there. But I'm pretty excited about the opportunities that that brings. And we're being pretty conservative about Instruments right now. We do have a strong cadence of new products that are going to be coming as we've alluded to in previous calls and again here today. But that's a business that's had both currency headwinds and headwinds based on ASP declines. So we're being pretty conservative in our thinking on that business right now.

Noah Poponak - Goldman Sachs & Co.

Andy, are you assuming Surveillance has a positive growth rate in 2017?

Andrew C. Teich - FLIR Systems, Inc.

Yeah, but it's low.

Noah Poponak - Goldman Sachs & Co.

And I guess, you've given – you've spoken to the fourth quarter book-to-bill there and the lumpiness of the business. Do you have any other numbers on what that was split by geography? Just my understanding of the lumpiness of your business and the short cycle nature of the business, but seem to be on a recovering trend and most of the sort of leading indicator data points we can look at in U.S. defense seem pretty positive. So was it elsewhere in the world or was it sort of just random including the U.S.?

Andrew C. Teich - FLIR Systems, Inc.

Yeah. So from a booking standpoint, Noah, actually the U.S. and Europe were up in Q4, Middle East was down and it was down pretty strongly and that is a business that is pretty lumpy as we've discussed in the past and I think it's a business that would likely – will likely rebound again. Actually, I take that back on looking at the data. Now, U.S. was down. Americas, other was up, Europe was up slightly. Middle East and Africa and APAC were down in Q4.

I don't read too deeply into those things though because it just is a lumpy business. The one-point that I made earlier about the Middle East and Africa having some tie to oil prices. We expect that we would see a return there. If I look at the world in total for the full year, the U.S. was down high single digits. The rest, every single other region that we look at Americas, other Europe, Middle East and Africa and APAC were all up for the year in total, bookings for the year were up slightly 2016 versus 2015.

I think we're going to see stronger sales in the U.S. in 2017. We're starting to see some early evidence of that, but I think it's going to be skewed towards the second half of the year as the administration refines its plans for refit of product and for how technology is going to get deployed on the border.

Noah Poponak - Goldman Sachs & Co.

I appreciate the color there. So just to make sure I'm clear, you're saying, Surveillance U.S. bookings full year 2016 declined high single digits year-over-year?

Andrew C. Teich - FLIR Systems, Inc.

That's correct.

Noah Poponak - Goldman Sachs & Co.

I guess, does that surprise you? We haven't seen that from too many defense companies and, again, budget kind of getting better. You do – it's really budget authority that's getting better in 2016 and outlays not quite yet. Maybe is that – are you just waiting for the timing lag to come through there?

Andrew C. Teich - FLIR Systems, Inc.

Yeah. And if we sort of look at the pieces of our business, the things that went down, our integrated systems business was down and those were mostly deliveries into the U.S. and our Maritime business was down, this is bookings again in the U.S. and that's just timing of program last year we had a big – in 2015, we had a big program, the PB-EOS program, the U.S. Navy Special Operations came through and Coast Guard programs.

And I think it just shifts by customer, so I am a little bit surprised. I would have thought that the U.S. would have been stronger in 2016, but I'm not concerned about it. I'm confident that we're set up pretty well in 2017. You got to keep in mind that our business is short cycle in nature, we're not – those other companies that you are seeing growth come from are program of record business based, is my guess. And our program of record based business or business that is driven by program of record, manifest itself more so on our OEM business and that business was up significantly, and it's part of our total U.S. government business was up strongly year-over-year.

Noah Poponak - Goldman Sachs & Co.

Okay. That's really interesting. Any quantification you could provide, even if a relatively wide range on where you expect the total company segment operating margin to come in for 2017?

Andrew C. Teich - FLIR Systems, Inc.

I'll have Amit cover that one.

Amit Singhi - FLIR Systems, Inc.

Hi, Noah.

Noah Poponak - Goldman Sachs & Co.

Hello.

Amit Singhi - FLIR Systems, Inc.

How are you?

Noah Poponak - Goldman Sachs & Co.

Doing well. How are you?

Amit Singhi - FLIR Systems, Inc.

Good. So overall, we expect in terms of the non-GAAP adjusted operating margins that we've provided, adjusting out for some of the intangibles we do expect it to go up year-over-year slightly. So it will be in the same ballpark range, but it will be a slight improvement compared to 2016.

Noah Poponak - Goldman Sachs & Co.

Okay. So it sounds like you're assuming less than 50 basis points of total segment margin expansion, adjusted?

Amit Singhi - FLIR Systems, Inc.

Right, right around that.

Noah Poponak - Goldman Sachs & Co.

In the guidance?

Amit Singhi - FLIR Systems, Inc.

That's right.

Noah Poponak - Goldman Sachs & Co.

Okay, okay, okay. Okay, terrific. Thanks so much.

Andrew C. Teich - FLIR Systems, Inc.

Thanks, Noah.

Operator

Thank you. Our final question comes from the line of Jeff Kessler from Imperial Capital. Please go ahead.

Jeffrey Ted Kessler - Imperial Capital LLC

Thank you. Just one quick question on Security. Have you gotten to a point yet in the retail area where there's been weakness for a couple years due to far eastern imports and things like that, have you gotten to a point of where it's going to – you can see a bottoming out of that so that the other areas in Security, which do have more growth, can improve? You had growth in that division, it began to slow down, a lot of it due to retail. Are you at that bottom point now that – where you can start seeing the comps going forward to be not as bad?

Andrew C. Teich - FLIR Systems, Inc.

So Jeff, the retail space certainly continues to be a very competitive space, and I expect that that's going to continue. Our strategy in dealing with that has two major prongs to it. Number one is differentiate products, and we've got some new products that we will be launching in the retail space that are differentiated from our historical bundled wired and wireless products that we've sold under the Lorex brand. The second thing is, an increased focus on the higher margin parts of that business and that's the former DVTEL business, our Video Management System based business, and enterprise class camera business, and also the thermal camera business, we've got several product introductions that are teed up for the thermal camera space that I think will further extend our leadership there as the adoption rate of thermal and security particularly enterprise based applications increases.

Jeffrey Ted Kessler - Imperial Capital LLC

All right. Great. Thank you very much.

Operator

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Andrew C. Teich - FLIR Systems, Inc.

Great. Thank you all for joining the call today. And as mentioned in my previous comments, I'm confident that FLIR is well-positioned for continued growth with a strong management team, market leading products, and a dedicated employee base.

Our plan for 2017 is bolstered by an aggressive new product introduction plan and thoughtful integration of the recently acquired businesses. With today's announcement, I remained as committed as ever to our execution plan and a smooth transition to FLIR's next leader.

As always, I want to thank the global FLIR employee base for their continued dedication and execution, the outpouring of support this morning has been truly humbling. I look forward to speaking with you all again next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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