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Edited Transcript of FLIR earnings conference call or presentation 14-Feb-18 2:00pm GMT

Q4 2017 FLIR Systems Inc Earnings Call

WILSONVILLE Feb 15, 2018 (Thomson StreetEvents) -- Edited Transcript of FLIR Systems Inc earnings conference call or presentation Wednesday, February 14, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carol P. Lowe

FLIR Systems, Inc. - CFO & Executive VP

* David Ray

FLIR Systems, Inc. - President of the Government & Defense Business Unit

* Frank Pennisi

FLIR Systems, Inc. - President of the Industrial Business Unit

* James J. Cannon

FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director

* Shane R. Harrison

FLIR Systems, Inc. - SVP of Corporate Development & Strategy

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Conference Call Participants

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* Andrew Jay Lipke

Stephens Inc., Research Division - Research Analyst

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Jeffrey Ted Kessler

Imperial Capital, LLC, Research Division - MD

* Jonathan Frank Ho

William Blair & Company L.L.C., Research Division - Technology Analyst

* Joshua Ward Sullivan

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Noah Poponak

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Peter John Skibitski

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the FLIR Systems Fourth Quarter and Full Year 2017 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Shane Harrison. Please go ahead, Shane.

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Shane R. Harrison, FLIR Systems, Inc. - SVP of Corporate Development & Strategy [2]

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Thank you. Good morning, everybody. 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 flir.com/investors.

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. 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 are as of today, and we do not undertake any obligation to update any such statement 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 these adjusted measures is in our press release this morning.

Let me now turn the call over to Jim Cannon, President and CEO of FLIR Systems. Jim?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [3]

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Thank you, Shane, and thank you, everyone, for joining FLIR's Fourth Quarter 2017 Earnings Call. With Shane and me today are Carol Lowe, our CFO; Travis Merrill, the President of our Commercial Business Unit; Frank Pennisi, the President of our Industrial Business Unit; and I'd like to welcome David Ray, the new President of our Government & Defense Business Unit.

The fourth quarter was another sound quarter from a growth and profitability standpoint. We grew the top line at 4% year-over-year, improved our adjusted gross margins, reached the highest quarterly adjusted operating margin since 2012 and improved our working capital metrics.

The quarter capped off a year that saw a record level of revenue and adjusted earnings per share, and we feel we're set up well for 2018 with a strong backlog, a repositioned Security business and a lower-than-expected tax rate. We're very encouraged to see how lawmakers agree on a multiyear U.S. Department of Defense budget. And while we're well into our 2018 operating plan, this will help us focus on U.S. DoD priorities for 2019 and beyond.

I'll start the review of the fourth quarter on Slide 3 of the presentation. This morning, we reported fourth quarter revenue of $495 million, which was an increase of 4% over the fourth quarter of 2016 and 2% on an organic basis. Our commercial products revenue grew 7% over the prior year and our government products were flat with the prior year. As a reminder and as discussed on our last call, our customers accelerated the delivery of a couple of key programs into the third quarter that affected this fourth quarter of 2017.

Adjusted gross profit and adjusted operating income grew 10% and 8% over the prior year, respectively, with operating margin expanding approximately 80 basis points over the fourth quarter of 2016. We demonstrated solid leverage by growing operating income double the rate of revenue growth.

Adjusted earnings per share for the fourth quarter were $0.58, which represents 12% growth versus last year's adjusted earnings per share of $0.52. Total company 12-month backlog finished the quarter at $652 million, that's up $60 million or 10% over the end of 2016. Indeed, the highest year-end backlog level in nearly a decade.

For the full year, shown on Slide 4, revenue of $1.8 billion was 8% higher than 2016. Organically, 2017 revenue growth was 2% over 2016. Commercial products grew 13% and government products grew 2% compared to the prior year. Adjusted gross profit grew 12%, with margins improving 180 basis points. Adjusted operating income also grew 12% while adjusted EPS grew 11% from $1.69 to $1.88.

As mentioned on our earlier calls and as shown on Slide 5, we intend to fuel parts of our business, feed other parts of our business and focus on our operating portfolio.

As announced last week, we sold our Canada-based nonthermal security operation that included Lorex-branded retail security products as well as small and medium business security products in the first quarter of 2018. We made the decision to divest this business in order to better focus our Security division's differentiated technology on the more attractive critical infrastructure and enterprise markets for security solutions. We want to thank the employees of Lorex and our SMB business for their hard work over these last 5 years.

On Slide 6, looking ahead to 2018. Today, we announced our initial expectations for full year revenue to be in the range of $1.73 billion to $1.76 billion and full year adjusted EPS to be in the range of $2.05 to $2.10. When you exclude the result of the divested businesses from 2017, these ranges represent expected revenue growth of 4% to 6% of organic growth and adjusted EPS growth of 9% to 12%. This outlook represents our highest organic growth rate in nearly a decade and implies solid operating leverage in the business. Carol will provide more color around this guidance.

We also today announced a 7% increase to our quarterly dividend to $0.16 per share. As we've discussed in the past and as we will begin reporting in 3 business units rather than 6 segments beginning in the first quarter of 2018, for your reference, in the appendix of the slide deck, you'll find a quarterly revenue and operating income history by our new business units. This realignment of businesses and resources will reduce our complexity, improve our agility, unlock synergies, increase team collaboration and enhance management focus. It is our goal that this leads to improved ability to grow and create sustained shareholder value.

With the addition of David as our Government & Defense Business Unit President in January, our executive staff transition is complete and we're ready to execute on our strategy and accomplish our task of exceeding our commitments with integrity while we innovate the world's sixth sense to enhance perception awareness, in order to improve decision-making to save lives and livelihoods. We intend to discuss our strategy in detail at our upcoming Investor Day on May 16 in New York City. We'll be sending out invitations in the coming weeks, but please hold this date on your calendars.

On Slide 7, you'll find an update and overview of The FLIR Method, or TFM, our continuous business improvement initiative that we feel will accelerate organic growth, improve profitability and generate excess cash to maximize value creation.

During the fourth quarter, we began aligning internal resources as well as recruited new talent, to execute on our TFM strategies. For 2018, one of our priorities is the creation of a pricing analysis function to apply pricing strategy across all of our businesses so we ensure we're making informed pricing decisions. Additionally, we're implementing several productivity enhancement projects which are intended to improve manufacturing efficiencies and increase our sensor production yields, which is so important as those savings trickle through all of our vertically integrated businesses.

The longer-term mission of TFM includes focusing our sights on pricing and productivity. It also drives innovation and product development, standardizes core business processes, improves cross-business communications, enhances our talent development programs and boosts our acquisition and integration processes. Ultimately, all these benefits will better enable us to grow organically, drive strong profit margins and generate cash.

On the topic of product innovation, you'll see on Slide 8, a summary of the products we've introduced since our last earnings call. Many of these products are built around Boson, our highly differentiated thermal camera core that offers industry-leading size, weight and power consumption capabilities.

First, our Security segment introduced a new thermal bullet camera called the FLIR FB-Series ID, which combines a thermal sensor with high-performance video analytics to offer high reliability in alarming solutions. In December, the Security segment also introduced the Quasar panoramic visible light camera that effectively reduces the number of cameras required for wide-area surveillance.

At the Consumer Electronics Show in Las Vegas, we rolled out our second-generation thermal-vision Automotive Development Kit, or ADK. This ADK is designed to introduce autonomous automobile system designers to the power of thermal sensing, specifically how the technology is ideal for sensing at night, through adverse weather conditions, identifying and classifying living beings, sensing at long distance, which includes seeing up to 4x farther than traditional headlights.

In January, at the Shooting, Hunting and Outdoor Trade, or SHOT Show, in Las Vegas, our Outdoor and Tactical Systems business, or OTS, introduced the FLIR Breach advanced thermal monocular. The Boson-based Breach incorporates a digital compass and other features into a lightweight housing that can be handheld or helmet-mounted. Also at the SHOT Show, OTS' Armasight by FLIR brand launched 3 new families of night vision scopes that offer multiple mounting options, better battery life and more lens options for multiple fields of view.

And lastly, our Instruments segment Engius brand launched our latest intelliRock system, which is a sensor system used by construction professionals that provides data to ensure the strength and the quality of concrete. The new intelliRock III version now incorporates a Lepton camera to add thermal sensing capability to the solution.

Let me now welcome Carol to FLIR's quarterly earnings call and have her review the fourth quarter financial and operational highlights. Carol?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [4]

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Thank you, Jim. On Slide 9, you'll see our fourth quarter financial result. Please note, with the exception of cash flow, all of these financials are on a non-GAAP basis. Reconciliation to GAAP data is included in the appendix.

Consolidated revenue for the quarter was $495 million, a 4% increase compared to the fourth quarter of 2016. Geographically, revenue increased 25% in the Middle East, 12% in Europe and 2% in the U.S. while Asia was down 8% due to a tough comparable in the prior year. The strength in the Middle East region was due to deliveries from the Surveillance segment. Revenue to the U.S. government was 24% of total revenue and increased 2% versus last year.

Adjusted gross margin improved 250 basis points year-over-year to 49%, driven by product mix, acquisition and new products. Fourth quarter adjusted operating margin was 23%, about 80 basis points higher than last year, with the gross margin improvement being offset partially by higher R&D and selling spend. Adjusted net income for the fourth quarter of 2017 was up 14% to $82 million; and adjusted earnings per share was $0.58, 12% higher than the prior year. Quarterly cash flow from operations grew 2% to $99 million and was 121% of adjusted net income. During the quarter, we returned $21 million to shareholders through the payment of dividends.

At the segment level, revenue growth in the Detection, OEM & Emerging, Maritime and Instruments segments was partially offset by declines in the Surveillance and Security segments. Improved margins in several segments helped to grow total adjusted operating income faster than revenue. We finished the year with $519 million of cash.

On Slide 10, you'll see our full year financial results. Consolidated revenue was $1.8 billion, an 8% increase over prior year and 2% on an organic basis. Geographically, revenue increased in all regions except the Middle East, which was down slightly. Sales to the U.S. government increased approximately $50 million for the year, up 12%, and represented approximately 26% of total revenue compared to 25% in 2016.

Consolidated full year adjusted gross margin was 49%, 180 basis points higher than last year due to margin-accretive acquisitions, product mix and new products. Our adjusted operating margin for the year was 20%, 70 basis points better than the prior year.

Adjusted 2017 net earnings totaled $263 million or $1.88 per fully diluted share compared with $234 million or $1.69 per fully diluted share.

All segments, except Security, grew their revenue in 2017 versus the prior year. The decline in Security was due primarily to the retail product line, a business that, as Jim mentioned, has since been divested. Total segment operating margin improved 90 basis points for the year.

Our guidance for full year revenue is $1.73 billion to $1.76 billion and full year adjusted EPS of $2.05 to $2.10, representing revenue growth of 4% to 6% and adjusted EPS growth of 9% to 12% when you exclude the divested Security businesses. This outlook assumes a diluted share count of 142 million shares and that our adjusted effective tax rate will go from the 25.4% in 2017 to 21.5% in 2018.

The reduction in the effective rate in 2018 is due to the enactment of the U.S. Tax Cuts and Jobs Act of 2017. The new statutory federal rate reduction of 14% impacts our rates by about 6 points, given over 50% of our income is earned outside of the U.S. This reduction is offset by approximately 1 point from the elimination of certain tax credits under the new law and by another point on the net change in our expected foreign income tax rate.

The U.S. tax reform resulted in $93 million of discrete tax items in our fourth quarter 2017 GAAP results. This is made up of $81 million of deemed repatriation charges on previously earned foreign income, most of which will be payable over the next 8 years; and a $12 million charge due to the revaluation of our net deferred tax assets.

Detailing the segments a bit more, you will see on the left side of Slide 11 a summary of Surveillance's fourth quarter results. Fourth quarter revenue for Surveillance was $151 million, down 5% from the fourth quarter of 2016. Strength in land products was offset by softness in airborne. OTS and integrated systems product line compared to the prior year. Operating income for the Surveillance segment was $48 million, in line with the prior year, but we saw an operating margin improvement from 30% to 32%.

Surveillance bookings grew 9% year-over-year, with growth in all regions except Europe. Notably in the quarter, we booked a $7 million order for Black Hornet Nano UAS system by the Australian Army. Surveillance backlog increased 8% over the prior year to $354 million.

On the right side of Slide 11 is a summary of the Detection segment, which saw fourth quarter revenue grow 18% year-over-year to $39 million. Timing of deliveries under the DR-SKO program drove this increase. Operating profit increased 18% with margins maintaining at 30%. Detection finished the fourth quarter with $59 million of backlog, up $2 million from the end of 2016.

Moving to Slide 12. Instruments revenue of $103 million was up 7% over the fourth quarter 2016 and helped Instruments finish 2017 with an all-time high annual revenue level. Broad product line growth drove the Q4 revenue increase, with particular strength in volume, handheld, plant predictive maintenance cameras as well as growth in our science cameras.

Instruments operating profit in the fourth quarter increased 3% over the fourth quarter of 2016 to $33 million or 32% of revenue. Operating margins declined 110 basis points as investments in the sales organization and R&D were made to accelerate growth as we move forward in 2018.

The results for the OEM & Emerging segment are shown on Slide 12 as well. OEM & Emerging fourth quarter revenue was $88 million, increasing 15% over last year and represented another all-time quarterly high in revenue for the segment. The acquired Integrated Imaging Solutions line of business was the driver of the growth. Organic revenue was up slightly due to strong results from our Lepton cores, partially offset by a small decline in other cores and components sales. The Lepton revenue in the quarter was the highest level of Lepton revenue since its introduction in 2014.

OEM & Emerging operating profit grew 43% year-over-year to reach $26 million. Operating margin of 29% was up 560 basis points versus the prior year on higher product margins and improved yields. Order backlog in the OEM & Emerging segment increased 5% during the quarter to $169 million.

Moving to Slide 13. On the left slide, you'll see the Security segment revenue of $71 million was down 3% compared to last year's fourth quarter. High-end cooled thermal was the primary driver of the decline due to the fact that in the prior year, we shipped a number of cooled security cameras for a specific project that did not repeat in 2017.

Security's operating income was $5.7 million or 8% of revenue and declined 36% from the prior year. Continued pressure on gross margins in the Lorex retail and the SMB businesses, combined with higher investments in Lorex e-commerce marketing, drove the decline in margin versus the prior year.

As Jim stated, we completed the sale of the retail and SMB portion of the Security segment last week. The businesses divested had combined revenue of $140 million in 2017 and were breakeven on an operating income basis. We recorded a $23.6 million noncash loss in our GAAP results related to the transaction.

Maritime segment revenue was $44 million, up 14% versus the prior year, which represented the highest growth rate in this segment since our acquisition of Raymarine in 2010. The market performance of Raymarine's Axiom multifunction displays led this performance, which spurred growth in related sensors and instrumentation, including thermal cameras, echo sounders and radars in the quarter.

Maritime operating income was $4 million or 9% of revenue. This represents the highest operating margin for a fourth quarter since we created the Maritime segment. Improved margins, combined with OpEx discipline, created significant leverage, with operating income growing 90% over the fourth quarter of 2016.

This concludes my summary of the financials and the segments. I'll now pass the call back over to Jim.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [5]

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Thank you, Carol. We are proud but not satisfied with these results and with our performance in 2017. It was a year of a lot of change, and the team executed very well, considering. I commend the very hard work of all of our employees in making 2017 a success.

As we look ahead, our focus will be on growing organically, improving margins and deploying cash effectively. We've pivoted our Security division away from consumer-oriented markets and toward the markets that can derive the most value out of our differentiators. The FLIR Method is underway, and we expect to begin to see improvements in cost, processes and innovations during 2018 and beyond. And I now feel that we have the right senior team, organizational rhythms and operating structure in place to take this excellent company to the next level and achieve our vision of enabling the world with a powerful sixth sense.

I'll end the prepared remarks by reminding everyone of our daily task: To consistently exceed our commitments with integrity; and our purpose, which is to innovate the world's sixth sense to enhance perception awareness in order to save lives and livelihood. We're committed to organic growth, margin improvement and executing our plans without compromise to our core values.

I now open up the call for questions and answers, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Noah Poponak from Goldman Sachs.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Can we talk about balance sheet utilization? Because with the strong free cash generation of the business, you're back into a net cash position after spending, really, just a few quarters out of one; haven't bought back stock in a little while, the guidance says the share count, going up a decent amount. So what is the thought process around balance sheet -- proper balance sheet utilization? Where should net debt-to-EBITDA or net debt-to-cap be? And what are you looking to do? I know, Jim, you've talked about wanting to add more inorganically. What's out there in terms of size? And could you not at least offset share count creep while still looking for sizable acquisitions?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [3]

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Sure. Well, as we mentioned in our earlier call, we paid down some of our debt in the third quarter as we levered up to prepare for an acquisition in the first half of 2017 that just didn't materialize, right? And then, as we -- it went through the second half of this year. And as you stated, it's important to us to grow inorganically. As we think about this business going forward and the capabilities we have, there's a lot that we want to do to augment those capabilities, in particular as we talk about moving from sensing solutions into helping make decisions, the analytics and software required, again, to focus on total mission outcomes for our users. And that's going to require inorganic activities to make it happen in concert with our organic work. Now with regard to the potential targets that are out there, their size, et cetera, it's sort of all over the board. And I think you all know valuations right now can be incredibly high. Now we have a very active pipeline underway. Of course, there's only so much, certainly, we can talk about that here. Have not yet, certainly, been able to execute on the deal in the back half of this year to talk about, but regardless, lots of activity underway. And as we mentioned on earlier calls, we want to have a balanced approach of share buyback opportunistically when it makes sense for us, of deploying our own capital to invest in our own technologies. We want to constantly innovate and disrupt ourselves, if you will; do acquisitions, as we've talked about. And we're also looking at opportunities to make minority investments in companies that perhaps we don't want to acquire outright, but have a technology or a capability that's important to us. So that's an area of interest to us as well. But Carol, any additional thoughts from your perspective?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [4]

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Yes. Thank you, Jim. I would say we'll share more information on our capital allocation strategy when we have our Investor Day in May. We do enjoy the benefits of investment-grade rating and would intend to maintain that rating. We feel like it's the right decision for the company. It gives us financial flexibility to address acquisitions as they come up when there's a right strategic acquisition, in addition to whether -- when there are broader macro impacts from an economic standpoint. So we'll continue to focus on maintaining the investment grade and look for the right opportunities to invest for both organic growth as well as acquisitions, as Jim described.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [5]

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And I'll just cap it off, Noah, by saying right now, the real focus we have, and you see it in the guidance of 4% to 6% organic growth, we want to consistently demonstrate organic growth and, as we mentioned in the past, having an inorganic strategy that complements that as we go forward.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Where do you -- where can you take leverage, net debt to cap or net debt to EBITDA and maintain your investment-grade rating?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [7]

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So we can probably go, right now, up to about 2.5x. But again, it all would depend on the quality of the asset if we are executing an acquisition. So depending on the cash flow generated and the accretive value, that gives us room as well, as well as a commitment to bring leverage back down. So as always with acquisitions, it depends. But we have quite a bit of room to go from our current leverage rate before we would even start pushing that outer bound.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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And where would you pin the likelihood that, that happens in 2018, that you take leverage to 2, 2.5x for inorganic activity?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [9]

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Yes, there's no way really for us to predict that, right? Certainly, we'd be opportunistic as those kind of deals came along. But right now, very -- would be difficult for us to predict anyway.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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So with the guidance having the share count up a decent amount, should we think of that as there is enough in the pipeline to -- even though you can't predict that likelihood, that there's enough in the pipeline, that there's a decent chance of that happening? Or should we think of that as more like a placeholder. And if nothing happens, you all buy back stock?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [11]

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Yes. We really don't want to speculate what's going to happen with future acquisitions in 2018. Suffice to say, we're going to continue to be acquisitive, but impossible for us to predict timing or give you any sort of forward-looking insight there.

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Operator [12]

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Our next question is coming from Peter Arment from Baird.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [13]

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Jim, on the guidance, when you -- the 4% to 6% organic, maybe can you just maybe talk about some, maybe the puts and takes? How you're maybe thinking about that or how that looks, maybe if you can, from a segment level, maybe if you could just quantify it a little bit.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [14]

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Yes. Sure, Peter. If we look at past performance, 4% to 6% organic growth is a sound improvement as we go into 2018. And we look across the business, and you know from following our company for some time with 6 segments, now 3 business units, over the past several years, it's been a bit choppy, the end markets. We would have 1 business that could be significantly ahead, but then that could be neutralized by another business that perhaps the market dynamics weren't as strong. Right now, as we look at our end markets across Commercial, Industrial and our Government & Defense Business Units, we feel pretty good about all of those markets. We have a multiyear budget now that's been passed by our lawmakers. And while in 2018, that doesn't mean a lot of tailwind to us, certainly going into 2019, and with OCO dollars, OCO funding being included in that budget, it gives some confidence for our war fighters to make decisions around readiness and modernization, et cetera. In our Commercial Business Unit, we took a pretty big step focusing the Security business away from retail and into places where we can differentiate. Our Maritime business has grown nicely throughout 2017, and with Axiom and other new products, has momentum. The Industrial business unit, in particular the acquisition of IIS, which anniversaried itself in November, has seen just tremendous organic growth throughout 2017, and that's without the introduction to thermal into their kind of product or technology offering, that's with their core machine vision. So across all of the BUs, when we think about that 4% to 6% organic growth rate, we don't see any real laggards. All the business units, we expect to perform and contribute to that kind of guidance. And we want to, throughout, as we mentioned earlier, do that with leverage down to our earnings. So as I mentioned on the earlier question, organic growth, maintain and improving margins, good capital efficiency, those are the 3 sound metrics that we're going to be really, really focused on, and then, as you'll hear on our Investor Day, executing a strategy with inorganic opportunities that lay in accretive to that effort.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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That's helpful. And just as a follow-up, just you mentioned kind of create this new -- or pricing strategy. I was wondering if you'd just give us an example, maybe, of how this is different from what is being done today. From -- I guess you mentioned standardization across the platform.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [16]

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Yes. So with The FLIR Method, and we're really excited about it, it brings an operating discipline into our business that really begins to take us into -- I hate to use the word next level, but for lack for a better one, I'll use it -- to the next level. Again, FLIR is a great company. But as we brought 6 segments into 3 business units, we really tapped into a lot of economies of scale and synergies when it comes to standardizing processes. And when we think about how we want to drive margin improvement, pricing and productivity are 2 of those key levers. Now with regard to productivity, for a long time, we've worked to improve our processes and improve yields; improve, again, the way that we implement Lean on the shop floor, but we can always do better. And we've got different sites at sort of different places on that continuum of Lean manufacturing prowess. With regard to prices -- pricing, the same holds true. So we wanted to bring in a seasoned pricing leader who's spent a career in that discipline. And we're very fortunate to get a great individual onboard now building out that team. And you know with good pricing analysis, first, it starts with collecting the data, right? Really understanding where those opportunities are, pricing to win, et cetera. I'll say that the team is formed. Those efforts and operating rhythms are underway. But a pricing effort won't take effect right away. We're going to be working through the first half of 2018, and I suspect more in the second half of 2018, really going into 2019, is where we're going to see the real tailwind of that effort. So the 4% to 6% organic growth that we're targeting right now is really volume-driven to begin with.

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Operator [17]

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Our next question is coming from Drew Lipke from Stephens.

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Andrew Jay Lipke, Stephens Inc., Research Division - Research Analyst [18]

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Just maybe talking about the Commercial strategy and thinking about the level of vertical integration that FLIR's historically targeted there. And maybe you rolled out your thermal by FLIR at CES. Can you maybe talk about this and talk about some of the changes that you're making in the go-to-market strategy in Commercial?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [19]

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Yes. So when we think about -- now when you mentioned thermal by FLIR, I mean, that's in our Industrial business unit, but we'll talk about commercial products in general. I wouldn't say there's any significant shift to how we're going to market per se, but we're certainly organizing differently. We're thinking about end markets. For example, first responders, there's a lot of different parts of our business that touch that. How can we come together and have a more coalesced offering? But across our Commercial Business Unit and Industrial Business Unit, there's a lot of product innovation that's underway that's given our sales team a lot of great tools to go out in the market and help solve problems for our customers. We mentioned ADK that we launched at the Consumer Electronics Show, which is really helping autonomous automobile designers understand what they can do with thermal. Again, the benefits, we could talk about on and on as we mentioned earlier, its capabilities. And thermal by FLIR as well, we've got a lot of great partners that, again, have end users that thermal technologies really help with their jobs day in, day out and accomplishing their mission. So you'll see our partners with thermal by FLIR, and I don't know if it signals a different wholesale go-to-market strategy, but certainly, maturing some very strong relationships with partners in the marketplace.

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Andrew Jay Lipke, Stephens Inc., Research Division - Research Analyst [20]

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Okay. And then it seems there wasn't a viable case for thermal in retail security. And a lot of that seemed to tie to the fact that you could never really drive the thermal penetration there and realize the pricing. As we think about some of your other markets, I mean, are there any others that need portfolio shaping? Or maybe that there's not a real viable case for thermal, in your opinion, as you look maybe at that Commercial segment?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [21]

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Well, you're right. And again, we made the decision with the retail business that long term, it wasn't a fit as we want to focus on more of those perimeter security application where thermal really is a differentiator and critical infrastructure, et cetera. In our Maritime business, which has grown nicely, improving margins, we, again, got that business out of bankruptcy and have steadily made improvements to it. But it was really this year with Axiom, the new MFD and other technologies, that it began to grow and accrete at a great clip. And when we looked at what was our thermal offering for the recreational boater, there wasn't, perhaps, the adoption we wanted. Now we're addressing that and have addressed that by introducing price points that are more affordable for the recreational boater to use thermal on the water and also then focusing our business on a lot of commercial maritime applications. I'll point to the SINS and SINS-2 order that we secured from the Coast Guard. When those guys are going out to see the recreational boaters are trying to get off the water, and there's no doubt that thermal technologies are an important technology to increase awareness and perception on the seas to avoid other objects, to operate under tough weather conditions, et cetera. So again, right now, I'm not prepared to announce any kind of wholesale go-to-market difference. But you'll see us continue to focus on, in the Maritime space, those commercial opportunities and build our relationships with folks like the Coast Guard, maritime law enforcement, et cetera.

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Operator [22]

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Our next question today is coming from Jonathan Ho from William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [23]

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I just wanted to start out. Could you maybe quantify for us or just remind of how much of the revenue was pulled forward from Q3 to Q4 in terms of the Surveillance Business Unit? And then, just given some of the changes in the business, how should we think about any potential shifts in seasonality for 2017, either on the revenue or expense line?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [24]

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Right. So we had about $15 million that came into the third quarter of 2017 out of the fourth quarter of 2017 for that Surveillance business, accelerated deliveries that the customers needed. The EO/IR-FP program, which was awarded in Q3, we shipped about $7 million of that in the third quarter, another $4 million in the fourth quarter as we are constituting -- or reconstituting the supply chain to make deliveries. And then DR-SKO was another piece, again, that had that shift. If we think about seasonality going forward, I don't foresee -- we don't predict any huge change in what we've seen traditionally with our seasonality. If we think about our Government & Defense business, now that there is a multiyear budget in place, perhaps that provides more consistency, where there would be a bit more volatility in how some of the business would come in. But at this point no real change, I believe, in our seasonality. Carol, anything to add from your perspective?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [25]

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So Jonathan, I would just note that as we look at our 2018 operating plan and the guidance we provided, just a reminder that we did have a very strong Q3 as well as Q4 in '17. So from a comp basis, when we compare '18 to '17, the second half of the year will be a little bit more challenged versus those comps compared to the first half of 2018.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [26]

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That's very helpful. And then just as a follow-up in terms of your comments around operating leverage. I guess I wanted to get an understanding -- or a better understanding of what you think the magnitude of the impact and the timing for some of the process enhancements you're looking at would be, for either 2018, 2019. Maybe sort of medium term, what can you really do from an operating leverage standpoint?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [27]

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That's a great question. So we have expanded margins throughout the course of the year, but I would not attribute that margin expansion in 2017 to The FLIR Method. We introduced The FLIR Method in the third quarter. We established the executive sponsorship. We began to detail how we wanted to execute it and how it made sense for FLIR; what are the levers that we want to go after? Because it wasn't just productivity, but we want to increase velocity; we want to increase the velocity in which we innovate. We want to focus on talent development. A lot of components to The FLIR Method, again, to mature and become a much more disciplined operator as we move from 6 segments into 3 business units. So now I'm happy to say we do have that dedicated leadership and resource at the point of impact. We've moved some very talented folks to be dedicated to The FLIR Method. We've recruited some great talent from outside. And probably our biggest event to date is in the fourth quarter, we did a big effort at our IIS business that you know has grown significantly over the past year to a point that its backlog really needed to be reduced. We got to improve our capacities there. So the team went up there with the intent to do just that, reorganize the manufacturing footprint, shop floor to be able to get more product out, more velocity and capacity through the business. And we're beginning to see that. But like all continuous improvement efforts, there's a bit of a long tail until we can really realize, forecast and have great confidence in predicting when that productivity will come through. So as we think about 2018 right now, while we certainly have internal targets that we're going after, much of The FLIR Method's benefit, as on the pricing side, will come towards the end of 2018 with the intent that we're really trying to build strong conditions with regard to margin improvement as carryover into 2019.

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Operator [28]

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Our next question today is coming from Pete Skibitski from Drexel Hamilton.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [29]

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Jim, you alluded earlier to the strong kind of budget outlook at this point within DoD. And in light of that, I'm just wondering, are you guys starting to see any kind of chunkier, larger program opportunities at DoD? Or do you think as far as Surveillance goes, it's a matter of continuing to kind of hit singles and doubles rather than homeruns. You got the kind of that large order a quarter or 2 ago. I'm just wondering if there's more out there with the budget going up.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [30]

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There are more out there. There's some pretty significant programs, probably the largest of which, which is the soonest, is G-BOSS(E), which is going to be what the EO/IR-FP, or what used to be RAID, evolves into. So certainly, that's something that's front and center for us. Others as well. David Ray brings a new perspective to our Government & Defense Business Unit as well. We're going to compete for programs as well as continue to go after singles and doubles. But why don't I let David say a few words in this regard.

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David Ray, FLIR Systems, Inc. - President of the Government & Defense Business Unit [31]

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Thanks, Jim. Jim mentioned earlier, I think the outlook for 2018 is good for the business. To your question about the budget, as the budget firms up, as we talked about, we see more opportunity in kind of your [rotary ring] platforms with respect to modernization budgets as they firm up, Jim talked about readiness, which if you think about the concept of readiness, really being able to look at ways to modernize existing systems that are in the field, both land, sea and air. Those present opportunities for us from an upgrade perspective to really look at ways we can go grow our business with those doubles and triples that you talked about versus the singles that we've kind of seen in the past.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [32]

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And we're not opposed to homeruns either. So we're going to swing for the fences where we can, for certain.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [33]

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Let me ask one for Carol. Carol, do you have any CapEx expectation for 2018? And maybe a D&A outlook also?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [34]

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So our CapEx, we are expecting it to be higher than what it has been in the last couple of years, ranging somewhere around that 2.5% to 3% of revenues, so that's where we expect that to be. Our D&A, depreciation, amortization and including our stock comp amortization, was $102 million for 2017. And we would expect it to be basically at that level for 2018.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [35]

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Got it. And Carol, does this new revenue recognition standard impact you guys in any meaningful way?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [36]

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No, it doesn't. The transition impact that will go direct in retained earnings upon implementation; it's less than $5 million. And on a go-forward basis, it's not significant. Obviously, some timing impact, especially in the Government & Defense business, but overall, not material.

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Peter John Skibitski, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [37]

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Great. One last one, guys, maybe for you, Jim. I feel like we haven't talked about this yet and I feel like it needed to be broached because it's been in your filings. This [I Tower] kind of language, let's call it, that's been in your filings, is there any reason for us to be concerned there? I just -- I raise it because I've had another company that had an issue and it cost them some money. How are you guys thinking about that? I'm sure you'll have that language in the K.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [38]

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Sure. Well, we've consistently disclosed that we're in continuing dialogue with the State Department with respect to compliance programs, and we detailed the voluntary and other disclosures that we've made to the State Department with respect to these issues. We've also mentioned on previous calls the investments that we've made to remedy these issues. These are areas that we've maintained significant focus, and we're working hard to make sure we've got the best processes, best people in place to ensure we're world-class in that regard. Historically, a consent agreement's been a tool used by State Department to ensure remediation in situations like ours. But regardless of the outcome of our continued discussions with state of the company, we have both a legal and a moral obligation to safeguard our technology, and we're committed to that. As a veteran myself and to represent the hundreds of veterans we have at FLIR, we know firsthand how important it is to protect the technology for our country.

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Operator [39]

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Our next question is coming from Jim Ricchiuti from Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [40]

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Just a question on the IIS business, and you alluded to the strength you saw last year. And I'm just wondering, what's the outlook look like for this business, just given the difficult comparisons? What are you seeing in some of the core commercial markets that they address?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [41]

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Well again, the acquisition of Point Grey, or IIS, as we call it now, fantastic acquisition. And as we bought the business, again, we intended to introduce thermal technologies. But their organic growth rate, the backlog that then became and the all hands on deck to meet that backlog, really, we've not even gotten to that step yet, which we see as opportunity as we go forward. Now throughout 2017, they grew tremendously. Do we expect that continued growth rate? No. They had one job in particular that drove a lot of organic growth. We're kind of gotten through that and we're back down to what we'll say is what is a more normal rate going forward is still a pretty significant clip. Also mentioned, this is one of the places where we first had made big steps with The FLIR Method to drive improved capacity. But with us here is Frank Pennisi. He leads the Industrial Business Unit. Frank, any additional comments you'd like to make about IIS?

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Frank Pennisi, FLIR Systems, Inc. - President of the Industrial Business Unit [42]

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I will tell you that IIS sits in 2 fabulous markets. You've got a machine vision market that's a high single digit market. You've got the people counting market, that's a low double-digit market. And the fact that it's a strong player in that arena gives us a lot of tailwinds and a lot of ability to continue driving and performing throughout the year.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [43]

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And it's a part of our company we're going to continue to invest in. We like the technology. There's, again, great synergies with the rest of FLIR and the customers we serve. So again, you'll see us continue to feed that part of our business.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [44]

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And a follow-up question. You may have addressed this and I may have just missed it, but did you comment at all on the potential gross margin lift that you could see from the divestiture of the Lorex business?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [45]

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No, we didn't make a specific comment at the gross margin. At the operating margin level, the improvement without the Lorex business for 2017 would have resulted in 170 basis points higher operating margin. The basic...

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [46]

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But it did...

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [47]

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Go ahead. I'm sorry. The business that was disposed of just basically ran at breakeven at an operating income level for 2017.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [48]

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Got it. But is it fair to say that it has been a drag on gross margins.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [49]

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Yes, $140 million in revenue at breakeven on margin, yes.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [50]

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Yes, yes. And the last question for me, and this is more of a -- just with respect to the automotive market, more of a bigger-picture question. Jim, you've had some challenges, clearly, penetrating the automotive market. And I'm just wondering, Jim, just as you think about that market and the ADK, any sense as to how we might think about FLIR playing in this market, longer term?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [51]

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Sure. And I don't know if I'd characterize it as challenges. I would think that marketplace and the technologies that are going to be used for ADAS are still very much evolving. Low-cost radars, thermal sensors, lidar, et cetera, there's still just a lot of technologies being explored and price points being examined to see what makes sense. As we talked about ADK and introducing that, that's another way by which we want to drive adoption awareness of the capabilities of thermal technologies. And we have had successes in particular with using thermal cameras to identify deer or other animals that could be on the side of the road ahead or outside of the headlight beams, to be able to predict any kind of collision there. And I'll say also, when we think about ADAS, we think about thermal technologies, and again, we do more than just thermal, low-cost radars, et cetera, we think about unmanned, not just automotive. For example, commercial trucking applications that indeed might enter the market and be seen on the roads before you see automobiles in ADAS applications, or the same technology is used on the military side of the house, where you'll see more and more unmanned vehicles on the battlefield. One of the biggest casualty-producing tactics that our enemies have used has been the IED and so having trucks or convoys moving over open roads and the battlefield exposed to that is certainly something that our leaders want to eliminate going forward. And again, there, you see our technologies that are already widely adopted and widely known. So I think there's certainly market maturity that's got to continue to happen. We're going to continue to educate and collaborate with our partners to inform them about the capabilities of thermal technologies, but we want to also provide a whole suite of sensing solutions in that regard, not just for the automotive marketplace, but I would call it for the unmanned space.

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Operator [52]

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Our next question is coming from Jeff Kessler from Imperial Capital.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [53]

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I have a couple -- just 2 quick questions. Number one, as you consolidate and come out with basically 3 new groupings, that speaks toward cross-selling and cross-selling, obviously, not just across all of the divisions, but particularly within the 3 new divisions, more emphasis on that. Are there going to be some incentives set up to -- that are not in place right now to improve and incentivize more cross-selling of product as these groups begin to -- as the groups begin to consolidate from 6 to 3?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [54]

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Jeff, that's a great question. And that's absolutely one of the opportunities that we wanted to go after as we consolidated from 6 segments to 3 business units. For example, our OEM business sells to a lot of defense prime contractors that also touch what was our Surveillance business. Or if you look in the Commercial Business Unit, we have security products and technologies that sell well with intelligent traffic solutions or other transportation safety applications. Or Maritime, for example, we mentioned Maritime working to -- with the Coast Guard on SINS and SINS-2. And obviously, we work on the Coast Guard on the surveillance side as well with airborne gimbals and a whole host of other technologies. So step one was bring the businesses together under common leadership. So you've got a leader that's making sure they're making decisions for one FLIR, if you will. And then step two, just that, how do we organize our team, identify all those end customers we're going to and deconflict any space that we might have there so we're putting the best face forward? And then lastly, of course, we want our sales teams, as they get out in the marketplace, not to be disincented or to see other parts of our company, indeed, as competitors within markets, but operate as one FLIR. And as we go into 2018, those things are coming together. We're, again, about 1.5 quarters into the integration of the segments into the business units, but already, opportunities are coming forward. That's a great question, Jeff.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [55]

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And then one final question, that is, I think it was mentioned that Boson sales were down a little bit. Was that for one segment, or was it for the company as a whole? And that was for the quarter, I'm assuming.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [56]

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No. I must have misspoke or you have heard that wrong. Boson is actually up, and we've got some great product launches with it. The Boson, for its size, weight, power consumption, processing capability, market-leading capabilities. So an OTS with the Breach; in other cameras, the Duo Pro, et cetera, Boson now as we're improving more and more just to get the capacity up and the yield up as well, Boson is a growing product line for us.

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [57]

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Yes. I think just to clarify, the reference was to some other core and core components. It was not relative to Boson.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [58]

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Okay, okay.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [59]

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Boson has been very well received in the marketplace. It's enabling, again, a lot of solutions and capabilities.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [60]

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No, I only asked because I must have misunderstood, because that surprised me greatly.

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Operator [61]

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Our next question today is coming from Michael Ciarmoli from SunTrust Robinson Humphrey.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [62]

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Maybe Jim or Carol, I don't know who wants to handle this one. But you've -- clearly, you've refocused the Security segment. You've got momentum in all markets. The volumes seem to be driving all the growth. I understand the pricing analysis and productivity, maybe you get a little bit of benefit in late '18, but that's more '19. I would have expected to see more leverage in drop through. I mean, it seems like the margin expansion next year is really just from losing the low-margin Lorex, and we've sort of got flat operating margins with the majority of EPS growth coming from tax. Is there more conservatism there? And I could appreciate it, Jim and Carol, this is your first time issuing full year guidance. But any color why there's not more core margin expansion on the volume growth?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [63]

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So if you're looking at earnings per share, the one thing to note, so the tax reform is giving us the year-over-year benefit, the $0.10, so you've noted the favorability for that. You also have to take into account the dilution that occurred relative to shares in 2017. That creates an overhang for us in 2018. And so it masks good operating leverage performance by about $0.04 per share. So you have to take that into account as well. And I think that's why it's not coming through in terms of the levers that we're really seeing in operation's results for the year.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [64]

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Okay. But it's still seems like the margins are going to be fairly flattish, right? So we're just saying that there's some of that overhang was in the margins as well?

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Carol P. Lowe, FLIR Systems, Inc. - CFO & Executive VP [65]

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No. From a margin standpoint, we do have -- we have the uplift relative to the sale of the Lorex business. And right now, again, we're focused on accretive revenue growth, organic growth that's built into the forecast. And as Jim noted, it's predominantly on volume for 2018.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [66]

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And as we've looked back at past years, putting forward 4 to 6 points organic growth, maintaining, indeed, expanding margins, consistently demonstrating leverage, that's something that's real important for us, to have a consistent say/do ratio going forward. And that's why you hear so much focus about The FLIR Method, pricing, et cetera, systemic things that we can put in place so that if we have any kind of large mix shifts, et cetera, in the business, we can still, again, grow organically, maintain or expand margins and impress the business forward. So for us, 2018 is a good step forward, particularly when you compare it to those metrics over the near past.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [67]

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Got it. That's helpful. And then maybe just for David on the Government. You came from Raytheon. I've always thought FLIR had the quicker go-to-market strategy, more the commercial off-the-shelf. It seems like the DoD, with comments from Ellen Lord, she wants to get technology into the field faster. I mean, it would seem like the new strategy is tailored specifically to what FLIR delivers from a manufacturing standpoint to the war fighter. Is there anything you guys have to do differently with the sales strategy? Is it -- or is it just more basic blocking and tackling to either win the singles, doubles or even get the homeruns?

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David Ray, FLIR Systems, Inc. - President of the Government & Defense Business Unit [68]

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Well, I think it's a combination of both. That's a great question. I think what Jim talked about our ability to focus, if you think about what we've traditionally done in the markets we play in with respect to our Surveillance and Detection business, I think there's a tremendous opportunity to focus on those customers where we can drive the most amount of value. I agree that one of the reasons this company is positioned as well as I think is in the government defense space is because of that agility. It's because our size, as we continue to grow, allows us to take innovation, implement and execute at a pace that our competitors can't in the marketplace. And we're going to take advantage of that. And we think it presents opportunities. We just have to take that energy and focus it in the right markets with the right customers on the right missions and continue to focus on how we're helping the customer deliver mission outcomes and not just selling product. We feel like we can do both. We feel like that creates an opportunity to capture more of the customer's budget, but doing that in a focused manner is really what's going to take us to the next level.

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Operator [69]

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Our final question today is coming from Josh Sullivan from Seaport Global.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [70]

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Just one question. Are there any updates on the Black Hornet with SBS? I think the Industry Day was mid-January. Just any update on what this opportunity could look like or maybe timing at this point?

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [71]

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Yes. So there is another Industry Day, or fly-off, I'm not sure what the nomenclature of it is, at Fort A.P. Hill, that's coming up. No decision yet. Hard for us to predict when that decision will come, but still very much in the competition. And again, there's going to be another gating exercise or fly-off that's coming up we'll be participating in. I will note in the fourth quarter, and as Carol mentioned, we got a $7 million Black Hornet award from the Australian Army, and we're really proud of that. And programs are going to build upon that. I've had the privilege, over the past quarter, to talk to various users that actually used Black Hornet in theater, on targets, et cetera, and the feedback that we get from them, it really moves us. When we think about our purpose of innovating to save lives and livelihood, the Black Hornet is doing just that right now around the world. So not sure exactly when SBS will come, or how, to a close, but we continue to focus very heavily on that technology and believe very much in its capability in theaters.

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Operator [72]

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Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

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James J. Cannon, FLIR Systems, Inc. - President, CEO, President of Government & Defense Business Unit and Director [73]

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Well, again, I want to thank all of you for joining our call today. I want to especially thank all of our employees for their hard work in 2017 and their dedication to our customers. I look forward to talking to all of you again soon and seeing you at our Investor Day on May 16 in New York City. Thank you very much.

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Operator [74]

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Thank you. That does conclude today's teleconference and webinar. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.