TECHNOLOGY

Thermal & Infrared Imaging

Spring 2015
Nathan Eisenberg: Lead Analyst
neisenberg@theowlfund.com
Goutham Bollu: Associate Analyst
gbollu@theowlfund.com
Kyle McGarry: Associate Analyst
kmcgarry@theowlfund.com

FLIR Systems, Inc.

Exchange: NYSE Ticker: FLIR Target Price: $37.17

COMPANY OVERVIEW
FLIR Systems, Inc. is the global leader in designing,
developing, marketing, and distributing thermal imaging
systems, visible-light imaging systems, locater systems,
measurement, and diagnostic systems. The company operates
through six segments: Surveillance, Instruments, OEM &
Emerging Markets, Maritime, Security, and Detection. A
breakdown of its 2014 revenue by geographic region is as
follows: the U.S. commercial
market (30%), U.S. government
Geographic Breakdown
(20%), Europe (23%) and the
Rest
of
World
markets
United
respectively (27%).
27%

States

50%
INVESTMENT THESIS
FLIR is currently trading at a
Other
6.6% discount to its 10-year
23%
Foreign
average P/E multiple of 22.5x.
This is a result of declining
revenue from FLIRs government systems business since 2011.
Additionally, working capital inefficiencies restricted cash flow
and compressed margins beginning in 2010. However, FLIRs
shift away from reliance on U.S. government spending and
continued emphasis on commercial and consumer applications
will allow consistent top-line growth to return. Growth in
commercial markets will be driven by innovative new products
across an increasingly diversified market, from high-end and
professional imaging products to consumer and amateur
imaging products. Working capital improvement processes,
including heavily-monitored inventory procurement methods
and aligning executive compensation with working capital
management, will re-expand margins, delivering significant
bottom-line growth. Finally, an approaching Presidential
election-year will lead to moderate increases in defense
spending, stabilizing FLIRs government systems segment
through 2016. These catalysts will drive appreciation of FLIRs
P/E multiple to its 10-year average of 22.5x, resulting in a
dividend-adjusted return of 20.58%
Europe

Sector Outperform
Recommendation: BUY
Key Statistics:
Price

$31.19

Return
Share O/S
(mm)
Market Cap
(mm)

20.58%
139.8
$4,363

52 Week Low
52 Week
High

$28.32

Yield
Enterprise
Value

1.41%

$37.42

$4204

Earnings History:
Quarters

EPS

1Q14
2Q14
3Q14
4Q14

Revenue YoY

$0.25
$0.33
$0.39
$0.51

-28.57%
-5.71%
21.88%
45.71%

Price

-5.75%
1.44%
6.41%
6.82%

Earnings Projections:
Year
2014
2015E
2016E

Q1
$0.25

Q2
$0.33

Q3
$0.39

Q4
$0.51

Total
$1.46

$0.32
$0.34

$0.38
$0.44

$0.42
$0.48

$0.53
$0.60

$1.65
$1.89

1-Year Price Chart

All prices current at end of previous trading sessions from date of

report. Data is sourced from local exchanges via CapIQ, Bloomberg
and other vendors. The William C. Dunkelberg Owl fund does and
seeks to do business with companies covered in its research reports.

Spring 2015
CATALYSTS
OEM and Emerging Products
FLIR ONE
In March of 2014 FLIR announced the first mobile thermal imaging
unit for smartphone users. This first model was a casing that could be
fitted on the iPhone 5 and 5s models only. The casing included a
dedicated battery, not leeching off of the users phone life, and two
cameras, one infrared and the other a traditional optical camera. As with
most first products to market, the FLIR ONE was not widely adopted.
FLIR decided not to scrap the idea of mobile thermal imaging and
announced at the CES conference in January of 2015 its revamped
model, available for all iPhones that use the lightning adapter as well as
crucially making it available for Android users. This new model has 4x
the resolution as the previous model, weighs in at 2.75
ounces, or 1/3 the weight of the first model, and
includes automatic tuning for optimal performance
(the previous model had to be tuned manually). The
excitement is not exclusive to the hardware, MSX
technology uses both the optical and thermal cameras
and splices the images taken from both into one,
coherent image that is easier for people to understand. The many uses for the FLIR ONE include camping, car
maintenance, photography, household maintenance, plumbing, and animal observation. Analysts on the street are not
seeing the potential given the lack of adoption of the previous model. We believe that the new model is not only superior
in every way to the previous one that failed to impress, but it will also capture a market more than twice of what last years
model could. Furthermore, the shock value of mobile thermal imaging is still intact with people still raving about the FLIR
ONE on tech review websites, pointing towards the future applications of commercially available, personal thermal
imaging. Shipping in the middle of 2015, we believe that sales of the FLIR ONE will far surpass the figures analysts are
using in their models.
Road and Traffic Management
FLIR has been developing infrared systems to observe traffic flows and then transmit that information to traffic signals
to help move traffic in an efficient way. With the ever-increasing urbanization that we are experiencing, people are sitting
in more and more traffic, queues at traffic signals are piling up. This not only wastes time but fuel as well, not to mention
the added CO2 emissions, which is harmful for the planet. FLIRs upcoming systems, Trafisense and C-Walk aim to not
only intelligently manage traffic flow but also keep automobiles, cyclists, and pedestrian crossers safe in all conditions at
all times. Little has been released as to the pricing of these systems but a pamphlet from FLIR states that it will be less
than you expect. Very few analysts have picked up on this area of growth, mostly due to the little information surrounding
the systems. We expect to see growth coming from governments in Asia and the Middle East, areas that are known for
being early adopters in civil engineering. We do not see much adoption in the United States, mostly due to the aging
infrastructure. Highway spending in the U.S. will mostly go to the deteriorating asphalt and failing bridges across the
country. However, officials will be looking for any positive news to give to their citizens, especially when it comes to time
savings and the positive environmental impact. The low cost of the systems will enable growth in the U.S. but not near
the levels that will be seen in the Middle East and Asia. We hope to hear more concrete data, contracts, and pricing at the
upcoming SPIE DSS conference on April 20th, 2015 but we believe these systems will be an integral part of the
transportation infrastructure in developed countries for years to come.

Spring 2015
Healthcare
There has been controversy as of late surrounding the
effectiveness of mammograms. One study from the New
England Journal of Medicine found last year that up to
21.9% of women diagnosed and treated for breast cancer
ended up being misdiagnosed and did not have breast
cancer. Some medical professionals are calling for a
multiple approach including the use of thermography.
FLIR was approved by the FDA in 2004 to help doctors
look at skin temperature for a number of screening
techniques. Currently, the FDA and some other medical
professionals advise against the use of thermography citing
that it is not effective enough on its own for breast cancer
screening. We believe that the controversy surrounding
thermography will only help FLIR, at the least it garnered
attention and at the most it will be used alongside
mammography in a multi-step approach to help find
cancerous cells in the near future.
Security
In order to defend something one must detect and be
able to see any possible threats. FLIR expands the
perception of civilians and the military alike, allowing
the user to see what they wouldnt be able to otherwise
because of lack of light or poor weather conditions.
Governments worldwide are experienced increased
threats not only in number but also in complexity. FLIR
systems help detect chemical, nuclear, and biological
threats, all tactics incorporated in terrorist attacks which
has grown at a tremendous rate of 180% over the last 14 years. Global commercial security spending grew 6.8% from
2012-2013 to a level of $201.7 billion and is expected to grow to $240 billion by 2017, backed by the growing middle class
with assets to protect. FLIR released FX Wi-Fi, which condenses hours of thermal security footage to just minutes, making
it easier for homeowners. FLIR is the best positioned infrared imaging company in rising macro trends given its strong
brand name and it being the pioneer in its field, controlling most of the segments in which it operates.

TARGET PRICE
FLIR is currently trading at a 6.6% discount to its 10year average P/E multiple of 22.5x. Multiplying this
target multiple by NTM EPS of $1.65, we derive a TP
of $37.17. This price appreciation and dividend yield
project a total return of 20.58%

Implied P/E Multiple: 22.53x

Valuation Price Target = $37.17
Projected Return: 20.58%

PEER GROUP IDENTIFICATION

Garmin, Ltd (GRMN)

o Producer of navigation equipment.
FEI Company (FEIC)
o Creates advanced industrial tech
instruments.
L-3 Communications (LLL)
o Supplies surveillance and recon systems to
U.S. Government.

Spring 2015
Segment Overview
Surveillance
FLIR provides enhanced imaging and recognition solutions
using a commercially developed and military qualified
(CDMQ) model. These systems can be purchased off the
shelf or ordered customized with prices ranging from $2,000
to well over $1,000,000 per system. Typical customers are
military, law enforcement, public safety, and other
government customers. The systems are used for border
patrol, deployed for military use, and for search and rescue
patrols. The systems sold are usually highly sensitive in
nature, the military does not want information about the
technology and designs of the products released to the public.
Surveillance makes up 32% of the companys revenue;
revenue from this segment declined 7.4% YoY due to a fewer
U.S. Government funded customers.
Instruments
Instruments are devices that image, measure, and gasses thermal energy, gases, and other environmental elements. These
devices are used in industrial, commercial, and scientific applications such as laboratory studies of thermodynamics as well
as development of firearms, ammunition, etc. The FLIR and Extech brands sell these devices in commercial applications
to help pinpoint gas leaks in pipelines and facilities as well as monitor quality control to help factories pinpoint
manufacturing defects in heat-sensitive processes before they occur, saving batches. The Instruments segment is expanding
in terms of revenue, growing 4.9% YoY and represents 23% of the total business.
OEM and Emerging Products
The Original Equipment Manufacturer and Emerging Products segment provides thermal imaging camera cores and
components that are then sold to third parties for use in thermal imaging systems. These products are seen in traffic
management systems, aerial drones, Readout Integrated Circuits (ROICs), pan/tilt tripod and mounting systems, and
mobile devices. The ROICs are used mostly in astronomy but are also found in any scientific instrument that needs to
observe wavelengths. Pan/tilt systems are used for surveillance domestically and in the military as well as commercial,
providing a 360 degree view gyrostabilized platform to mount thermal and optical cameras on. Mobile devices use the
newest, smallest, and most powerful thermal imaging core, Lepton which is used on helmet cameras, weapon mounted
displays, and commercial use in the FLIR ONE as discussed previously. This segment makes up 15% of FLIR and has
seen revenues increase 9.5% from 2013, mostly due to increased shipments to U.S. customers. This growing segment also
boasts the highest operating margin of the segments at 28.4%. We foresee this segment to continue to grow and represent
an even larger portion of the company.
Maritime
The development and manufacturing of imaging instruments for both recreational and commercial boats falls under the
Maritime segment. The company sells under the FLIR and Raymarine brands, the former focusing on commercial and
slat-water whereas the latter focuses on small fresh-water systems. The systems use navigation (GPS), autopilot, sonar,
radar, thermal and visible optics, communications, and Wi-Fi. These systems are not solely for but do help fishermen not
only navigate their boat but also locate fish. This segment accounts for 13% of revenue, this segments revenue increased
1.9% YoY due to more deliveries in Europe.

Spring 2015
Security
This segments is used in homes, ports, airports, petrochemical facilities, nuclear
plants, warehouses, businesses and its products are used to detect possible theft,
random acts of violence, and terrorism in all conditions at any time of the day and
night. Traditional security measures are very cumbersome and expensive, and
often create ways for people to break in, such as additional lighting creating
shadows. FLIR offers many options, many of which include systems that
incorporate optical, thermal, radar, alarm, and pan/tilt technology. The high-end
systems incorporate multiple cameras operating at different lens lengths, offering
detection of man-sized beings up to 11 miles away. On the other end of the
spectrum, Lorex provides low-cost mass-market solutions mostly for home and
retail security. This segment is FLIRs fastest growing, increasing its revenues 27%
from 2013, representing 12% of the whole company.
Detection
The smallest segment of FLIR, accounting for 6% of total revenues and saw a 5%
revenue decrease YoY, the Detection segments offers sensors, instruments, and
platforms for the identification of chemical, biological, radiological, nuclear, and
explosive threats. These platforms are used by homeland security, the military, and
first responders.
INDUSTRY OVERVIEW
Infrared & Thermal Imaging
The infrared and thermal imaging market was a $3.4bn market in 2014. With
expectations of +15% CAGR through 2020, the industry is expected to expand to
over $8.4bn. Once dominated by military spending, the infrared and thermal
imaging markets are shifting rapidly towards the commercial sector. Commercial
applications for these imaging products and services vary widely, from industrial
manufacturing, security and automotive maintenance to photography. This
commercial shift is also creating a demand for low end and entry-level imaging
products, creating a high-volume market allowing diversified firms with these
technologies to counteract more cyclical revenue drivers such as military spending.
Thanks to the declining cost of these technologies, products such as thermalimaging cameras
Infrared & Thermal Imaging Market Size
(and smartphone
attachments) and
$10,000
thermal detection
$8,000
security cameras
are now available
$6,000
to mass-market
consumers.
$4,000
$2,000
$2014 2015E 2016E 2017E 2018E 2019E 2020E

Risks
Product mix
The company has been growing the
complexity of its business through
acquisitions. Its operating margins vary
by product and substantial changes in
the mix of products sold could have a
negative impact on operating margins.
Government spending
FLIR depends on the United States
government for a material portion of
its income and changes in government
spending could adversely affect its
business. Additionally, at its discretion,
the United States government may
change its spending priorities and or
terminate, reduce or modify contracts.
Security
In the course of business as a United
States government contractor, FLIR
faces security threats and technology
disruptions, including threats to its IT
infrastructure, in attempts to gain
access to proprietary or classified
information.
Economic Moat
Pricing Power
FLIR has a narrow, stable economic
moat of pricing power. It would be
very difficult for a competitor to
challenge its global leader position in
thermal and infrared imaging, which
includes: R&D innovation, customer
relationships and market share in many
of its commercial and government
business segments.

Spring 2015
U.S. Defense Spending
U.S. defense spending is cyclical in nature. In addition to tracking
the size and scope of U.S. military involvement, it is often impacted
by political positioning and the parties in charge. For instance,
emphasizing strong national defense is seen as a required stance for
most politicians and in particular, ones running for presidential
office. Thus, presidential election campaign years often see a surge
in defense budgets. Following two years of declining defense
spending ($711bn FY11 to $640bn FY13) after reduction in
military engagement in the Middle East, experts expect defense
spending to rise through 2016 on election-year politics and
heightened threats to security abroad, including: Islamic State of
Iraq & Syria (ISIS), prolonged Ukrainian conflict and troop
extensions in south-central Asia. This increase would likely come despite budget sequestration, thanks to contingency
funds allocated for emergency events. Proposed by President Obama, both parties are expected to support the measure.
Following a Republican victory in the 2014 midterm elections, defense spending has become an issue of focus surrounding
the 2016 presidential elections. Historically strong on national defense, Republicans have reiterated their stance on the
need for a well-funded military, seeking to balance the budget through cuts on social programs over defense. While
defense spending has largely become a micro-dispute over a few billion dollars here or there (on a +$0.5tn/year base), a
Republican victory in the 2016 elections would likely prolong the cyclical upswing of defense spending through 2020.
Global Defense Spending
Global military expenditures fell 1.9% in 2013 to $1.75tn, led by
decreased consumption in Western countries, particularly in N.
America and Europe. This is in stark contrast to recent trends in
defense spending in emerging and developing countries. For instance,
China, Russia and Saudi Arabia, the three largest defense spenders
after the U.S. (11%, 5% and 3.8%, respectively), all saw substantial
growth in military expenditures. Growth in military expenditures by
region in FY 13 were:

Middle East 4% growth to $150bn

Africa 8.3% growth to $45bn
Asia 3.6% growth to $407bn

Drones & Thermographic Inspection

Unmanned aerial vehicles (UAV), more commonly referred to as drones, are undeniably one of the most anticipated
technological devices of the moment. Experimental grocery and aerial post delivery services notwithstanding, there are
proven areas of growth in the employ of drone technology, particularly in engineering, construction, industrial and
agricultural settings. One such example is thermographic inspection, in which an aerial-specific thermal-imaging camera is
attached to a drone, offering a birds-eye view useful for a wide range of commercial applications, such as site appraisal,
conditions monitoring, plant and systems design, as well as a number of inefficiency (e.g. power use) and quality
management detection and analysis tools.
While still currently heavily regulated, commercial drone flights were given official sanction this year, with full adoption
and safety regulation expected by 2017. Following this receptive regulatory environment, the drone market is expected to
grow at a CAGR of 19% through 2020, outpacing the slower-growing but already sizable defense drone market.

Spring 2015
FINANCIALS
Revenue
FLIR recognizes revenue in six distinct segments: Surveillance,
Instruments, OEM and Emerging Markets, Maritime, Security, and
Detection. FLIR recorded FY 14 revenues of $1,531mm, a 2.3%
increase YoY and clocking in a five-year CAGR of 5.94%. The
exception to this trend occurred in FY 12, with revenues down almost
9% YoY, following 11.2% growth in FY 11. This was a result of
decreased revenues in FLIRs government systems segment, which
was impacted by defense spending cuts following the official end of
the Iraq War. Moving forward, management has guided revenue
growth of 1-4.5% in FY 15, due to a 3 point impact on FX. Even with
negative FX translation, we believe this to be a conservative figure,
and estimate revenue growth of 4-6% in FY 15 as FLIR benefits from
a more attractive global defense spending environment as well as
continued growth in commercial-oriented segments.

Revenue
2,000.0
1,500.0
1,000.0
500.0
0

Government Systems
Surveillance
FLIRs surveillance segment reported revenues of $492mm in FY 14, a 7.4% decrease from FY 13, primarily due to
further reductions in demand from the U.S. government. However, Q4 revenues were better than expected, growing 8%
YoY driven by demand for integrated surveillance systems. This segment represents 32.1% of FY 14 total revenue, down
from 50.4% of FY 10 total revenue. Despite YoY declines since 2010, surveillance backlog grew 5% to $295mm. We
believe surveillance revenues to be bottoming out as defense spending firms up.
Detection
The Detection segment reported revenues of $26mm, surpassing analyst expectations thanks to first delivery of FLIRs
integrated chemical, biological, radiological, nuclear, and explosives (CBRNE) threat response system as part of the U.S.
militarys DR SKO program. FLIR was awarded the first full-grade CBRNE production order in Q4 of FY 14 of $27mm
for 2015 delivery.
Commercial Businesses
Security
The Security segment reported revenues of $56mm, a 27% increase YoY. High demand drove three consecutive quarters
of +30% growth in FY 14. FLIRs diverse product offering, including high-end thermal cameras and retail security cameras
(Lorex) saw strong growth. FLIR will expand this segment further in 2015 with the release of several new security products.
FLIRs market leadership is expected to sustain Security as its fastest growing segment over the next years.
Instruments
The Instrument segment reported revenues of $354.1mm in FY 14, a 4.9% increase YoY. This growth was driven by
strong sales in test and measurement products as well as automatic cameras, particularly products released in late 2013 and
2014. Launch of the TG-165 handheld IR thermometer in Q4 set a segment record for most units sold. Growth in these
instruments more than offset weaker demand from building maintenance end markets.

Spring 2015
OEM & Emerging Markets
OEM & Emerging Markets segment reported revenues of $226.9mm in FY 14, a 9.5% increase YoY. Strong demand for
uncooled camera cores and newly introduced mobile accessories drove revenue in this segment. Launch of Muon in Q3,
a next-gen uncooled core developed for thermal product OEMs to assist in processing and packaging, supported growth
in this segment. The second iteration of FLIR ONE was introduced at CES in January and is expected to help drive
continued growth in this segment in 2015.
Maritime
The Maritime segment reported revenues of $192.6mm in FY 14, a 1.9% increase YoY. Growth was tempered by a below
average Q4 as a result of heavy pricing pressure from competitors over the holiday season. FLIR was also caught offguard by stronger than expected demand for its professional-grade maritime imaging products and unable to meet demand.
This segment released new versions of several maritime products at CES, including the newest Dragonfly and Pro
Fishfinder imaging systems. These products are expected to drive strong growth in the Maritime segment in 2015.
Margins
FLIR recorded gross, EBITDA and net income margins of 49.1%,
Margins
21.8% and 13.1%, respectively in FY 14. Margins have compressed
significantly since 2009, following consistent declines in its
70.0%
government systems business largely due to defense budget cuts.
60.0%
Additionally, FLIR struggled with working capital inefficiencies
50.0%
beginning in 2010 through most of 2013. A particular issue during
40.0%
this period was inventory management, as inventory averaged
30.0%
33.4% of current assets, nearly ten points higher than 2009s
20.0%
average. Management has acknowledged this operating weakness
10.0%
0.0%
and has been working since 2013 to improve working capital
2009 2010 2011 2012 2013 2014 2015E
efficiency. In particular, FLIR has focused on improving
procurement processes and aligning executive compensation with
Gross
EBITDA
Net
working capital management. This has proven effective thus far, as
inventory turnover has improved from its 2012 low of 1.87 to 2.35 in 2014. Additionally, operating margins improved
across all business segments in 2014. Management has targeted a turnover ratio of 3.5 which would put it back in line
with its peers. We expect FLIR to continue to unlock cash trapped in inventory through these efforts.
Surveillance
Operating margin for the Surveillance segment was 23% in FY 14, a 30bps increase YoY. Q4 saw particularly strong
operating margin expansion to 29.1%, a 390bps increase QoQ.
Detection
Operating margin for the Detection segment was 12.8% in FY 14, a 290bps increase YoY. Q4 margins were 20.7% as a
result of FLIRs first CBRNE order fulfillment. Margins are expected to expand moderately again in 2015 due to higher
government demand.
Security
Security segment operating margins grew to 13.9% in FY 14, a 160bps increase YoY. Q4 margins were especially strong
at 18.3% as a result of seasonal retail demand and new product sales. Margins are expected to continue expansion in 2015
as Security sees continues to see high demand.

Spring 2015
Instruments
The Instruments segment recorded 27.9% operating margins in FY 14, a 390bps increase YoY. Once again, Q4 margins
saw marked expansion, this time as a result of TG-165s successful launch.
OEM & Emerging Markets
OEM & Emerging Markets segment operating margins also expanded in FY 14 to 28.4%, a 290bps increase YoY. Keeping
in line with FLIR Q4 operating margin trends, OEM & EM recorded 32.7% margin, a 400bps increase QoQ on uncooled
core and mobile attachments demand.
Maritime
Maritime operating margins were 12.7% in FY 14, a 90bps increase YoY. This is despite a slight contraction in Q4
operating margins (100bps YoY) as a result of seasonal pricing pressures.
Debt
FLIR has a debt principal payment of $250mm in 2016. FLIRs total debt reaches $384mm with $14mm in interest
payments. The company also has an unused revolver credit line of $150mm. FLIR has an interest coverage ratio of 24.33x,
which shows it is more than capable of fulfilling its short-term debt obligations. Additionally, FLIR has a current ratio of
4.33x and a quick ratio of 3.29x. FLIR holds an investment grade of BBB-, which is due to its relatively small size compared
to non-financial, investment grade companies.

Shareholder Returns
FLIR recorded a 10% increase in dividend yield to $0.44 in FY 14.
The dividend grew at a three-year CAGR of 22.36%. This dividend
carries a payout ratio of 26.5% and gives the capacity of FLIR to grow
it, giving shareholders higher yield as free cash flow improves. FLIR
is also committed to returning value to shareholders via its share
repurchase programs. FLIR has spent approximately $712mm buying
back around 28.1 million shares in the past 5 years and authorized a
new buyback program that spans 15 million shares over 2 years.

Payout Ratio
40.0%
30.0%
20.0%
10.0%
0.0%
2011

2012

2013

2014

Spring 2015
Free Cash Flow
Cash flows from operations totaled $226mm in FY 14, down
Cash Flows
over 30% from FY 13. This includes the impact of a restructuring
initiative completed in Q3 as well as higher than average accounts
400.0
receivable from the government systems segments (Surveillance
300.0
& Detection). This is expected to reverse in 1H FY 15. Excluding
FY 14, CFFO grew at a 6.9% CAGR of 6.9% since 2009. CFFO
200.0
is expected to grow 48.5% in 2015 as accounts receivable
100.0
normalize and growth segments drive net income. Following
FY 14 CFFO contraction, free cash flow fell over 30% YoY.
0
2009 2010 2011 2012 2013 2014 2015E
Excluding FY 14, FCF grew at an 8.13% CAGR since 2009. FCF
is expected to grow 44.1% in 2015 as CFFO rebounds. CAPX
FCF
CFFO
CAPX
has increased at a 7.9% CAGR since 2010, a small but important
component of FLIRs continued growth. Management is intent on returning value to shareholders and will use free cash
flow to continue to increase yield and share repurchase programs as it finds its share price attractive.
R&D Spending
FLIRs R&D spending has grown to $142.8 million, which represents a 9.35% 5-year CAGR. This continued increase in
research and development should enable FLIR to continue innovating emerging imaging technologies, particularly ones
with commercial and consumer applications.

EPS

Earnings
FLIRs EPS stayed largely flat since 2010. EPS hit its 5-year low
of $1.36 in 2013, with modest growth in 2014. 2014 top line
growth came in at $1.53 billion, a 2% increase YoY. Looking
forward, management expects top line growth to increase to $1.6
Billion and an EPS of $1.70, representing growth of 11%.
FLIR Comparables Analysis

$2.00
$1.50
$1.00
$0.50
$2010 2011 2012 2013 2014 2015E

It is very difficult to find direct comparable companies to FLIR,

the only companies that do exactly what it does are small private companies. We have identified three companies that are
direct competitors in a certain segment and operate in a similar manner; the average of the three is comparable to FLIR.
FEI Company makes instruments used in manufacturing that find small defects, similar to FLIRs Instruments segment.
Garmin is a producer of navigation equipment and is the closest competitor in the Maritime segment. L-3 Communications
supplies surveillance and reconnaissance systems and is comparable to FLIRs Surveillance segment.
Capitalization
Equity
Enterprise
Market
Market
Value
Value

Company (TICKER)

Stock
Price
04/12/2015

FLIR US Equity

4,362.55 $ 4,204.16

21.04

18.92

12.53

8.17

3.80

20.68

27.20 49.02% 22.68% 13.08%

23.17

12.43

8.53

17.76

18.81 BBB

LLL US Equity
GRMN US Equity
FEIC US Equity

$ 126.04 $ 10,435.66 $ 14,007.66

$ 46.66 $ 8,950.09 $ 6,178.49
$ 78.94 $ 3,303.16 $ 2,855.10

16.02
15.11
26.53

16.41
15.07
22.19

10.46
9.84
19.27

10.75
8.10
12.33

(6.21)
3.93
(1.34)

10.81
26.74
18.06

(22.69) 9.40% 10.97% 5.55%

3.82 55.89% 26.74% 12.69%
(0.33) 46.86% 18.06% 10.99%

73.49
-

11.97
10.31
9.92

4.84
7.61
7.39

6.10
---

42.36 BBB---

16.0
19.2

16.4
17.9

10.5
13.2

10.7
10.4

(1.34)
(1.21)

18.06
18.54

(0.33) 47.94% 20.37% 11.84%

(6.40) 40.29% 19.61% 10.58%

24.50

10.31
10.73

7.39
6.61

Median
Mean

31.20 $

Valuation Multiples
Growth Rates
Margins
P/E Multiple
EBITDA
Revenue EBITDA EPS
Gross EBITDA Profit Debt/
LTM NTM LTM NTM Growth Growth Growth Margin Margin Margin Equity

ROE

Leverage
Interest
Credit
ROA Coverage Debt/Capital Rating

6.1
6.1

14

Spring 2015
Discounted Cash Flow Statement Assumptions
We are forecasting 2015 sales growth of 5%, slightly above managements guidance, which we believe to be conservative.
Following 2015, we continued sales growth at mid-high single-digit rates in 2016 and 2017. This is a result of expected
incremental revenue from commercial business segments, as well as stabilization of government systems revenues. From
2018 out, we are projecting sales growth to step down from high single-digit rates to 4% in 2021, reflecting our view that
FLIR will remain an innovator and market leader in infrared and thermal imaging. We are also projecting slight margin
expansion across the board as efficiency processes further improve margins. All other assumptions were derived from
long-term averages or management guidance, e.g. plans to return capital to shareholders.
Valuation
FLIR is currently trading at a 6.6% discount to its 10-year average P/E multiple. This is due to declining revenue from
government systems segments as well as working capital inefficiencies trapping value. As FLIR continues to innovate the
thermal and infrared imaging market and grow its commercial business with new product applications for all end markets,
from consumer to industrial, it will see growth offset reduced U.S. government procurement. Additionally, entering a
Presidential election-year cycle will see moderate gains in defense spending, providing short term mitigation of this business
risk. Finally, FLIRs ongoing working capital improvement processes will drive a return to efficiency and strong financial
performance evident through continued margin expansion.

Spring 2015
APPENDIX

DCF Assumptions

FLIR Historical P/E

1-Year

Spring 2015
3-Year

5-Year

Spring 2015
10-Year

FLIR to Comp Group

3-Year

Spring 2015

5-Year

Spring 2015
DISCLAIMER
This report is prepared strictly for educational purposes and should not be used as an actual investment guide.
The forward-looking statements contained within are simply the authors opinions. The writer does not own any
FLIR Systems, Inc. stock.
TUIA STATEMENT
Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his
tireless dedication to educating students in real-world principles of economics and business, the William C.
Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging,
practical learning experience. Managed by Fox School of Business graduate and undergraduate students with
oversight from its Board of Directors, the WCD Owl Funds goals are threefold:

Provide students with hands-on investment management experience

Enable students to work in a team-based setting in consultation with investment professionals.
Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs
and partial scholarships for student participants.