Unidentified Analyst: Got it. And then on the Unmanned Systems – Air systems that you guys cited as being lower for DI. Is that related to just sunsetting programs? Or what was driving that change?
Robert Mehrabian : I think basically, it’s tough comps rather than real declines. We think our drone businesses are healthy. We also have some businesses that our anti-drone or flame detection systems, which we’re selling in Europe, which are very healthy. So I think it’s just a matter of tough comps. Other than that, we feel very good about our drone businesses.
Operator: A question from the line of Joe Giordano with TD.
Joe Giordano: Close enough there. How are you doing?
Robert Mehrabian : Good, Joe. Good.
Joe Giordano: Can you — I’ll start on free cash flow. I think that at the end of the day, that probably came in a little lighter than you thought for the full year. Can you talk about how you think ’24 shapes up and how working capital looks for the year?
Robert Mehrabian : Yes, you’re right. It came in a little lighter, but we made some really good progress in the third quarter, and especially in the fourth quarter, from our managed working capital perspective, we had some significant improvement in our — trying to reduce our inventory. The flip side is, we also did not — we’re always like most companies suffering from not being able to get cash for our R&D. So I’d say but that affected us maybe $75 million or $60 million to $75 million. Our cash, nevertheless, if you looked at it, we paid down $680 million of debt in 2023. Our debt-to-EBITDA ratio — net debt-to-EBITDA ratio is about 1.9. So let me fast forward to 2024. We believe we’ll do a little better in 2024 than we did in 2023.
We’d like to think that we would have a 100% conversion, recognizing that there is always going to be this R&D headwind. Even though everybody in the Congress has agreed that the R&D program should be passed. I think nothing is passing in this Congress. So we’re not — we’re assuming we don’t get that. Nevertheless, we think will be somewhere between $900 million, $925 million and $1 billion. If we hit those numbers, which we think we will then our debt-to-EBITDA ratio should go down from 1.9 to closer to 1.1 to 1.2, which is — which puts us in a really good position to be able to make both small and midsized acquisition.
Joe Giordano: That’s really helpful color. My last one, we’ve kind of talked about the a lot, but I just want to — maybe if you can frame for the full year of ’23, like how much down was like the industrial and scientific vision? And what did that do to margins? And then how did FLIR margins for the full year look year-on-year?
Robert Mehrabian : Okay. Let me just pick the first part. Industrial and scientific vision, I’m going to say we’re down about 2% year-over-year, larger declines in Q4 than that. In terms of the margins, FLIR margins actually improved significantly year-over-year. It went from 20.3% in 2022 to 22.1% in 2023, which was very healthy. As a consequence, we were able to hold the overall margins in Digital Imaging relatively flat.
Joe Giordano: And you’d expect FLIR to expand margins again in ’24, correct? Just inherent in that margin commentary?
Robert Mehrabian : Yes. We think FLIR would have some margin expansion. But if you look at it as a whole segment that is our Digital Imaging segment, we expect margins to increase somewhere between 50 and 100 basis points in 2024.
Operator: Next, let’s go to the line of Kristine Liwag representing Morgan Stanley.
Kristine Liwag: Robert, last year, you talked about some facility consolidation at Digital Imaging. And you’re also talking about 80 basis points in margin expansion this year for the segment. How much of that is from this consolidation from before on the floor integration? And how much of that is on better price cost? And ultimately, could we expect to see higher margins there if you have additional cost takeout you could do this year?
Robert Mehrabian : Yes, Kristine, let me see if I can do this properly. We — we are in the process, for example, now in terms of space consolidation. What we’re doing is we’re getting out of leased spaces and moving to owned spaces. For example, in Massachusetts, we have an own space in Bevrica, we’re getting out of a lease space there, and that should be effective in March. That will help us say something of $500,000, $600,000, $700,000. The issue that we have whole consolidation overall is helpful. It’s the growth of our businesses and the lower costs that we have put in place this year. that should be more helpful. So when Edwin thinks about or talks about margin improvement, he is looking at really a lower cost structure, which we’ve achieved maintaining that and getting some growth, especially from our longer-cycle businesses. So it’s a combination of those. I would say, lower cost and growth trumping just space consolidation.
Kristine Liwag: Great color. And in terms of industrial automation and the laboratory instrumentation markets, you’ve talked about a rebound for the second half of the year. What metrics are you looking at? What indicators are you following to — that you’re watching out for this end market?
