Q3 2019 Earnings Call
This time all participants are in listen only mode. A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
It is now my pleasure turn the call loved your host lots and lots and Investor Relations. Thank you you may begin.
Thank you operator, good morning, everyone and thank you for joining our call.
We looked at our earnings press release on the presentation slides referred to on this call are available under the events and presentations section of flares Investor Relations website at Www <unk>.
All over again I need to remind you that the statements made on this call.
Words, such as anticipated.
Estimates.
To identify forward looking statements.
These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Perhaps another factor that could cause our actual results could differ materially from these forecasts.
The forward looking statements, we make today speak as of today.
We do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.
We believe that the non-GAAP information is useful because it can enhance the understanding of our core ongoing operating results.
We'll take consistent comparison up results over time.
A full reconciliation between GAAP and adjusted measures is in this mornings press.
With that that's all my pleasure to turn the call it could jump can president and CEO .
Yep.
Thank you lost a good morning, everyone and thank you for joining FLIR third quarter 2019 earnings call.
Speaking with me on the call today, as Carol low our Chief Financial Officer.
Heroin are also joined by Travis Merrell President of our commercial business unit, David Wright President of our government and defense business unit, Frank couldn't easy President of our industrial business unit and so when you're going to general counsel.
Overall flares third quarter consolidated results were mixed.
I'm quite pleased with the performance of our government defense business.
Which delivered franchise program awards solid organic revenue growth that is augmented by the successful acquisitions of endeavor and area.
We also continue to build momentum in the industrial business unit, which generated strong bookings in the quarter, along with expanding operating margins.
However, a couple of divisions within our commercial business unit.
Consolidated earnings were inline with our expectations and cash flow from operations remains very strong I am not satisfied with where third quarter revenue performance.
With that said, we remain very confident in four years long term strategy, which we shared in May 2080.
We've made meaningful progress.
Several areas of our strategy and continue to evolve the execution of our strategic plan.
Our strategic priorities are evolving <unk>.
The focus upon.
Leadership in sensor solution.
Airborne I S R and decision support all the while evolving focus on professional the end market customers.
We've made great progress and consolidating a leading position in group, one unmanned air and ground.
And I shared in yesterday's announcement, we're also advancing our solution supporting autonomous automotive technology.
As the execution of our strategy evolves, we will continue to you'll see that focus clear strategic priorities.
We're like most companies faces many current external challenges negatively impacting our growth.
Although these challenges are largely external the low organic growth rates are not accepted.
And we must actively work to simplify and reshape our product portfolio to emphasize higher growth opportunities across the entire enterprise.
We look forward to sharing with you more details over the next six to nine month.
We are currently planning to folks at Investor Day in Q3 2020.
Carol will provide additional details on our third quarter financial performance in her prepared remarks.
As announced earlier this morning, we reported third quarter revenue of $471 million.
Total revenue growth was 8%.
Foreign currency exchange negatively impacted gross by nearly $5 million or approximately 1%.
This brings the year to date foreign exchange impact on revenue to a headwind of approximately $20 million.
Total bookings increased 13% compared to prior year as growth was driven primarily by significant franchise program win.
In the commercial and the industrial business units, along with government and defense non programmatic orders in the quarter.
For the first nine months of 2019 total bookings are up 14%.
At quarter end total company 12 month current backlog stood at $668 million, an increase of 13% compared to the balance at the end of the third quarter 2018.
In addition, total backlog increased nearly 17% to $810 million over the same period.
Compared with the third quarter last year, adjusted gross profit increased 6% to $240 million, primarily due to contributions from the recent acquisitions and organic growth within the government and defense and industrial business units.
However, adjusted gross margin of 51% decreased 129 basis points compared to the prior year due to the ongoing ramp of recent acquisitions, along with weaker end markets in our commercial business unit.
This more than offsets productivity gains from initiatives through the FLIR method in all of our business units.
In addition, adjusted operating income declined 4% compared with a third quarter last year.
Adjusted operating margin was down 282 basis points year over year due to the dilutive effect of recent acquisitions as well as in the increase in corporate expenses, which Carol will discuss in more detail.
Based on our year to date results and outlook for the fourth quarter, we're fine tuning our full year 2019 guidance.
We now expect full year revenues of approximately $1.9 billion representing growth of approximately 7%, which includes organic growth of approximately 2%.
Which represents the low end up the guidance range, we had provided previously.
Finally, we announced the quarterly dividend of 17 cents per share, which will be payable on December the six to shareholders of record as of November 26.
I'll start with a few key third quarter highlights that will help fuel our business in the near term.
Feed the delivery of our strategic plan.
And also address more specifics on our recent progress in executing the FLIR method.
Let's move to slot for with some key recent awards that will help fuel the growth of our business.
In the third quarter, the government and defense business unit was awarded a 35 million dollar indefinite delivery indefinite quantity contract by the U.S. Army.
See that are also enables the ability to map chemical agent contamination.
As well as aid in the decontamination a personnel or equipment after the exposure to chemical weapons.
It can also be used at various stages of the hazard management process to minimize the spread of contamination.
All consistent with our strategic objective to innovate technologies to better informed decisions, which save lives.
And at this marks association of the U.S. Army or a USA annual meeting along with our partners Textron and how and how our team to viewed a working prototype.
The ripped saw him five offering for the Army's next generation unmanned robotic combat vehicle for our CV program.
Which is highlighted on slide five.
This is a perfect example of the growth opportunity for our government and defense business unit from large franchise programs utilizing ondemand technologies.
Surveillance gimbals.
Had their drones and ground robots.
As a result, we're very optimistic about our teams competitive position for this program with final award selection anticipated later next year.
This program is well aligned with our long term strategic plan to position FLIR as a leading unmanned solutions provider for the D.O. These modernization priorities, which include utilizing unmanned solutions to protect the war fighter.
Our industrial business unit also continued to advance franchise programs as highlighted on slide six where was selected by the end here for to taught them. Its vehicle production contract what they call Global auto maker planned for initial unit sales in 2000.
21.
Supply, Bob FLIR to enhance the safety of self driving vehicles.
Clears automotive qualified thermal sensing course are a key component of venier thermal sensing cameras and systems, which you have proven effective on hundreds of thousands of passenger vehicles today.
With over 15 years of experience in automotive.
FLIR has the only automotive qualified thermal sensor that is deployed on over 600000 cars today for driver early warning systems.
Turning to slide seven each business unit released new products, ranging from handheld and drone mounted detection equipment for incident responders and multiple thermal imaging cameras that will help improve safety on the job.
In September the industrial business unit launched a new high performance industrial thermal camera in the T series family called the T. a 60.
This new thermal camera is the first to feature on available subscription to onboard inspection route software I.
The camera incorporates our advanced vision processing, including patented Ilim, FX and Ultramax technologies to enhance the image clarity.
Additionally in September the commercial business unit launch the new mm 300 series of Marine thermal cameras.
The M 300 series integrates with the latest generation of Marine navigation displays, including the award winning Ray Marine Axiom multifunctional display.
Finally, the government defense business unit introduced the M. you B C 60.
The industry's first multi gas detector for unmanned aerial systems.
Created for emergency response teams. The C 60 will allow operators to fly drone into a same to determine the flow of hazardous vapors, both at the source and in the air.
Doing so allows responders to assess the situation remotely before sending any one into harm's way when the C. Threesixty arrives in the market. This quarter. It will immediately change the chemical and gas monitoring process forever.
In early October we announced the acquisition of the intellectual property and certain operating assets of ARIA inside C.
Which con near the development of tethered small unmanned aerial systems.
The ARIA assets have been integrated into flares unmanned systems and integrated solutions business.
Further augmenting our industry, leading technology portfolio.
Already as innovative technology, and IP assets will enable us to enhance current capabilities and advanced the range of solutions, we can deliver to our customers in this growing market segment.
Now turning to slide nine the FLIR method or TFS is comprised of six elements with an emphasis on one FLIR.
CFM remains at the foundation as we fuel feed and focus the business to drive long term value creation.
Over the next several months, we'll be utilizing the tools of T. FM to assess the overall complexity of our company.
For a company our side, we bring to bear an exceptionally wide range of technologies, serving a equally wide range of end markets and customers.
At the same time, we'll work to reshape our portfolio to better serve professionals with innovative technologies that provide critical decision support to save lives and livelihoods. We look forward to updating you on our progress on these activities in future calls.
That I'll now turn the call over to Carol for her review of the third quarter financials Carol.
Thank you Jim looking at Slide 10, you'll find our third quarter financial result.
Please note with the exception of cash flow all of these financials are on a non-GAAP basic.
Reconciliation to GAAP data is included in the filed appendix.
As Jim mentioned, we generated $471 million in revenue for the third quarter, resulting in a year over year growth rate of 8%.
Adjusted gross profit increased 6%.
Mostly due to the acquisitions made to advance our unmanned strategy.
Line adjusted diluted EPS was 59 cents and the third quarter inline with our expectation notwithstanding the lower than expected third quarter revenue.
We have experienced elevated corporate expenses compared to the same quarter a year ago. This is mostly due to deliver it investments in R&D technologies, our IP infrastructure and the investment in sustaining general trade compliance resources.
Those funds.
Back to receive the results of the audit by the end of Q1 2020.
This audit will greatly inform our remediation effort and required compliance and bus.
We will provide update on this matter, while we work our way through the remaining term of the agreement.
Year to date cash flow from operations.
$277 million marginally higher than $276 million generated in the first three quarters of 2018.
And the third quarter, we repurchased approximately 1.5 million shares for $75 million, increasing our year to date share buyback to approximately two and a half million shares.
Finally, we returned $23 million to shareholders in Q3 through the payment of dividends.
For a year to date dividend payment $69 million.
Our cash balance at September Thirtyth, 2019 was approximately $295 million.
After adjusting for discrete items flowing through GAAP income tax expense.
Our adjusted effective tax rate for the third quarter was 16% down from 20.5% and the second quarter.
Driven mainly by a higher benefit earned from foreign derived intangible and calm and research credits.
Combined with a lower U.S. tax burden on income earned by foreign subsidiaries.
Taking the impact of these items into account for the full year. There was a catch up reduction from the first half.
For the full year, we now expect our effective tax rate to be approximately 19% excluding discrete tax item.
Expanding a bit more on our 2019 outlook as Jim mentioned earlier, we expect full year revenue of approximately $1.9 billion, which represents year over year growth of 7%.
Including organic growth of two per slot.
At the bottom line, we anticipate full year adjusted earnings per share of approximately $2 and 35.
Which was the low end of our original guidance range.
As communicated on prior calls are 2019 adjusted EPS guidance includes approximately six cents of dilution from the Harry on labs, and endeavor robotics acquisition.
Through the first nine months of the year, we have realized nearly all of that dilution and expect these acquired businesses just scale sequentially from the third to the fourth quarter.
Turning to slide 11.
I will highlight the performance from each of our business unit.
Beginning with the industrial business unit third quarter revenue was $177 million driven by strength Uncooled cores and cameras that was offset by lower demand for test and measurement product.
Machine vision cameras, and the continuing gradual transition from handheld to U.S. faith and fixed Mount offering.
The Q3 revenue resolve were seasonally in line and essentially flat year over year.
Operating income for industrial was $58 million, 4% higher in Q3, 2018 operating margin improved a 140 basis points year over year, driven by sustained productivity gains, resulting from the FLIR method.
And we continue to realize favorable product mix.
The government defense business unit saw revenue growth of 24% year over year, including contributions from the unmanned acquisition.
On an organic basis, the business grew by 10% significantly exceeding 1% organic broke the previous year.
All businesses within the government and defense business unit contributed to the organic bread.
It is also worth mentioning that several of the recent large Programatic awards, we haven't now such as NBC RV.
And M. P cat will be in development for the next several years with production anticipated in the second half of 2021.
These programs take time to mature, but are expected to be a significant source of growth in the future.
Operating income for the government and defense business units increased 5% year over year and total operating margin declined 494 basis points due mainly to higher operating expenses from recent acquisition.
In Q3 government and defense current backlog reached $447 million to end the quarter, a 21% increase over the third quarter of 2018, having successfully placed a large end of life program.
While government and just that book to Bill in Q3 was less than one due to delays of award from our Middle East customers. We have several awards that are in final stages that are expected to close later in Q4, 2019 and Q1 2020.
Book to Bill for government and just that stands at 1.6 for the first three quarters of the year.
The commercial business unit third quarter revenue was down 5% year over year inclusive of a negative 1.4% impact from foreign currency.
The maritime business continues to experience you're on your revenue decline, which correlates directly to industry condition I.
Additionally, headwinds from the OTI asked realignment persisted into the third quarter.
But we're seeing some positive signs as a result of the team's effort to reposition our products for the professionals.
Our I T S business on the other hand experienced strong double digit top line growth over last year.
Operating income an operating margin for the commercial business decreased 28% and 286 basis points year over year, respectively.
Although implementation of the FLIR method is bringing record productivity to our processes.
Overall profitability for the business units was negatively impacted by the revenue declines in maritime and O T S.
Foreign currency exchange and U.S. import tariffs also continue to have a negative impact on our financial performance.
In the appendix on Slide 14, you will find our GAAP to non-GAAP reconciliation.
Note that the totaled $18 million, an after tax reconciling items expenses associated with acquisitions represent the largest portion.
Total pretax acquisition related expense is $21 million, including amortization of acquired intangible assets $15.5 million.
That agreement related expenses were approximately $4 million pre tax for the third quarter.
I will now pass the call back to John .
Thank you Carol.
Third quarter was a productive period for FLIR, we continue to advance our strategic priorities and made good progress on many fronts as evidenced by the successful integration of recent three acquisitions and our success in furthering important to franchise programs that will be the.
Key to achieving our growth objectives.
As part of this we've also made great strides in unmanned air and ground programs, while advancing our solution supporting autonomy automotive technology.
It is our objective to evolve into a higher growth company, while enjoying best in class margins as compared with industry peers.
However, we still have a lot of work ahead.
Clears topline growth did not meet our expectations in the third quarter and we're working with a sense of urgency to identify and address our challenges head on.
Looking to the fourth quarter and beyond we will continue to accelerate our efforts to leverage the FLIR method across the enterprise and doing so we remain diligent in our daily tasks to consistently exceed our commitments with integrity and our purpose to innovate the world six cents.
To save lives and loudly.
With that I'd now like to open up the call for questions operator.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation don't want to get your line is in the question Q you may prestart too if you'd like to remove your question from the Q.
We ask that you. Please limit to one question and one follow up and re Q4 additional questions.
Just been she was a speaker equipment and may be necessary to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
My first question comes from Pete Skibitski with Al Beck's Global Advisors. Please proceed with your questions.
Hi, good morning, guys.
Hey, Hey, Jim on the lower organic revenue guidance from from 5% to 2% is that all due to the commercial unit or are there other factors in other segments as well or is the balance basically FX, that's why make sure I understand that.
Yeah. There is some modest FX impact as we mentioned, but the bulk of it is in our commercial businesses. If we look at our expectations for our government defense business unit full year on organic basis I it'll be ahead of what our expectation is with the acquisitions contributing as well if we look throughout the industrial.
Portfolio, we've got some real strength in OEM, but the commercial business units headwinds principally around maritime and no Ts restructuring are well below expectations and not growing to prior year. Despite some real bright spots is we mentioned in the Rts business, which is.
Continued to grow nicely and be very accretive, but just too small to move the overall enterprise if you will.
Oh, Okay that makes sense just one follow up for me can you just give us a better central which which programs in particular are driving the strong government organic growth.
I think it's been strong this quarter I think the second quarter also and then just maybe you can find somebody or middle Eastern awards that you're expecting.
Yes, so throughout the year the government and defense business has done a really good job finding non programmatic business to offset the end of life of the E Mail RFP program as well as Drs Kao, which we produced our final shipments on this past quarter. So.
So a bulk of the backlog building such really have been off a non programatic winters weve oriented the business to compete on much larger programs of record is we enter 2020 that said soldier borne system.
Which we were awarded earlier in the here and are well into delivery on in fact, the third brigade combat team of the 82nd Airborne took the black Hornet through soldier borne system to Afghanistan or we've gotten good feedback.
As well as the M.B.C. RV the nuclear biological Kimco reconnaissance vehicle <unk>, we're producing has been the two most notable programs.
But as we go into 2020 M. beyond is when we expect some of these again much larger programs to begin to produce for our ground robots systems, the mid or program as we exit this year and go into next year, we'll be in shipments.
Through Q4, and accelerating into next year for ground robots. The sub T program also will be well into delivery and as we mentioned in the prepared remarks in the slides a we're really.
Excited about the remote combat vehicle with team Repsol, our partnership with Textron, and how and how to produce what it's really disruptive modernization with a unmanned ground robot system to augment our ground armored forces the the bidding.
Well the international order expectations that we mentioned that didn't materialize in the quarter, we're out of the middle East a we still expect to be awarded goes however, Tommy has slipped to the right a bit we hope to receive them by year end or early into next year.
Appreciate the color.
Thank you.
Our next question comes from Peter I met with Robert W. Baird. Please proceed with your question.
Yeah. Thanks, Good morning, everyone, Jim Carol everyone else.
Jim Hey on the your mentions of the reshaping the product portfolio in the commercial segment.
What can you.
Kinda give us any color on that in any expected timeline when you're talking about that in 2020.
Well some of that has already been well underway with our restructuring of the O. Ts business. That's happened throughout the year and that's a tough transition as we pivoted to focus on professional users of weapons sights law enforcement military customers et cetera, and that continues to produce head.
When forces we moved through that transition you know after a the May 2018 strategy that we described in our priorities through 2021, a this is the logical Tom that we work to evolve that strategy as we mentioned, we're gonna have an investor day in Q3 of next year, but we're all.
Already looking at how we need to prioritize the business going forward.
We cover down on a very wide range of end markets and we want to have more of a growth flooding again, while having best in class margin rates compared to our peers. So when we look at our priorities going forward or we're going to put much more emphasis on sensor leadership unmanned it autonomous airborne I asked SAR indeed.
Vision support because across all of our technologies, helping that professional make a better decision quicker to save lives and livelihood is is our ultimate purpose. If you will.
Our maritime business has grown nicely from 2017 through 2018, but throughout this year continues to have headwinds are they also have worked to pivot to have more of a professional focus with their multifunctional displays and other feature functionality throughout the technologies.
They've launched and the Rts businesses I mentioned inside the commercial business unit is actually done quite well, it's just sub scale to move the overall enterprise.
So looking not just the portfolio, but how we focus future R&D shape the portfolio into higher growth footings, if you will and address complexity inside the business. So we have the right systems to be able to scale them be comply going forward are the key components of the evolution.
Of our strategic plan.
But we're not.
At this moment to give any any specific direction.
Okay, and if it just as a follow up just on the on switching over to industrial growth. I mean, maybe this is for Frank but I'd be OEM sounds very solid in that channel, but what are we seeing from the market dynamics on you know machine vision and test and measurement. When is this a bottoming out process or what the what exactly can you give us color there. Thanks.
Yeah, what I'll tell you and the machine vision space, specifically, what you're seeing you exceeded the reports of our peers theres a bit of a downturn in the semi out in the semiconductor and the automotive consumer electronic space.
The general consensus is that were at or near a bottom at this point what I'll tell you is our business is performing either at or above the level. Our peers, we've seen double digit bookings growth in the machine vision business. So feeling great about that and just feel like we're on the kind of at the bottom in that particular space and the test and measurements base.
I will tell you. It's just generally a GDP growth markets. So were generally a in good position with that that's just a function of what's happening with the economy.
Thank you for that.
Our next question comes from Jim Ricchiuti with Needham and company. Please proceed with your question.
Hi, Thanks.
A follow up to that last question, yes, it's a little surprising to hear that you're seeing that kind of bookings growth in the machine vision business just given the weakness that you talked about in some of these key markets, where where's the momentum in bookings coming from in the industrial machine vision camera business.
Yes, so I'll tell you a lot of it is the fact that we've put a lot of time and effort into our go to market efforts that have been than today will allow us to have a relatively broad based booking for starters, but I would tell you. Some of those areas of higher growth are occurring in the life Sciences and robotics spaces. In addition to the fact that we're getting some competitive wins and some of the spaces that are.
Still bit downtrodden.
And there's been some nice innovation in that business to a point the Firefly, that's got onboard analytics et cetera.
Okay. That's helpful and as a follow up I I don't know if you're willing at this point to discuss the pipeline for the Andy business looking out to 2020, but I was wondering if.
Jim you or David might be willing to comment on that it sounds like there is activity that you're expecting up potentially this the end of this year in the middle East, but how does the pipeline look more broadly for some additional franchise ones.
Yeah, I'll make some comments and David you can add some color you know year to date the book to Bill for our government defense business is about 1.06.
We've seen a lot of strengthen again the unmanned applications as we go forward and expect some program awards for unmanned ground robots hopefully between now in the ended the year some of the much larger programs begin to award as we exit 2020 going into 2021, but David you want.
Add some color Jim I think you're spot on the only thing I would add is when you pick apart gimbal business and our surveillance business areas programs like GE boss next year will stop pharma brought an acquisition strategy. We think we're well positioned there the modernization efforts.
The customers, how rather routing platforms start takes effect.
RFP old perspective in second half of a year, but in the first every year.
Like Chris age cover about having RSV are expected to be awarded in the first half of next year, which really other big movers and shakers, what's going to drive how the franchise activity from business.
Thank you.
Our next question comes from Michael Seer Moly with Suntrust. Please proceed with your question.
Good morning, guys. Thanks for taking my questions, maybe just to stay on the government side, Jim I think you alluded to remember for Shimmer Carol you know talking about some of these larger programs.
In development Phase you know they don't really I guess shift into production until second half 21.
Can you just elaborate there are a little bit and I mean, it's that that's sort of code here to kind of calibrate our expectations for margin expansion assuming these there.
Normal kind of startup costs learning curves and does that prevent the government margin from I. I mean, I know what stale, but at one point you guys talked about a 29% margin, but just maybe to calibrate our expectations about how we should think about the cadence of government margins given given these development program.
Yeah, you know when I think about our government defense business most of its growth over the years and historically the strength has been non programmatic business OCO funding a work with so calm and door you know sales directly to foreign Allied militaries and that continues to be a focus and can be very.
Profitable driving strong margin accretion with good product mix. So we're going to maintain that certainly in the near term. That's a lot of focus of ours and as we look at the book to Bill largely throughout the year most of it has been non programmatic.
But as we talked about when we met at our Investor Day last year. We're now building the right infrastructure. The right go to market strategy and in the right product design to align with the requirements of much larger programs and when they come in we really want them to layer.
On top of what is the core legacy business to drive growth.
When we look at the programs, we're going after whether it be unmanned ground robots with Chris age for example, the remote combat vehicle and our partnership with team Repsol, Textron and how and how a lot of these technologies are technologies that don't require.
Tremendous amount of additional R&D and development on we feel quite confident in going forward and these will begin to layer in you know through the end of this year through 2020 and 2021.
But the bulk begin to deliver it towards the end of 2020 and going into 2021, but in the Meanwhile, we continue to work diligently again on growing that non programmatic business that can be much more problem.
Got it and then just just one more follow up Jim I mean, you know if I look at Maritime I mean, I think you called out some nice growth and 17, but you know I think this was 180 million run rate business back in 2012, it's clearly margin dilutive if it doesn't seem core I mean is this.
I mean, it's it's one that's going to be divested I mean, it seems that clearly help eliminate some of your volatility boost your margins.
You know I know, you're you talked about reshaping, but I mean, this one clearly sticks out I guess.
Right well, we're disappointed with the performance year to date, certainly we're probably a lot of work that's been done in that business to drive innovation, but as I mentioned as we go for we're evolving our strategy, we're going to focus heavily upon sensor leadership on man diet SAR decision support in between now and the outcome.
During Investor day, which will be Q3 of next year, just general complex the reduction and potential reshaping the portfolio, it's going to be considered.
I'm not prepared today to talk about any specifics around any individual business unit.
But it's something that we always consider in as we naturally evolve the strategy, we're going to pay much more attention to going forward.
Sounds good thanks, guys.
Our next question comes from Justly Jeffrey Kessler with Imperial capital. Please proceed with your question.
Taking a look at the commercial.
Division again, not to beat the dead horse, but.
Good.
It seems like Farfen dead, we just came from a conference in which companies like axis and actually site logics, who actually competes with you on.
In some of those in some of those areas.
Actually we are having good years.
The high end, where it is less price sensitive is having a good you're obviously at the bottom end it.
Goes up because of up.
Let's call the Asian.
Asian price.
Asian price pressures.
It's it's meaningless to try to sell into that marketplace. This point.
Well I'm, what I'm interested in is that given that there. There is some say there's quite a bit of success it but at the top end of the vision.
Of the vision business.
In the.
Wonderful the oats, yes area I'm just wondering.
I'm just wondering.
What do you expect to get out of the repositioning toward those end users who value.
Mm hmm value your capabilities.
Over.
Overprice.
Is there a big certainly is there is there seems to be a market since it seems there is a market for it and the question is how are you in a position.
Shelf for that market.
Thanks, Jeff I'm for our commercial security business, we absolutely are focused on critical infrastructure in applications, where the customer does have a willingness to pay for our technologies.
For the commercial security business in the quarter, we actually had very strong bookings Todd to critical infrastructure projects in India. We also continue to see success with applications like data center perimeter security or airport per perimeter security. Your other federal government applications. As you mentioned we are.
Do not see a lot of value going forward and competing at the bottom into that market against Chinese.
Imported cameras and such but for these critical infrastructure applications that need to technology and also values. The cyber security that our products bring will continue to focus upon and intend to grow you mentioned, the OTN business as well and for the LTL business, our outdoor and tactical systems.
It was largely a commercial weapons sight business focused upon outdoor enthusiasts.
And we've moved that business to oriented to the law enforcement and military professional the work that's required to reconstitute those channels to market build the right products that meet their requirements reduced the number excuse to serve their specific needs. We've made good success with or are in the early stages.
I've seen a return to growth is we're developing that market.
So if I if I have this right.
The OTN size being repositioned youre the commercial part of your commercial part of of the commercial business.
Which is obviously much more than just and then just to.
Garden variety commercial I'm actually is.
Is doing is doing fairly well so I take it that's the combination of OTN and maritime or what really are pulling that part of the business down whereas.
Where we are whereas the.
As side and the commercial security side or are the ones are the parts of that business that are doing well, so what I'm thinking about what you might say in a year from the hours so that youre.
At your Investor Day.
Thinking about.
What parts of these businesses you really watching what parts of these businesses are not are not going to be well, let's let's say core to the company.
That's right and you're correct, it's the maritime and OTN businesses inside commercial they're providing the principal headwind.
Right.
Thank you very much.
Thank you.
Our next question comes from Josh Sullivan with Seaport Global Securities.
Securities. Please proceed with your question.
Hi, good morning.
Good morning, Josh.
Just a question on the industrial business can you expand on the comment on that the transition on the handheld business to other platforms, just where are we going that transition.
The other non handheld platforms higher margin.
And then how long do you think that transition will play out.
Yeah, I'll make a couple of comments and Frank you can chime in you know, we see more and more fixed mount applications as people want continuous monitoring of different plant property and equipment and a lot of unmanned solutions, whether it be for inspection applications for safety with regard.
The first responders, we see that unmanned growth a lot, but frankly, you want to add some commentary I would say that when you look at Jim's key priorities, which are unmanned autonomy. This decision support it really fits very well with this.
The trend of folks walking around with a handheld using and having to interpret that data is still there, but the growth in that particular categories slowing and shifting over into going into drones and fix mounts. Those particular categories armed back to very high growth market and industry for us and we're seeing that try.
In addition, we're actually capturing that quite well relative to the margins all the say that the margins about entire ecosystems are still create where as a whole.
We have accelerated go faster growth that's a good thing for business.
Got it appreciate that and then just one on the you economists automotive efforts.
The current thoughts on the adoption timeline for the auto industry, maybe what are some of the near term opportunities here.
Yeah. The right now we participate in almost every demonstration or experimental fleet. That's out there as we state. We believe thermal is a core part of the sensing suite, it's going to be required is levels of eight as move up as we announced yesterday partnered with being there.
They have won a contract with a major automaker that will go into production in 2021.
It's the first to use multiple thermal sensors in the solution. We're really excited about it we think it will encourage other automakers to adopt this is a core part of their sensing suite. So that's the first victory. If you will then we've got a lot of work to make sure we deliver upon that successfully and then from 2020.
You want onward, we expect to see quick adoption, because we've had great success and a lot of the demonstration fleets that have been out there.
I think you'll see I think you'll see a trickle in 2021 and that trickles turns will flow over the next few years over that the thing that I'd also want to emphasize is that not only as it autonomy vehicles that were talking about but if you look at a b.
Domestic or automatic emergency braking a recent study came out from AAA that the Wall Street Journal published the basically says would only be systems essentially don't work.
Not placed directly into thermal sweet spot and that has actually we've not only gotten a lot of momentum in the thermal space and a ton of as vehicles, but on standard vehicles as well into building the sent us a thermal enhanced or thermal assisted ABTS system. There's a lot of adoption coming up about direct what we're very excited about as a company.
But I appreciate it thank you.
Our next question comes from Noah topic with Goldman Sachs. Please proceed with your question.
Hi, good morning, everyone.
Morning No.
So if I take the new 2019 revenue guidance a billion nine 2% organic.
I assume government and defense has a similar kind of growth rate in the fourth quarter as it out in the third kind of.
Just through mid single approaching high single digits.
It would imply that industrial and commercial or at least one of the two or would have to have.
Pretty healthy acceleration in the fourth quarter versus the second and third.
So you know one.
How's that happened because it doesn't.
Ill make some of the.
Headwinds, you're describing our changing in real time right now as we're a month into the quarter.
And then as I go into 2020.
It can become that kinda headwinds you have their olivier enough, where you know versus easy comps.
Those segments can grow in line with the five and 4% long term targets you have.
Should I think about those are still being a little slower and 20 twond.
As we go into the fourth quarter, we do expect continued headwinds in the commercial business principally.
The industrial business unit had a really strong bookings quarter. If you will the government defense business as we talked about we continue to expect strong performance.
We're certainly disappointed you know we want all the business units to achieve that 5% or greater organic growth rate.
Certainly from when the time, we've targeted that there've been some external headwinds that we shape, but it certainly our intent is we go forward to have all the businesses contribute to our growth.
So we can be on a growth flooding Carol you want to add some Howard some color no up because of.
The growth in Q4 for government and defense the.
As expected to be higher than what you're estimating Ah, okay, we'll be very strong, especially including what's in the unmanned business.
And as those programs ramp so in total were slightly higher number somewhere.
Okay.
Ken the entire company grow 5% organically and 2020 with what you see right now.
Well, we don't want to provide specific guidance to 2020 quite yet as we go through the fourth quarter. We're building our annual operating plan. So we can go through the proper diluents diligenced understand that men.
Obviously on the February call, we'll be providing that direction.
Alright, and final thing Carol can you.
Specify quantify how much him in the third quarter 2019, and then in the full year of 29 team how much total.
Non recurring is there between the consent agreement expenditures.
Incremental investments anything else, that's impacting the margins the way you're reporting them adjusted to that doesn't repeat going forward.
Or isn't permit.
So the the amount year to date that is below the line is called out in the <unk> GAAP to non-GAAP reconciliation and there's approximately 12 million that's year to date and if you look at what run through with us in our full year guidance.
For ongoing.
The trade compliance costs will be at a run rate as approximately $11 million to $12 million by the 29.
And that is reflected in our net.
Adjusted operating income the other thing I'll note is that when you look at our cash flow, Indeed, basically flat free cash flow year over year off cash from operations were hovering that incremental cash requirement designed not only the ongoing.
Cost for global trade compliance, but also these onetime costs that are sitting below the line. So that's a reflection of the positive.
That we've had from the Ts and.
And contributing that cash flows to.
Offset so we can maintain strong cash flow from operation.
Do you know today, what those are going to be in 20 Tony.
So we will be important as I noted in our earlier prepared remarks by the audit that's currently under.
Under way it started so we're having audit.
All of our major site and anywhere where we have a product that has to be license and we won't have the results of that until towards the end of Q1 and that will greatly inform our remediation effort. So right now.
It would just be a gas until we get resolved.
I see want to know that again, we're really committed to make sure we ramp up 100, Vietnam to more aggressively manage working capital to generate the cash that's needed. So we can cover these costs without having a negative impact on title cash flight for the comp.
Our next question comes from Louis Dipalma with William Blair. Please proceed with your question.
Good morning, Jim Carol Frank in Lhasa.
Good morning, Good morning Lewis.
For the industrial business unit.
Is the strength that you're seeing with machine vision bookings and the shift from handheld or higher priced drawn platforms is that enough.
Offset.
Macro weakness and your exposure to China and should we expect the industrial business unit growth.
Fourth rate to improve over the next couple of quarters.
The I would say we continue to expect headwinds in China with machine vision Theres no one catalyst in that market right now.
That's driving it from an external standpoint, we do have new products. As we've mentioned we've had some strong bookings as we moved into different parts of the market are diversified the kind of applications. We go after the big driver inside of our Bu is the OEM business unit.
They had really strong bookings.
This past quarter, they kinda led the way with that.
And they continue to be a cornerstone of that industrial business unit.
And we are encouraged about what we see potentially the near term with instruments as well.
Okay and you.
You just mentioned the a the OEM part of that.
Business. Some your your partner DJ I has dominated the unmanned systems market for the first responder vertical in the U.S. Since you are like a very strong partner and supplier with BJ I you have benefited from that but are you contend with that existing.
Relationship over the long term do you envision that.
Ariane labs, and Black Hornet could also be competitors to DJ I for the first responder vertical in addition to you being a partner to DJ.
You know black Hornet, and Ariane labs, with Sky Ranger and Skywriter focused principally upon government applications federal government in particular, the largest customer being the department of defense and right now we continue particularly with black Hornet to stay focused upon that Deo de customer.
DJ I do have a tremendous amount of market share on the commercial and enterprise markets and we provide payloads to them as well as develop our own payloads and we've seen good adoption across that first responder market. They can be so price sensitive is their budgets are often constraint.
But for now our Scott Ranger writer in Black Hornet are certainly focused upon federal government applications principally.
And one last question what role does.
The own near has and your contract announcement from last night and are they are only integrator partner.
They are not our exclusive integrator partner they are a preferred partner of ours and Weve, a very long relationship with them. Frank do you want to add some commentary essentially there there are a tier one and where it's here to supplier. We are back working with a large number of other manufacturers, whether that's directly with.
The Oems or with tier ones and.
Basically, but but essentially I'll say that were principally it was.
Excellent.
Thanks, guys.
Thank you.
Ladies and gentlemen, Weve reached the end of the question and answer session. At this time I'd like to turn the call back to Jim Kennedy, President and Chief Executive Officer for closing comments.
Thank you operator in closing I'd like to thank all of you for joining the call today and for your interest in our company as always I would also like the thank the more than 4000 FLIR team members around the world for your hard work passion and dedication to our mission. We look forward to updating you on our progress when we report our 2019 fourth.
Quarter and full year results in February Thank you and have a great day.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.