Q4 2019 Earnings Call
[music].
Greetings and welcome to the FLIR systems fourth quarter and full year 2019 results conference call.
This time, all participants are willing to listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero under telephone Keypad. As reminder, this conference is being recorded it is now my pleasure to introduce your host thoughts the glass and Investor Relations. Thank you you may begin.
Thank you good morning, everyone and thank you for joining the call.
Please note that our earnings press release, some presentation slides referred to on this call are available in the events and presentations section of lives Investor Relations website at Www Dot FLIR dotcom back Flash investor.
Before we begin I'd like to remind you that statements made on this call other than historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act like 95 and are based on our current expectations.
Words, such as anticipated.
We expect.
In town.
I'll leave.
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 from our expectations.
Please refer to the earnings press release, we issued earlier today as well, it's weird FCC filings for a description of factors that could cause actual results to differ materially from these statements.
All information discussed on this call is out today, and so does not intend and undertakes no duty to update for future events or circumstances.
During the call will discuss the GAAP and non-GAAP financial measures.
A reconciliation from GAAP to non-GAAP measures is available in this morning earnings press release.
With that it's now my pleasure to turn the call over the Gen Cat President and CEO for systems Jeff.
Thank you lots of good morning, everyone and thank you for joining flares fourth quarter and for your 2019 earnings Conference call.
Speaking with me on the call today, its Carol low our Chief Financial Officer.
Carolyn are also joined by Travis Merrell President of our commercial business unit, David Wright President of our government and defense business unit price Pennisi, President of our industrial business unit, and Sonia going though general counsel.
We're finished 2019 with full year revenue of $1.9 billion and fourth quarter results that reflect a continuation of many of the trends we experienced in the third quarter.
Our government and defense and industrial business units delivered performance is highlighted by fourth quarter revenue growth and expanding for your backlog.
I also continued to be very pleased with our success and advancing our strategic priorities that will be key to achieving our long term growth objectives.
However, our commercial business unit continued to face challenges that negatively impacted clears consolidated organic revenue growth and profitability targets in the fourth quarter and for the full year and 2019.
As a result, I remain on satisfied with our recent financial performance, notably our organic topline growth.
I'm, especially disappointed that we did not achieve our revised full year guidance as a result of the headwinds we faced in our commercial business unit.
The lumpy nature of the revenue once certain near term programs that are difficult to predict.
And unforeseen impairment charges on minority investments.
We expect the financial and operational trends, we experienced in 2019 to persist into the coming year, which is reflected in our 2020 outlook. In fact, we view 2020 is a Europe evolution in many respects.
First we have reached end of life on large multiyear programs that provided solid revenue contributions over the past several years.
Second the significant new franchise program wins, we've recently announced are not expected to begin a meaningful ramp until 2021 of them beyond.
And third we're continuing to make investments in R&D and compliance to successfully execute the recently awarded franchise programs and position clear for long term profitable growth.
Specifically, our 2020 R&D investments include at least $50 million to support the ramp of significant franchise programs with little or no corresponding revenue.
To mitigate the impact of the challenges we will face during this transition we've launched a companywide initiative called project to be ready.
Project to be ready aims to reduce cost and simplify our product portfolio to better align our resources with higher growth opportunities.
Much more on all of this in a moment.
While we're working with a sense of urgency to tackle these near term headwinds the future of FLIR has never been brighter and we remain very confident in our long term strategy.
Today, our strategic priorities outlined on slide three of the presentation are evolving to emphasize professional in market customers with a focus on leadership and sensor solutions unmanned and autonomous solutions.
Were born I S R and decision support.
In 29 pain, we made tangible progress toward advancing our strategy.
Examples include leveraging our enhanced on man technology and solutions offering made possible through our recent acquisitions to extend the leading position in group one unmanned systems.
We also continue to develop our solutions supporting numerous industrial opportunities as a technology supplier to aerospace and defense Prime contractors as well as an advanced driver assistance systems or Ada Es.
As evidence of our success I will highlight a number of recent franchise program wins in each of these strategic areas of focus later in my remarks.
While it's critical that we continue to successfully execute our strategy much work lots ahead.
We're is clearly evolving into the company, we aspire to be long term.
I'm more confident than ever that we can achieve our stated objective of being a growth company with best in class margins.
With that let's move to an overview of our 2019 financial performance.
Carol will provide additional details on fourth quarter performance in her prepared remarks.
As noted on slide four we finished 2019 with annual revenues of $1.9 billion up 6.3% from a year ago.
Organic top line growth was 1.1%.
Total bookings were up 11% while total currently 12 month current backlog stood at $673 million.
An increase of 12% compared to the balance at the end of 28 team.
In addition to total backlog increased 13% to $807 million over the same period.
Adjusted gross margin of 51.7% held relatively steady year over year, while adjusted operating margin of 21.4% declined 130 basis points.
Problem merely due to increased investments in research and development and ongoing export compliance expenses to position FLIR for long term growth.
Adjusted EPS grew to $2.23 per diluted share.
Please turn to slide five I.
I'd now like to switch gears and discuss our recent progress in executing our strategic priorities to fuel seed and focus the business.
This includes key fourth quarter award that will fuel our business.
New products and investments that will be delivery of our strategic plan.
As well as more specifics on project be ready.
He initiative to focus our business by optimizing both our long term operational and financial performance.
Let's turn to slide six which outline key recent awards.
In the fourth quarter, our government and defense business unit was awarded a five year $109 million production contract by the U.S. Army to build upwards of 350, FLIR Cobra robots as part of the Army's common robotic system heavy.
More Chris H. program.
Chris age program will give the army a program of record.
Building sustain a fleet of large unmanned ground vehicles for years to come.
The Chris age platform called for a robot weighing up to 700 pounds that will be used to perform a range of mission.
Such as disarming vehicle born improvised explosive devices.
Unexploded ordinance or related heavy duty tasks.
A variety of sensors and payloads can also be added to the UGI the to support other missions.
This award exemplifies why we acquired endeavor robotics early in 2019 to strengthen our position as a leader in unmanned systems capture strategic franchise programs and deliver lifesaving robotic technology to our war fighters and the field momentum is building.
Since the U.S. Army Award we've already received to follow on awards for our Cobra robot totaling approximately $40 million.
In addition in January along with our partners Textron and how and how we were awarded to your contract to build for Repsol M. five vehicles for the Army's next generation unmanned robotic combat vehicle for our C.
The program.
She is highlighted on slide seven.
Our TV is a testament to how we're able to leverage our proven on man technologies and trusted relationships with important defense Prime contractors.
Clears contribution to this platform will include our world class intelligent sensors, and unmanned assets, including cameras delivering 360 degree situational awareness.
Surveillance gimbals tethered drones and ground robots. This program exemplifies how FLIR substantial technology portfolio.
Combined with contributions from Textron, and how and how will be a disruptor on the battlefield.
As a result, we're very optimistic about our teams competitive position for this program, which is our largest ever program pursued.
With production awards estimated to be in excess of $1 billion over the life of the program.
This program is well aligned with our long term strategic plan to position clear as a leading unmanned solutions provider for the D.O. These modernization priorities, which include utilizing unmanned solutions to protect the war fighter.
It also provides ample justification for the investments we made early in 2019 to acquire erion and endeavor that together help create the foundation for our success on the Repsol M. five.
As noted on slide eight our industrial business unit continued to generate momentum with new franchise program wins.
On the heels of the I'd be you award, we announced in the third quarter call to provide thermal cores for V in years level for autonomous vehicle production contract.
During the fourth quarter, we signed a new agreement to provide thermal cameras to a leading robo taxi disruptor.
These are just the latest opportunities and the rapidly developing a das market.
These awards highlights the value a thermal sensing for self dropping applications, which we believed to be in a central component and the a that sensor suite.
Paving the way for future adoption by other automotive manufacturers.
Furthermore, we expect to eight asked fuel technology, such as thermal augmented autonomous emergency braking to be integrated as a standard safety feature in the future.
Key to our Ada Es success, it's flares more than 15 years of automotive experience and the fact that we can claim the only automotive qualified thermal sensor that's been deployed on over 700000 vehicles today.
During the fourth quarter I be you also want to fire programs on two different continents.
With awards in New South Wales, Australia, and Chile.
These awards exceeding a thousand units provide multiyear placement of our premium NFP a compliant case 65 camera solution to professional firefighters.
The contracts from these influential fire departments and they will clear to leverage these Halo awards as a means to focus on smaller regional fire departments in 2020 and beyond.
While these are just the latest stinky franchise programs that we have one slide nine includes an overview of the opportunity that large multiyear franchise programs bring the FLIR.
This view provides a look it's some of the franchise programs that we have benefited from in prior years that are sunsetting.
And also how lots the tremendous opportunities that lie ahead.
Color coded by the FLIR strategic priority under which the programs fall.
The franchise programs, we are pursuing as displayed total almost $9 billion of opportunity through 2023 and beyond.
Importantly, a number of these programs have already been warrant.
And are reflected in our total backlog.
While we acknowledge there's a significant amount of work ahead of us to win an execute we're excited and optimistic about the opportunities.
Illustrating my earlier point you can see that 2020 is a transition year defaults between program sunsets and significant ramps in 2021 and beyond.
During 2020, we will rely heavily on non programmatic orders across our business units and we will also be investing heavily to deliver on these future wins.
Since many of these investments will not directly translate into corresponding revenue until late 2021 and beyond.
We will be focused on optimizing our resources and R&D investments in 2020.
In the near term, we continue to release, new products and feed the support of growth of our strategic priorities, while simultaneously improving safety and efficiency for professionals.
Recent product releases are outlined on slide 10.
I'm very pleased that the evolution of our strategic priorities has quickly resulted in tangible evidence of success illustrated by New franchise awards, and our ability to bring new technologies to market with innovative products.
Equally important to our success will be positioning FLIR to deliver against the substantial wins, we've already achieved and capitalize on the significant growth opportunities that lie ahead.
To ensure our readiness during the fourth quarter, we launched project to be ready.
Highlighted on slide 11 that positions flair to compete when the execute and deliver and 2021 and beyond.
Project be ready, which utilizes many of the tools of the FLIR method outlined on slide 12 aims to reduce the complexity of our business to help at scale over the longer term, while eliminating cost in the near term.
As a part of this plan, we're consolidating our business units and simplifying flares product portfolio better aligning our business with our four key strategic priorities.
In doing so we have discontinued certain non core consumer centric product lines within our outdoor and tactical systems or OTI has business.
This process is largely complete.
Concurrently we have entered into a formal process to evaluate divestiture of our re marine non thermal maritime electronics business.
Although not core to FLIR, we believe our maritime business is best in class, that's industry with compelling and innovative products that make it an extremely attractive asset.
We have clear expectations relative to the valuation of these assets and we can move quickly to complete a transaction with a prospective buyer if those expectations are met.
The remaining divisions within the commercial business unit will be integrated into the industrial business unit.
Which along with our government and defense business unit will be our only two business units starting in the first quarter of 2020.
This integration is outlined on slide 13.
We believe this effort will help reduce complexity in our business and eliminate unnecessary overhead helping to improve our cost structure.
Before we turn to our business outlook and guidance for the year I'd like to quickly comment on some of our longer term financial targets, which we announced in may of 2018.
These targets included 5% compounded annual organic revenue growth, 23% adjusted operating margins and one half improvement in working capital turns each year through 2021.
While this reflected our best in balance projections at the time several factors over the past two years have impacted our ability to achieve them.
First the acceleration of our operating strategy and the influx of recent franchise program wins that I noted earlier have resulted in an increase in near term investments required to prepare for and execute these programs.
And second external macro factors significantly impacted certain end markets served by the commercial business unit.
Although we are addressing these with project be ready.
This was clearly a strong headwind to our business.
We look forward to discussing these evolving dynamics in more detail at our next Investor day, which we plan to host in the third quarter of 2020.
Turning to our outlook for 2020, the guidance that we're providing reflects our activities to consolidate and restructure the commercial business unit, including the discontinuation of certain products and our OTI EPS business.
However contributions from the Maritime Division are currently included in our full year projections.
That as a backdrop for the full year 2020, we currently expect.
Revenues of approximately $1.85 billion to $1.9 billion to $5 billion.
Adjusted operating margins in the range of 20% to 21%.
And full year adjusted earnings per diluted share in the range of $2.10 to $2.30.
With that I'll now turn the call over to Carol for additional details on the fourth quarter and for your financials Carol.
Thank you Jim looking at Slide 14, you'll find a summary of our fourth quarter financial result.
Please note with the exception of revenue all of these financials are on a non-GAAP basis.
Reconciliation to GAAP data is included in the appendix.
We generated $489 million and revenue for the fourth quarter, resulting in a year over year growth rate of 9%.
Organic revenue growth on a year over year basis declined by 1.5%.
Revenue was negatively impacted by foreign currency exchange, which impacted gray by approximately $4 million or 1%.
Adjusted gross profit increased 7% year over year to $250 million, primarily due to contributions from recent acquisitions and organic growth within the industrial business unit. However, adjusted gross margin of 51.
1% decreased 90 basis point.
Compared to the prior year.
Despite productivity gains achieved through the FLIR method across all business unit margin was impacted by weaker end markets and our commercial business unit, coupled with the ongoing ramp I've recent acquisition.
As Jim mentioned these acquisitions have been critical to strengthening our position and unmanned system and we're very pleased with their contribution to our program awards thus far.
Fourth quarter bookings increased 4% compared to the prior year driven by significant franchise program wins, and the government and defense and industrial business unit.
Adjusted operating income declined 4% compared with the fourth quarter last year and adjusted operating margin declined 283 basis points year over year.
Compared to the prior year adjusted operating margin was primarily impacted by higher R&D expenses to support future programs and ongoing export compliance matters.
After adjusting for discrete items flowing through GAAP income tax expense, our adjusted effective tax rate for the fourth quarter was 19%.
Steady with the fourth quarter of 2018 at the bottom line adjusted diluted EPS was 55.
In the fourth quarter.
We remain committed to better aligning our expense base with our revenue profile, we expect to reduce operating expenses and 2020 through ongoing execution of the FLIR method and project be ready all of which is reflected in the guidance Jim mentioned.
Earlier.
In terms of the consent agreement. We are currently approaching the second year of our four year timeline under the terms of the agreement we agreed to pay a 30 million dollar penalty half of which is suspended provided we use those fun to improve our compliance.
We have made solid progress on the implementation of a more robust compliance program and will continue to incur related expenses as we fulfill our commitment.
We have recently completed the first audit required by the consent agreement.
As previously shared the findings of this audit will help provide clarity on future remediation efforts and investments and then in compliance.
We will provide update on this matter, while we work our way through the remaining term of the agreement.
For the full year ended December 31st 2019.
Cash provided by operations with $370 million consistent with cash flow generated in 2018.
As outlined on slide 15, we used our cash flow from operations to fund our capital allocation priorities of investing in the growth of our business and returning value to our stockholders for the full year 2019, we invested $602 million.
To complete three acquisition and invested $45 million and capital expenditures.
We continue to return capital to stockholders with the repurchase of 100 in $25 million worth of our common stock and the payment of $92 million in dividends.
Our cash balance at December 31st 2019 was approximately $285 million.
Finally clears board of directors declared a quarterly cash dividend of 17 cents per share on FLIR common stock payable on March 20th to shareholders of record.
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Turning to slide 16, I will highlight the performance from each of our business units.
Beginning with the industrial business unit.
Fourth quarter revenue was $193 million up 6% year over year.
Driven by strength in cold cameras and component as well as machine vision.
Partially offset by decline and lower cost test and measurement equipment.
We're very pleased to have achieved an 11% growth and operating income to $64 million on a 6% increase and net sales.
This was driven by a combination of favorable product mix as well as higher revenue volume sustained productivity gains, resulting from the FLIR method and solid management of operating expenses.
As a result operating margins grew 142 basis points year over year.
The government and defense business unit, so revenue growth of 23% year over year, which includes contribution from the unmanned acquisition.
As Jim detailed in his remarks, we have a significant pipeline of large program awards and the government and defense business unit, which will be in development for the next several years. These programs take time to mature but are expected to be a significant source of growth in the future.
Yeah.
Operating income for the government and defense business unit was down slightly year over year due to higher operating expenses from recent acquisitions and lower margin product mix and.
In Q4 government and defense current backlog reached $435 million to end the quarter and 11% increase over the fourth quarter of 2018.
Government and defense book to Bill was 1.1 for the fourth quarter and 1.5 for the year.
Commercial business unit fourth quarter revenue was down 11% year over year.
Revenues continued to be impacted by lower sales volume and the I.T.S. business.
As well as a difficult year over year comparison in the security business, which build a large onetime project in the fourth quarter of 2018.
Partially offsetting this revenue decline was the strong performance of our I.T.S. business, which experienced double digit top line growth over last year for both the fourth quarter and the full year.
Operating income and operating margin for the commercial business decreased 19% and 156 basis points year over year, respectively.
In the appendix on slide 20, and 21, you will find our GAAP to non-GAAP reconciliation I will note that of the total $73 million an after tax reconciling items for the fourth quarter discrete tax items represent.
The largest portion totaling $32 million.
These include settlement with foreign taxing authorities.
Accrual of foreign withholding taxes, and the tax effect of the exclusion of certain amortization and consent agreement spending.
Restructuring expenses and asset impairment charges totaled $18 million.
Amortization of acquired intangibles was $15 million and compliance expenses related to the consent agreement were approximately $10 million for the fourth quarter.
As noted in our earnings press release issued this morning, beginning in fiscal 2020, we're simplifying our non-GAAP financial measures to enhance the comparability of our core operating performance on a period to period basis.
Items excluded will consist of separation transaction and integration Paul.
Amortization of acquired intangibles restructuring expenses and asset impairment charges discrete legal and compliance matters gains or losses on cell of businesses and discrete tax items.
Our financial outlook for 2020, which I will discuss in just a moment reflects this change for further details. Please refer to slide 22, and the appendix, which contains a reconciliation of GAAP to non-GAAP financial measures for the full years ended December.
31st 2018, and December 31st 2019 based on this new presentation.
Before I hand, the call back to John I would like to briefly touch on our 2020 guidance and certain factors, which may impact our assumption.
As Jim mentioned earlier and noted on slide 17, we expect full year revenue of approximately $1.85 billion to $1.9 billion to $5 billion at the bottom line, we anticipate full year adjusted earnings per diluted.
Chair and the range of $2.10 to $2.30.
We currently expect our full year effective income tax rate will be approximately 19% inline with the full year 2019.
It is important to note that project be ready is expected to incur restructuring costs of $40 million to $55 million during 2020, and 2021 with most of the cost being cash cost driven by head count reduction third party expense.
And facility consolidation, we expect to reach an annual run rate cost savings of approximately.
$30 million to $45 million by the end of 2021, a significant portion of which will be reinvested and research and development and other priorities to enable and drive long term growth.
The savings expected are included in our 2020 guidance.
Based on our current projection, including the timing of various program ramps in 2020, we expect both revenue and earnings to be backend loaded while we do not normally provide quarterly guidance our expectation for the first quarter is that we will generate total.
Revenue in the range of $435 million to $455 million and adjusted diluted E. P. S and the range of 37 cents to 42 cents.
As previously noted our first quarter and full year guidance. Currently includes contributions from the Maritime Division.
I would also like to briefly comment on the code that 19 virus or more commonly known as the Corona virus, we are continuing to monitor the situation, including the impact to our supply chain.
Currently we do not expect a significant impact to our business from a long term supply availability issue or lower customer demand stemming from any macro economic impact. We are proud that FLIR thermal imaging cameras are one of the tools being used in Asia as the first.
Yeah to help indicate higher than average scan surface temperatures I T cell system of the Corona virus.
It's important to note that while our thermal imaging cameras can detect and elevated body temperature, they cannot detect or diagnose and infection. We've sold cameras since the early two thousands for performing temperature screen relating to several widespread viruses.
Such as Sars, avian bird flu and others, helping to play a role and savings Allied and livelihoods of people around the globe.
Thank you for your time and attention I will now pass the call back to John for closing remarks.
Thank you Carol.
While we're disappointed with our performance in 2019 were clearly, making progress and becoming the growth company with best in class margins that we expect to be.
Looking ahead to 2020, we faced hurdle is we bridge the transition between sunsetting and new franchise programs in our forecast along with the investments required to support the anticipated growth.
We're tackling these challenges head on with project be ready and have identified a path to achieve our financial and operational targets in the year I'm confident in our strategy and proud of the tremendous team. We've built in believe FLIR future has never been brighter.
With that I'd now like to open up the call for questions operator.
Thank you the floors doping for questions. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation total indicate your line isn't the question Q you May press Star too if you would like to move your question from the Q2 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once you get a star one to register questions at this time.
Our first question just coming from Peter Arment Baird. Please go ahead.
Yes, Thanks, good morning, Jim Farrell.
Peter.
What a commentary can you give us just regarding where you are in the in the re marine prospects.
Yeah, we have formally entered into that process in that regard the re marine branded marine electronics business, so to be clear FLIR branded thermal maritime products will remain with FLIR now.
We do have several perspective bars and we're in the midst of that process now and as we mentioned if we can get to our very clear eyed valuation expectations were able to move very quickly with the transaction, but as in our prepared remarks, a while it might not be core to FLIR going forward and where we're focused.
It really is best in class with innovation that will disrupt that market like Doc sense. For example that we launched last year. So process, you know well underway right now.
And then that's helpful and then just and thanks for all the color on the slides just the on the the franchise slide on nine you know is there any way to kind of quantify what percentage of your revenues today are tied to franchise programs.
Yes.
Yeah, you know we wanted to show that slide because we think it's really important to demonstrate the transition that were in the mid stuff and if you note on there. The two programs that have been long lasted programs for us Drs Kao, most recently or sunsetting.
And when you look at the franchise wins that we have one mentors sub team many of the unmanned systems SBS a there in our backlog you know executing now of the 810 of total backlog all but about a 130 million of that is a current to ship in the next 12 months is we.
Look forward, though Chris age the robotic combat vehicle those awards are not yet in backlog a while they've been awarded you know they've not been moved into bookings in such as we move into them and then you see all the other future programs that were competing on as we look at those through 2000.
23, again, it's an atmosphere of north of $9 billion of opportunity of which about 10%. We have been awarded either awarded but not yet book door awarded and booked in the backlog.
But this year 2020 is gonna be that year that we really prepare.
So go capture and then execute on some of these some of these programs as we go forward and not just Deo de programs, we mentioned day daz in the prepared remarks, as well and and that's a really important addressable market for us going forward as we mentioned in the third quarter.
We did have a very important when would be in the air as standard safety features with a major OEM. This past quarter in the fourth quarter, we've seen a robo taxi a company adopt thermal with FLIR is a standard sensor suite that they have.
In the activity continues so a lot of effort underway to make sure that we continue to position ourselves to be that thermal provider of choice and are prepared with all of the right automotive hardening safety testing et cetera, that's got to be done two when these future model years, but.
As we've said on earlier calls those too you know take time to mature 18 to 36 months to be designed into and then into production with future automotive models.
Appreciate the color. Thanks.
Thank you.
Thank you. Your next question is coming from Michael Ciarmoli of Suntrust. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions here, but maybe I'm, Jim or Carol Jim you kind of briefly mentioned maybe the.
The kind of target model you had out there and you kinda told us you're going to have an investor day I guess later this year, but.
What what should we be thinking should we rely on any longer term targets. I mean, obviously, so those are very stale, but I mean can you give us any color about how you're thinking about this business in light of.
Project be ready cost take out reinvestment new program ramps I mean, it seems like there's a lot of moving parts here. So maybe maybe some help on on how we should think about modeling us.
Yeah, absolutely there is certainly a lot of moving parts right now if I go back to what we talked about in May of 2018, the 5% target the 23% operating margin again at the time that wasn't informed and balance you know direction that we put forth. A we were at the midst of delivering the E O R.
[noise] FP program Drs, Kao was well underway and there was still a fair amount of non programmatic opportunities to capture out there that had some scale to them.
And as we exited 2018, we remain committed to those targets through the first half was 19, but as we began to win more and more of these awards are made the investments necessary to be able to prepare to execute to them. They can deliver again continue to more stable an outsized growth in the future years.
Coupled with investments we need to make in compliance in the third quarter, a that certainly came to a wall in particular with the headwinds we saw in commercial so we find ourselves now with good cholesterol investments that we're making to execute on and wind.
A significant opportunity ahead of us in terms of all of these programs and do we need to be compliant, but we also found ourselves a bit out of position as we had added cost to the business that was tracking to that 5% CAGR. When indeed, we're not there in the near term with the commercial headwinds So project.
Be ready in the near term is intended to correct that.
While at the same time protecting these longer term strategic priorities as we go into the upcoming Investor day, we intend to provide is much fidelity is we can about the status of these various programs to the extent that we can specifically identify them you'll note on that slide a lot of them will.
Let's say Asian pursue European pursuits.
Et cetera, and that's not us trying to be coy, it's that we don't want to provide a a super Chris amount of stability.
But you know is we look at 2021 and beyond these are needle moving programs are CV alone again could be north of $1 billion and could be a program that that last for years and years, but with that comes uncertainty. So you know we.
Got a lot of homework to do between now and the third quarter. When we have that Investor day. I think you can expect us to give a lot more fidelity about the status of these programs the total opportunity and how we're positioned but there is tremendous let's say upside uncertainty around what these could be for us to look at stake.
Attic three year targets as we did may of 2018.
So then interest even looking at 21 or a 20, sorry can you give us a little bit more granularity just given these results from the pressures can you decompose growth by segment and margin or that we should be thinking about and I guess also you know if I look at that franchise program sheet I see.
You know I only see two headwinds you made some acquisitions that you I would've thought would have offset that.
It just seems like there's disproportionately more headwinds from just Drs Kao and New York.
Yeah, and a couple of other dynamics and yes happy to provide more color.
And we'll talk by segment first the commercial business unit as we've talked about has faced and continues to face headwinds.
That obviously is led to the decision of the potential divestiture, the discontinuation of OTN and the combination of Cebu and obviously inside the industrial business unit, we've got a year on year comp with large aerospace and defense primes that we're winning future probe.
Grams on but their programs have a bit of a valley to get through in 2020.
But we've got some upsides, we see in instruments for example.
It is having some robust fourth quarter you know in first quarter performance and then you've also got some businesses in there like machine vision that the machine vision market in general has been down for the better part of 18 months, we're seeing a stabilization potentially a return to growth, but sort of a low growth scenario. So.
The arbitrage of that between commercial.
In the industrial business unit is is there's some timing issues and OEM, that's the big needle mover others again remain in this sort of stabilization phase in terms of the impact to the overall company and a that has not yet ramping while we're winning awards again.
The awards come into future model years that will take another year or two to prom. When we think about the government and defense business. One thing to note in the past three years is Deo D. is focused on six very clear modernization priorities. They are indeed, making those priorities in.
At the same time overseas contingencies are slowing down.
So some of the areas, where FLIR historically one business.
Okay. So fundings tied to immediate overseas needs or non programmatic spending is really shifted into a very disciplined approach around modernization and we have also shifted our efforts to make sure we aligned with those requirements, but that leaves us in 2020 in some of our core.
Our government and defense businesses is our airborne I'm sorry in particular to really have to look to more international opportunities or smaller non programmatic opportunities detection with Drs Kao coming off was the bedrock of that business and very profitable so while.
Small it does have a leveraged effect, but the real star if you will inside the government defense business. Indeed, the company on whole is the gross that were seen an unmanned systems and that's with our nano drones and black Hornet, it's across the Sky Ranger and writer families of larger.
Group, one unmanned assets and a whole range of unmanned ground assets. The sub B pack box for sub T. operations, the mid or program, Chris age, but as those grow a there's a mix that we've got to manage all of those growth from small basis and as we.
We went awards that are learning curves that we need to come up to get them.
Two accretion so you have that mix effect, but we are seeing that happen for example, in our black Hornet or legacy Prox acquisition. The learning curves have been progressing nicely. We see the same with the legacy Aerie honor Skywriter and Sky Ranger business and now with endeavor ground robots beginning.
To get into production first sub T emitters, and a more scaled way, we expect to see that same arbitrage.
Got it thanks guys.
Thank you.
Thank you. Our next question is coming from Louie Dipalma of William Blair. Please go ahead.
Jim and Carol good morning.
Good morning locally.
I was wondering are you able to share whether the divestiture of re marine would be accretive to earnings.
So we're not going to break out any details about the re marine business at this time, when we actually are able to complete the transaction.
We do have a meaningful number of buyers that are currently engaged in the process. Then we'll we'll break out that.
Information.
Okay sounds good and is there any way to quantify the sales of.
Corona virus related temperature detectors and are you able to share with the the S. T is our on any of these cameras that are popular.
Yeah, we don't want to get into the detail of specific ASP user or camera product lines I will give some color, though you know for years going back to the Sars outbreak in others FLIR technology has been incorporated into ports and borders and airports and other places.
So look for elevated body temperatures the products that we provide really come from two parts of the company. The OEM business will provide an does provide infrared camera cores to other manufacturers of cameras that will produce products like this but then of course in our instruments business.
We have several ranges of cameras, whether they be fixed mount cameras.
Larger or smaller handheld cameras, so there's quite a range in what the price point could be a larger fix camera more expensive than a smaller handheld product. If you will so there is quite a range.
We have seen a significant increase in those orders in the past month.
Right now, we're working really hard to ensure that we have the supply chain to meet all of that demand. We do have that outlook forecasted in the outlook that we've provided so on the overall context of the entire company.
That alone is not a large needle mover to move the overall trajectory of the company, but it certainly contributing the instruments strong sales were also cautious when we look at the bookings that were getting around it.
So to be mindful about how much that really converts to revenue in the past, we would get a tremendous amount of bookings, but as the concerns of the virus virus elapsed those bookings would be cancelled and not turn in revenues. So while we have again really strong strengthened bookings and doing all we can to ship that.
Product.
Helping any even in a small way to contain this serves our purpose to save lives and livelihood, but frankly, a lot of uncertainty in right now we're getting daily frankly daily updates about about the supply chain and the incoming demand.
Sounds good and <unk> and what one last one Jim for your contracts for unmanned ground vehicles, such as the 109 million for.
Crs heavy.
Is that amount include.
The different types of sensors that you may be able to add on to these vehicles or would the sensors be additive to 109 million.
They could potentially be additive there's a base set of sensors that comes on the Cobra.
It's a part of the requirement for the program, but you know as we evolve new sensors or they want to accomplish additional mission.
With that product once it's in the field there so certainly could be its a very robust vehicles against 700 pounds well proven we expected to be in the inventory for very long time and assets in the inventory certainly we're going to continue to innovate more sensor suite indeed.
You'll see on a new product page, we enter induced a new fido explosive trace detector. Just this quarter that can be mounted onto an unmanned system or use handheld right now hard to quantify what that opportunity could be but when we look at things like Chris age or the robotic car.
Combat vehicle, which is a much larger and more ambitious program. If you will those base vehicles wants introduced into the fleet will remain a and we expect and hope to have future sensor suite upgrades is they might last more than a decade, if you will.
Sounds good thanks, Jim Carey.
Thank you.
Thank you. Our next question is coming from Andrew Buscaglia apparent Burke. Please go ahead.
Hi, guys I'm, just want to be clear on so your guidance for 2020.
Just because you're out the OTN.
Discontinued operations.
Are included in there.
So Andrew for Ts and 2019, we had there's approximately $27 million in revenues that related to MTS.
That 17 million would not be expected to re occur because of discontinuation of a specific product line.
Okay. Okay. That's helpful.
Secondly.
For in defense.
I was curious so you guys had called out in the past soldier lethality and just border security spend both were up quite substantially in the last budget proposal.
Did any of that surprised you or is there anything new here that we could gleaned from the recent budget.
Yeah, well you know again, there's there's immense focus on the modernization effort by the Army alone you know as $34 billion focused on modernization and such and we're pleased at how the budget really seeks to protect these modernization efforts in its interesting certainly RCB.
He is the largest program pursuit, we've ever done and it's also a really disrupting technology for the battlefield. It would change tactics and techniques. The war fighter as we introduce a unmanned system like that onto the battlefield, but aside from the six main priorities that Deo D is focused upon.
On what we're finding more and more is that our unmanned components.
On many different programs as a part of the requirement. So while we're focused on these large specific programs that you will see mentioned that we talk about there are also just a whole host of other places where unmanned systems will be a component of another overall program. So.
So right now as we look at it BOE D. budget in the efforts not just within the budget, but within the forces to shift savings that they can create to modernization.
We think it presents real opportunity for us and.
And again you know if we look at it the did the condition. We're in now where some of the revenue can be very uncertain and lumpy. That's exactly why we're targeting these longer term opportunities, but they take anywhere from one to five years to truly mature into ramp into production and right now we're right.
Did that kinda awkward tipping point, where we're winning this business we have to protect investment to make sure that we can execute to it but it's not yet ramping and of course as we go forward there's always uncertainty.
While we were awarded this first for vehicle prototype for our CV that we're really excited about programs can start and stop with things that are completely out of our control.
But again the total atmosphere is we displayed I think on it was chart nine.
Is continuing to Mount.
Yeah.
And did you I notice you didn't give a organic growth number for the government defense do you have that.
Well effectively all of our growth this coming year will be organic we're lapping the two acquisitions Ariane endeavor.
In fact, now I think it was February and March.
We don't have it called out specifically here, but the bulk of of the business you know in the year is going to be will we consider organic as we lap those and we see the revenue really ramping as we go quarter to quarter through the year as Carol mentioned with more of it being backend loaded.
And then I'm sorry, what about in.
In Q4, specifically.
In the fourth in the past fourth quarter yet.
Government and defense revenues organically were down 2% in the in the fourth quarter, but.
But for a four year up 5.5% I'm. So again on hold for the balance of the year. They had a strong strong year organically.
And then the overall growth we saw in government defense that gap, the organic force from Needham and company.
Okay. Thank you.
Thank you. Our next question is coming from Noah Poponak of Goldman Sachs. Please go ahead.
Good morning.
Good morning no.
Jim when we're sitting here at this exact time next year.
What's the chance that we're talking about 2021.
Also as a transition year versus you know talking about 2020 on accelerating its growth rate and its margins.
Back towards the mid the 5% or greater you had talked about previously because I get that theres programs rolling off of where the transitions are I get your you know appropriately investing in the business.
A lot of the things you're talking about like RCB for example, our longer data don't really contribute a ton to 2021.
Structuring number you're talking about goes into 2021. So is this a transition year or are we entering transition years.
That's a very good question.
And you know certainly 2020 is as we've described as we go into 2021 and as we go into the second half.
We do expect near term opportunities that are non programmatic as well as smaller programs not maybe the larger needle movers lock in our CV, but matters will continue to progress and ship Chris age we hope to have in the calendar year extensions further tranches of the soldier borne system.
So that will build and then just generally across the business Theres a lot of work being done to build backlog in more of the book to bill businesses like instruments and such we are seeing you know some strengthening there and how they operate so when I think of 20 to 21, certainly and I think slot non shows that we're in this sort of.
Valley, If you will I do believe and 2021, we're gonna be recovering, but when we you know state that we want to be a growth company with best in class margins that really levers to your point in 2022 and beyond but I do think at this point next year.
We will be nose up on our trajectory in the near term being the coming year, and we will have much more fidelity.
About those program wins additional program wins and timing.
When they will begin to convert.
In mature into revenue if you will so.
When I think of 2021, I expect us to be moving northward. If you will I don't see a two year trough per se.
But you're absolutely right. Some of these larger programs you know take more than a year or even two to really get into the money.
Got it on the R&D or the additional R&D youre pointing out for 2020, <unk> I think you said 50 million.
Is that is that a net number you know R&D as a percentage of revenue next year is 13 are north of 13% or or is there an offset and then I'm presuming that's related to defense programs are a lot of it is is there an OTA cautionary agreement there is any of that recoverable.
So we do not intend or that 50 million is not additive to our current run rate of R&D.
We've been really frustrated it the return on investment in our R&D. Historically, we spent about 10% our revenue on that number we obviously in the past couple of years have not gotten the growth out of that we would like to have so this year, we took a really different approach to R&D.
These four strategic priorities that we mentioned.
Sensor leadership Ondemand Airborne Onstar decision support Todd as you see them color coded to specific pursuits that we're going after we've really began to take a much more aggressive view at how we prioritize R&D.
So you will see R&D on a whole still hanging around that 10% of revenue number or maybe a little bit under but we kinda ring fenced about 50 million of that that we know were tied to executing.
These longer tomb term opportunities now we do have some see rat funding. We've received a you know several small C ran awards and we are seeking more but if you look at the overall R&D spend we have still the the lion's share I'd say, 90% plus of it is I read not.
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Understood and last one Carol where do you expect free cash flow to be in 2020.
So.
Before the restructuring we would expect it to us still largely be in line with the conversion rate that we've seen historically, but as I noted a lot of the restructuring costs are going to be.
They are cashcall, so that will impact.
Free cash flow that we'll have for the full year.
So and a lot of the total range that we shared willing hurt the bulk of fat in 2020.
We will have a breakout in terms of the component.
The restructuring costs in our 10-K that will be filed later today, so that will provide a little bit more information on what makes up the.
Before the restructuring is free cash flow up or down year over year 20 versus 19.
It's going to be comparable.
Got it.
Thank you.
Thank you.
Thank you. Our next question, it's coming from Jim Ricchiuti of Needham <unk> Co. Please go ahead. Thanks. Most of my questions were asked but I'm just a follow up on that R&D question that 50 million that you guys called out.
As it relates to some of the programs you're pursuing was their R&D that youre spending in 2019 allocated to go after some of this business.
Certainly there was an it's up you know it's a hard thing to die specifically because you know for example, some of the sensors and such that provide for you 60 essay that's been a part of our core R&D you know for many years to build to where we are now but then there were also very specific things Tom.
Todd to sometimes a singular program that we wanted to go after that we had to develop band. If you look at things like Hey, that's where we've had thermal cameras on vehicles for many many years doing things to get them to be a part of a standard safety feature per se required some very.
Specific work I will say, though.
When we look at our past model, where we would develop products that we would call commercially developed military qualified products that would put principally be purchased from these overseas contingencies or burst through you know immediate war needs in such it left us a little bit out a position.
Because it's more of that spend his absolutely shifted to modernization efforts in such you got to really aligned with the requirements of those programs. So again for the past year or so we've been making that effort. When we called out that 50 million, we wanted to give some fidelity of.
What we know is tied to specific programs that we have one that we need to maintain if we're going to successfully execute on but to your question. It's not a perfect thing that you can das per se.
As we work on these future technologies.
But the vast majority of it it sounds like is government and defense with a portion of it for the eight yes work that you're pursuing.
I would say.
We still have a pretty balanced effort between industrial and government and defense.
Again, one of the largest things that we're going after in terms of a future Tam as Ada Es.
On the industrial side also while it goes back to an aerospace and defense customer our OEM business and some of the innovations there driving to make components that go into larger programs per se is also been you know a really large effort of ours. The neutrino coal core for example.
In some of those innovations that we brought to market and I'll add too if I go the unmanned space and the unmanned space certainly right now it's principally concentrated on military defense applications.
But as we get scale with military defense applications and are able to bring price points down.
There are you know a million compelling use cases for first responders for industry for utilities and such so when you think about the unmanned R&D you know for example.
That that will have an industrial impact as well so I'll point back to the four priorities. The sensor leadership unmanned airborne eyes Saar decision support of those four airborne is our is the most defense centric sensor leadership applies to everything we do whether it be a handheld instrument.
Threesixty essay aid as our weapons sights and unmanned while more of it has to fit centric now over time, you'll see more and more industrial applications as the price points become more except for those markets.
Got it thanks Carol Thank you for the guidance on Q1 is there a way to think about that range is that at the low into the range does that reflect just more of the industrial macro concerns. There we're seeing or is there. Some defense business that we need to think about that could or could not fall into the quarter.
So it's it's a combination of both is risk we always have when it relates to the government and defense business is just the timing of licensing and we do have a number of orders that are expected.
To ship International orders in March and so that is dependent on that licensing and then it becomes a timing thing that.
We're comfortable with being able to deliver within that range absent something happening happening from a large macroeconomic standpoint or unexpected challenges from licensing we feel good about range.
Got it thanks a lot.
Thank you. Our next question is coming from Pete Skibitski of Alembic Global. Please go ahead.
Good morning Carol.
Hey, Jim many governments can you talk to us about the outlook 2020 by geography, you know kind of U.S. Europe Middle East of Asiapac, just so I need those regions have unusual headwinds it sounds like maybe the U.S. does.
I appreciate any color there.
Yeah in on a whole lot in here. The first part of your question are related to the government.
Yeah I was just wondering.
Government revenue in 2020, if you're if you're seeing any.
Particular headwinds by geography.
Yeah, I wouldn't say theres any one dramatic shift if we look at our revenue by geography, it's not really shifted substantially I will tell you, though as I mentioned.
You know Usdtwo D. is very focused on modernization program spend and if you're not aligned with those requirements and going after those programs. While there are still other non programmatic opportunities they're not nearly of scale. If you will if you reflect back in our past history.
During the height of the war spending in such there would be tremendous amount of opportunity that would come through OCO funds or other things that again right now the nature of that market is changed pretty substantially and we changed with it right to make sure we aligned with those requirements align our R&D effort et cetera.
Outside of the U.S., we still see strength in the middle East certainly and in Europe, and Asia has not been a tremendously large market for us per se, but we'll have an opportunistic things pop up here and there where we've had some success I will note, though that I do think a lot of allied for now.
The Terry's are watching the modernization effort with U.S. deal the very closely and as a programs are awarded they're looking to have so let's say benefit from the vetting of those programs that have interoperability and it creates follow on awards for example, with some of our unmanned system.
Comes with other Allied militaries, so we do see.
In some of these new technologies.
A lot of coalescence around awards as they have.
Okay, Great last question for me off.
On your when would it be anywhere on the autonomous vehicle and then also the robots actually win.
I'm just trying to pick up the slope of those programs are you just get could be potentially looking at on 20, 21.12, and a and also any progress lately on all the HP box.
Yeah, and again a lot of effort on our side going into this it's funny, if Bob backup a bit two years ago, we were really trying to evangelize watch thermal should be included.
Isn't additional sensor or all of the different automotive designers tool kits and such we're focused on that now we're completely past that is we talk to all the different.
Demonstration test fleets and Oems and such.
Value of thermal and not just for autonomy striving, but things like you mentioned autonomy is breaking.
Are so important now with regard to the robo taxi when we think it's important because that's going to be continued you know gross that we see and it's a standard feature.
The VISIONAIRE when that we pointed to as a standard safety feature as well as a milestone for us and we think it opens the door by setting that precedent for a lot of future opportunity. If you will so the tough thing, though is we when these awards now.
To get specified in into production and then you know into those future model years, it's really a three year fuse, while there might be some near term smaller opportunities on smaller fleets.
It really takes that long as they plan ahead for future model years, but I think we're seeing just the beginnings of of this open up is is these awards are happening and get proven I think it's going to quickly accelerate years three and beyond.
Great. Thanks for the color.
Thank you. Our next question first question is coming from Michael Carmelita Suntrust. Please go ahead.
Hey, guys. Thanks for taking the follow up.
Jim or tumor Carol just some clear so.
Noah's question R&D in terms of absolute dollar so they're going to be down though year over year in 20 Onest My team.
They will be slightly down, yes, and we had some very specific R&D effort underway.
We were able to capture but more importantly, as a part of project be ready, we're really focusing our R&D spend more it also the collaboration or I should say differently. The combination of I Bu in CVU also focuses more of that R&D spend.
Got it and then just Oh I don't know for you guys would your best but every on endeavor are they going to be profitable in 2020.
Oh, yes, absolutely.
They are profitable businesses that are scaling when we acquired them as we grew the business the way that we modeled they're learning curves that they were coming up if you will there they're kind of right on track with that but it is dilutive to our overall business. So as they have that outsize growth we have that effect.
On the overall company.
Great. Thanks, guys.
Thank you.
Thank you. Our next question is coming back or is coming from Noah Poponak of Goldman Sachs. Please go ahead.
Jim if I just.
Used to the same exact organic revenue growth rates by segment.
In 2020 that you had in 29 team.
That would shake out a little bit above your revenue guidance for the total company, So which segment has a worst grocer in 2020 versus 22.
Well the two principal headwinds we've got really it's both businesses, it's that I mean for our OEM business around major a in deep crimes and their program.
So while we have won a significant amount of business with them. The bulk of that business is 2021. So if we look at industrial and OEM Theres, a real whole significant hold the prior year that we've got to close up so that's the dynamic there on the other side of the house Drs Kao again, you know.
30 million some odd dollars a year, but very profitable for us on government defense and then that is are the airborne is our business Todd so much now to programs the non programmatic opportunities or are much smaller, but it is our largest and arguably most profitable product line when it's got full of.
So option and it's got headwinds as we go through the year before we have some of these airframe upgrades.
Happening offset again by that that lower mix, but but higher growing unmanned business.
It was it something in the zone of legacy commercial down high single legacy industrial close to flat and legacy government defense up low single.
Yeah, Yeah, generally I think thats directionally accurate.
And then where exactly as the margin compression coming from if R&D is.
Actually up and you'd be mixing up in terms of the segments of commercials down again.
What's driving the margins lower and 220, Yeah. There's couple of dynamics. One is on mentioned more and more of the growth this coming from that unmanned business. That's dilutive to the overall company. So on the gross margin line.
We certainly have that dynamic the highest growing part of our business has margins that are scaling.
We expect it and as I mentioned with OEM, which is also one of our most profitable parts for our business. It's got this timing gap to get over but if we look at Opex theres really three pieces.
One there's the necessary things, we need to do to be compliant and we're absolutely committed to those and going to do them. There's the investments that we need to make not just an R&D, but around the program management contract management. The other things non R&D to make sure we can execute on program.
But then frankly.
We got we built the cost structure in the back half of the year that was being built to support a 5% growing company and we work.
So that's the costs that we've Gotta go now take out of the business through project be ready.
Executing those actions now.
But it takes time to get that full annualized benefit to show up in the in the income statement.
When you.
Had first when you had your first full quarter, the second quarter 219 of Harry on an endeavor and you, but the government and defense segment margin was 24.
You stated that you if you saw that as the most dilutive to margin from the acquisitions.
And then it was up over 26 sequentially, but then it's back down sequentially in the fourth quarter somewhere in between.
Second and third so I mean, what are those is kind of the right go forward margin or can you just kind of help us think about the shape of the segment's margin going forward since you're layering in something much different on the legacy sorry.
Yes, certainly compared to our outlook than Drs Kao without a real offset.
To replace it's a driver and then I mentioned the airborne RSR business.
More and more of that on program not off program, we've got work to do.
To make sure we went secure those so don't think we fully appreciate that dynamic you know now into the real test for US is how we scale and come up the learning curve for the unmanned business. It's our expectation that it contributes you know into kind of the line averages that we want to have so to be candid right now I don't know if I can paint a perfect picture.
Of what that go forward margin looks like we certainly intend to at the upcoming Investor Day and by then we'll have two two and half quarters behind us executing on these larger unmanned programs that.
We're driving after now.
Okay.
Alright, thank you.
Thank you.
Gives me at this time I'd like to turn to flip back over to Jim for closing comments.
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 to thank all of the FLIR employees 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 2021st quarter results in the spring.
Thank you all and have a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines and have a wonderful day.
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