Q1 2020 Earnings Call
20 results conference call.
This time, all participants are any listen only mode. A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host lots the glass and managing director 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 and presentation slides referred to on this call are available in the events and presentations section.
There's investor Relations website at Www Dot Dot com slush investor.
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Forward looking statements within the meaning of the private securities.
He gets reform Act of March 90, Fives are based on current expectations.
Words, such as anticipated.
<unk>.
Expects intends believes and similar words or expressions are intended to identify forward looking statements.
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Could cause <unk> actual results to differ materially from our expectations.
Please refer to the earnings press release, we issued earlier today.
That's what was weird FCC filings for a description of factors that could cause.
Actual results could differ materially.
These statements, including among others risks related to cope with my kids.
All information discussed on this call jobs of today.
It's not in town and undertakes no duty to update for future events or circumstances.
But on the call, we'll discuss GAAP and non-GAAP financial measures.
A full reconciliation from GAAP to non-GAAP measures its available in this morning's earnings press release.
With that it's now my pleasure trying to call it would jump Kevin.
So youre FLIR systems jump.
Thank you lots of good morning, everyone and thank you for joining flares first quarter 2020 earnings conference call.
Speaking with me on the call today, as Carol low our Chief Financial Officer.
Before I begin I would like to quickly note as part of our previously announced restructuring activities through project be ready.
We've consolidated our businesses into two segments.
Industrial technologies and defense technologies, beginning in the first quarter all commentary regarding the performance of our business segments will be referenced as such.
Today, I will provide commentary on our Q1 financial and operating performance and our response to the cobot 19 pandemic.
It goes without saying that cobot 19 represents an unprecedented challenge for global Society.
I would like to sincerely. Thank all of the healthcare workers and first responders further courageous efforts to help those in the.
We're extremely proud that we're products and technology are played a critical role in helping people come back the spread of this virus.
We continue to experience increased demand for our thermal cameras for you said elevated skin temperature or E.S.P. screening.
Although these thermal cameras cannot detect are diagnosed cobot 19, the cameras do serve as an effective tool to measure the skin surface temperature of people entering public areas such as hospitals airports train terminals business isn't factories.
In fact, we've been using our own technology to screen employees for E. S T. When they enter our facilities.
For your cameras have a history dating back to the Sars virus in 2003.
And then H one N. One in 2009 of detecting elevated skin temperatures three screening.
I'd like to extend my gratitude to our employees for their commitment.
As we work to ensure that governments first responders and businesses across the globe have all appropriate E.S.T. resources during this challenging time.
I would first like to discuss how we expect co good night team to impact our business.
Both the headwinds and the Tailwinds and the actions FLIR is taking to address this extraordinary situation.
Please turn to slide three.
As we work to fulfill our mission to save lives and livelihood FLIR has been deemed an essential business and all of our manufacturing facilities remain open and operational.
In this environment, the health and safety of our employees is our top priority.
Given the various safer at home restrictions, we swiftly transition approximately two thirds of our workforce to working remotely.
For our FLIR employees on the front line directly involved in manufacturing or distribution, we're taking all the precautionary measures and have an acted stringent protocols to ensure their safety.
In light of Cobot night team, we are experiencing a dramatic and rapid increase in demand for thermal U.S.P. camera applications.
We expect will continue for the remainder of the year.
However, the demand has put stress on our supply chain and manufacturing capacity.
To address this we're reallocating internal resources.
Leveraging the strength of our relationships with our world class suppliers and optimizing manufacturing capacity.
Through investments are relatively small amounts of capital.
That allow us to exponentially scale E.S.P. camera production to meet growing customer demand.
We will continue to do everything we can to deliver this technology to all of those on the front line to help mitigate the spread of cobot 19 around the world.
The tailwind provided by the strong demand for our E. S. P products has helped to offset some of the headwinds to our businesses that we have experienced as a result of cobot 19.
Within the industrial Technology segment, we're seeing continued softness in demand for our more commercially centric businesses, such as maritime and security products.
We continue to see demand in our defense technology segment.
Typically in our unmanned business. However, we have experienced operational challenges due to covert 19.
Oh, no we face summit minutes straight up related process delays in securing customer sign offs and procuring the licensing for foreign sales as government agencies and overseas customers transition to remote work policies.
Again at this time these delays have essentially resulted in shifting the timing of revenues and bookings from Q1 to Q2 or later in 2020.
While we are experiencing unprecedented demand for our E. S. P solutions, we've grown opportunities within many of our core markets, most notably defense.
Covert night team has brought ongoing macroeconomic uncertainty.
Overall lack of visibility into future demand trends.
An elevated level of risk in our supply chain.
As a result of this uncertainty and supply chain risk we are withdrawing our previously issued outlook for the full year 2020.
While we are not providing specific guidance in the current environment Carol will provide some color on our expectations for the second quarter.
Despite the near term challenges, we face from the Cobot 19 pandemic, we remain very confident in our long term strategy.
Our strategic priorities outlined on slide four of the presentation continue to emphasize professional end market customers with a focus on.
Leadership and sensor solutions.
Unmanned and autonomous solutions Airborne <unk> SAR and decision support.
While we continue to make tangible progress toward advancing these priorities it goes without saying that responding to and fulfilling the increased demand for our elevated skin temperature products has become an extra ordinary priority in this time.
Crisis.
Now, let's move to an overview of our first quarter performance. Please turn to slide five.
As announced earlier this morning, we reported first quarter revenue of $451 million.
Reflecting growth of 1.4% compared to the prior year quarter.
Total bookings of $502 million were driven by strong demand for products in our industrial technology segment in particular applications related to E. S T screening.
Our defense Technology segment also experienced notable orders related to our unmanned systems.
And solutions.
Total bookings in the first quarter were down 6%.
The prior year quarter included two large unmanned franchise program awards.
However at quarter end, our total backlog was a record $859 million, reflecting an increase of 3% compared to the balance at the end of the first quarter 2019.
Adjusted gross profit decreased 3% compared to the prior year quarter, primarily due to softness in our adjusted gross margin from a shift in product mix favoring lower margin unmanned programs.
Adjusted operating income declined 23% and adjusted operating margin was down 516 basis points year over year.
Carol will discuss in more detail.
As noted on slide six our industrial technology segment continued to generate momentum with significant new program wins.
I mentioned earlier, various FLIR product lines used for E.S.T. applications related to the cobot 19 pandemic have seen a surge in demand.
We're has long been recognized as a global leader and thermal cameras for E.S.T. related applications as.
With unique functionality, including advanced measurement tools and alarms to enable faster critical decisions.
No several FLIR models offer a screening mode a built in a feature that the techs people with an elevated skin temperature compared against the sample of average temperature value.
Screening mode is designed to rapidly increase accuracy.
Ease of use and speed of existing screening procedures.
Late in the first quarter, we announced our latest offering the FLIR a 480 700.
Which were planned for introduction prior to the Cobot 19 crisis.
In the aggregate, yes fee related bookings totaled approximately $100 million in the first quarter.
Vast majority of these orders are expected to be shipped and booked as revenues within the next few quarters.
Demand that has come from a wide variety of customers and numerous industries, including hospitality transportation manufacturing and others.
In addition, many companies are looking to install this technology in their facilities in anticipation of lifting the shelter in place orders and as the global economy shifts to plans for reopening business.
While it remains unclear what the longer term marketplace demands for E.S.T. screening technology will ultimately become.
We are working aggressively to fulfill customer demand in the near term and to do our part to help prevent the spread of this virus.
Please turn to slide seven.
The industrial Technology segment also continues to make progress with opportunities in the rapidly developing advanced driver assistance systems or a that's vertical.
Along with the award we announced on the fourth quarter call to provide thermal cameras to a leading robo taxi disruptor during the first quarter, we find the similar agreement with another leading self driving technology company.
In addition, during the first quarter, we established a strategic partnership with fore sight.
Technology company engaged in the design development and commercialization of sensor systems for the auto industry.
Let's turn to slide eight.
In the first quarter, our defense Technology segment was awarded a 23 million dollar multi year production contract by the U.S. Air Force for more than 180 of the company Ciena Tar unmanned ground vehicles or you JV.
Senator car is a remotely operated medium sized UGI. The system that provides a standoff capability to the tech confirm identify and dispose of hazards.
Following this award from the U.S. Air Force. We also received they separate $18.6 million award from the U.S. Marine Corps for more than 140, FLIR Senator ours plus spares.
Finally, just this week, we received a separate non point 2 million dollar order from the U.S., maybe for more than 70 FLIR Scimitars as you may recall Symitar was originally chosen by the U.S. Army for its man transportable robotic system increment to or.
Emitters too.
We're honored that the FLIR Senator car has become the platform of choice for four branches of the military and the mentors increment to program can serve as a procurement channel.
In addition, subsequent to the end of the first quarter. The defense Technology segment was awarded an additional 21 million dollar contract from the U.S. Army to deliver its FLIR Black Hornet, three personal reconnaissance system or Prs.
The advanced nano unmanned aerial vehicles will support platoon and small unit level surveillance and reconnaissance capabilities as a part of the Army's soldier borne sensor program.
Back in January 2019, the U.S. Army awarded FLIR. The initial 40 million dollar contract for Black Hornet threes to support the SBS program.
Which we're currently delivery.
In total FLIR has delivered more than 12000 Black Hornet nano you a these to defense and security forces worldwide.
In the near term, we continue to release new products to feed and support the growth of our strategic priorities, while simultaneously improving safety and efficiency for professionals.
A few of our recent product releases are outlined on slide nine.
Overall I'm very pleased with the momentum we are driving as evidenced by new franchise awards and innovative products, we're bringing to the marketplace.
To ensure our readiness to capitalize on the growth opportunities in front of US late last year, we launched project be ready highlighted on slide 10.
Which positions FLIR compete when execute and deliver in the quarters and years ahead.
Project to be ready aims to reduce the complexity of our business to help it scale over the longer term, while removing cost in the near term.
Through project be ready, we will be a leaner more nimble organization and be better position to respond to a prolonged downturn or sudden disruption in the marketplace.
We remain committed to better aligning our expense base with our revenue profile and continue to expect to reduce our operating expenses in 2020 through the ongoing execution of project be ready.
As previously communicated we expect to achieve an annual run rate cost savings of approximately $30 million to $45 million.
A significant portion of which will be reinvested to enable and drive long term growth.
Today, the majority of the annual run rate savings have been identified.
We look forward to sharing our progress on future calls.
As a part of our transformation we are further streamlining our management structure.
By eliminating the business unit President leadership roles previously held by David Ray and Frank Phinisi.
This action will result in cost savings provide a more direct lot of communication and accountability with our lines of business general managers and increased the level of interaction that I have with our customers.
As shared on our fourth quarter earnings call.
We have eliminated the commercial business unit.
And as a result, Travis Merrell is also leaving FLIR.
David Frank and Travis his leadership and contributions to FLIR have been meaningful.
On behalf of the board and the senior leadership at flare I would like to thank them.
And wish them all the best.
These structural changes to our organization do not alter the way FLIR goes to market or the way we are organized to engage with our customers.
S flares transition progress is we're streamlining our organization in a manner that best positions. The company for success as we move forward during a period of uncertainty.
In addition to these structural changes, we're also working to simplify flares product portfolio and better align our businesses with our four key strategic priorities.
As part of this process, we discontinued several non core consumer centric product lines within the outdoor and tactical systems or OTN business.
However, given market place dislocation, resulting from the cobot 19 crisis.
We have decided to suspend efforts to sell our re marine non thermal maritime electronics business.
We continue to believe our maritime business is best in class, that's industry with compelling and innovative products that make it a extremely attractive asset.
We have clear expectations relative to the valuation of the re marine assets and in light of the challenging macroeconomic conditions has made a decision to maintain the maritime electronics business for the foreseeable future.
Finally, I want to recognize the important role our board has played during the cobot 19 crisis.
Participating in more frequent updates on the impact to our business and providing perspective to our management team.
In particular, we benefited from the advice and guidance of our chairman oral Lewis, who is shared has decades of experience, including over a decade of leading FLIR.
As we navigate through this time of transition and uncertainty we have requested Earl to provide additional Tom and efforts as a trusted advisor as I continue to focus on important strategic initiatives and the operational performance of the business.
I appreciate the time and dedication that oral along with the rest of the board will continue to invest in positioning FLIR for sustained growth in the long term.
With that I'll now turn the call over to Carol for additional details on the first quarter's financial Carol.
Thank you Jim looking at Slide 11, you'll find a summary of our first quarter financial result.
Even though with the exception of revenue all of these financial are on a non-GAAP basis.
As previously noted beginning in the first quarter, we have simplified our non-GAAP financial measures to enhance the compare ability of our core operating performance on a period to period basis.
Reconciliation to GAAP data is included in the appendix.
We generated $451 million and revenue for the first quarter.
Revenue was negatively impacted by foreign currency exchange rate, which reduced growth by approximately $6 million a 1%.
First quarter bookings of $510 million declined 6% compared to the prior year, primarily genes to the difficult comps and the year ago period as noted by Jim.
That said, our total backlog at the end of the quarter was a record $859 million, reflecting a 3% increase relative to the prior year quarter, driven by strong demand for our E. G camera.
Adjusted gross profit with $229 million, resulting in adjusted gross margin of 51%, reflecting a 252 basis point decline compared to the prior year quarter despite productivity gains.
Achieved through the FLIR method margin reflected a mix shifts towards the lower margin products in both segments. The margin decline was anticipated as we are in the beginning stages of the transition from the completion of certain large higher margin contract.
And the execution of our strategic priority to generate a steady stream of long term revenue for future franchise programs and award.
Adjusted operating income, but $76 million, resulting in adjusted operating income margin of 17%.
Down approximately 516 basis points compared to the prior year quarter.
Adjusted operating margin was primarily impacted by the lower gross margin.
Higher R&D expenses to support future franchise program and deferred compensation costs.
After adjusting for discrete item flowing through to GAAP income tax expense, our adjusted effective tax rate.
For the first quarter was 19% down from 20.5% compared to the first quarter of 29 team.
Adjusted diluted earnings per share was 42 cents in the first quarter.
In terms of the consent agreement, we are now halfway through our four year timeline.
Under the terms of the agreement we agreed to pay a 30 million dollar penalty half of which has suspended provided we use those fun to improve our compliance.
During the first quarter, we completed the first required.
This was a major milestones for our compliance efforts.
Our global trade compliance ongoing operational costs outside of the consent agreement call are at a current annual run rate of approximately $15 million.
Please turn to slide 12.
For the first quarter cash provided by operations was $51 million, we used our cash flow from operation to fund our capital allocation priorities of investing in the growth of our business and returning value to our shareholders. We invested 13 million dollar.
Others and capital expenditures and returned capital to shareholders through the repurchase of $150 million of common stock and the payment of $23 million and dividend. However, I'd like to know that we have not initiated share repurchases.
That's the escalation of the Cobot 19 pandemic.
At March 31st 2020, our cash balance was approximately $309 million and we had approximately $260 million in borrowing capacity within our credit facility.
We're comfortable with our current liquidity position.
However in light of uncertainties, driven by Cobot 19, our capital allocation priorities will place an emphasis on near term cash preservation beyond the cost savings initiatives. We are currently implementing as part of project be ready we will focus.
On working capital management, and our postponing all non essential capital expenditures.
That said, we remain committed to our investments supporting our Fourq strategic priority that will drive long term revenue growth and we expect to continue to provide returns to our stock holders in the form a quarterly dividends.
However, in accordance with our efforts for prudent cash preservation, we do not plan to be active in regard to share repurchase activity for the foreseeable future.
Well not a new matter in previously disclosed in our 10-K and 10 key filing.
I'd also like to nut, but at the end of March one of our non operating subsidiary in suite.
Saved an adverse tax judgments regarding Swedish tax authority or S. T. A reassessment as tax for the year ended December 31st 2012.
We do not agree with the courts judgment and intend to appeal additional details regarding this matter will be available in our form 10-Q, which will be filed today.
Turning to slide 13, I will highlight the performance from our key business segment.
Beginning with industrial technology.
First quarter revenue was $276 million up 2% year over year due to the increased demand for elevated yen temperature cameras as a result of cobot 19.
Rather needs were partially offset by lower volume in our maritime.
Yes, and security businesses.
Segment operating income was $64 million down 7% year over year.
Driven by a combination of unfavorable product mix and a noncash loss on disposal of equipment.
As a result operating margins declined 218 basis points year over year in the first quarter industrial technologies booking were $336 million, reflecting a book to bill ratio of 1.21.
And total backlog was $330 million at March 31st 2020.
Defense Technology segment revenues were $175 million and the first quarter, an increase of 1% year over year, which includes contributions from the unmanned acquisition.
Segment operating income for defense technology declined $14 million year over year due to a shift in product mix to lower margin unmanned program, which impacted gross margin and higher research and development expenses to support our.
Pipeline of large franchise program, which are expected to be a source of growth in the future.
The first quarter defense technology bookings were $166 million, reflecting a book to bill ratio of <unk> 0.95, and total backlog was $529 million at March 31st 2020.
Before I hand, the call back to John I would like to discuss our near term outlook as mentioned earlier, considering uncertainties, resulting from cobot 19, we have withdrawn our previously provided outlook for fiscal year 2020.
Thus far in the second quarter, we are seeing many of the same trends experienced in the first quarter the demand for F. G and defense technology remains strong, which is offsetting softness and other parts of our business such as maritime and security products.
Based on current expectation, we believe second quarter performance for both revenue and adjusted diluted earnings per share will be moderately favorable to our first quarter 2020 result.
Thank you for your time and attention I will now pass the call back to John for closing remarks.
Thank you Carol.
As we navigate the evolving and uncertain environment, we remain focused on the task at hand, supporting our employees valued customers and partners, while ensuring business continuity and proactively managing operational challenges.
We look forward to emerging from this crisis as a stronger enterprise that has stepped up at a time for need for the key stakeholders we serve.
With that I'd now like to open up the call for questions operator.
Thank you we will now be conducting a question and answer session and the interest that time, we ask that you. Please limit yourself to one question and one follow up if you would like to ask the question. Please press star one on your telephone keypad confirmation Tom will indicate your line is in the question Q.
You May proceed start to if you'd like you have your question from the Q.
Confusing speaker equipment, maybe necessary to pick up your hands that before passing the sparky one moment. Please.
A question.
Our third question from from the line Theater, our men with Baird. Please proceed with your question.
Yes, good morning, Jim Carol.
Peter.
Jim Thanks for all the details on the S T.
Bookings, maybe just just starting there.
Provide this I guess, a little color, what you're thinking about the.
I guess, what this product category would have been maybe a single digit revenue contributor in the past and it's obviously going to become a lot more meaningful how are you thinking about kind of handling all this capacity and.
I've a follow up related.
Yes, Peter that is the number one priority that we're focused upon in the company right now if you reflect back to our last earnings call. A question came up about S. T and we didn't consider it a needle mover at the time you know we have a lot of experience with this dating back almost two decades really big.
Getting with the Sars outbreak in 2003 in one H, one a bowl like cetera, and we would see spikes in demand we learned a lot about the technology in a lot of trade craft about how it really works and its benefits and limitations in the field.
But after the past earnings call as the full weight of the pandemic began to get felt.
Much more awareness came around the world historically, our market has really been in a pack and principally looking at applications that ports and its borders and that's still of course, the core customer, but is the virus moved into Europe, and ultimately across North America.
We've seen a whole host of what we would call non traditional.
Customers.
Factories distribution applications, all sorts of areas that now want to return to work and we've seen the demand come really in waves first with those traditional customers at ports and borders governments.
Beginning in a pack.
But then with essential businesses that needed to operate through the height.
And continue to operate through the height of the pandemic to create a safe work environment and now you know very different customers than we would talk to in the past is whole host of different industries returned to work.
If we look at it the practical constraints that we have right now again, we mentioned, we booked about a $100 million of business in the first quarter Weve shipped about let's say $30 million to $50 million of that business. We expect the demand in the second quarter to maintain.
Okay, and unlike past Pandemics Sars in one H, one et cetera, we would see a spike in demand and then when it began to subside.
That demand would quit quickly drop a there would be a small run rate of business for spares and replacements at airports in Korea and Japan. For example, this feels very different.
We know we don't have a vaccine we know this virus transmits unlike any other we expect through the summer and into the fall and winter we have to continue to take precautions again never say anything like it.
The biggest strain is on our supply chain.
If we look at our capacity and they're really two areas a free ASP for us. The largest is our complete solutions are a series cameras T series E series cameras and those cameras along with software provide a turnkey solution to screen.
For elevated skin temperatures, but we also produce infrared camera cores that other people are purchasing from us to integrate into screening applications that they are building with their own software et cetera. The split right now that demand is probably 75%.
Towards our complete solutions.
In about 25% encores that others.
Or using directly.
We've got a tremendous amount of capacity ourselves with some modest investments in Capex, we invested.
Little under $3 million, all told to expand our calibration.
Equipment and some other test equipment, we're able to exponentially scale, our output, but the real weak point has been on our vendors.
We're very vertically integrated with the core technology, but there are a host of different components commodities circuit boards in such that we source and through this past quarter as some of those businesses weren't deemed necessary and had the shut down or they have limited work schedules or just.
Frankly, the demand that we placed on 'em outstrip their ability.
To meet it we've been working really hard.
To bolster those suppliers to find alternate forms of supply and also think out of the box. For example, we are now working with general Motors as General Motors has a much more robust supply chain and a lot of leverage with existing vendors that we had to help us shore up so.
So right now day in day out that's really.
A key the number one priority if you will in the business to make sure we maximize upon this opportunity long winded way to answer your question, Peter but wanted to give you that context I appreciate that color and just so I just so we have the it sounds like the pace as continued so does this do you think this ultimately continues to offset.
The weakness that you're seeing in maritime Ltvs and sort of security when you're thinking about kind of the balance of here how that plays yes, as we mentioned earlier in the prepared remarks, and we look at the full year, we suspended that guidance because again there is just so much uncertainty, but when I think about what we see in front of us immediately and as Carol mentioned.
In the second quarter, we do expect the business to make moderate improvements.
A couple of notes one we expected the first quarter to be a low point for us with regard to margin. That's why we gave guidance around the first quarter. It's why we launched project be ready project be ready is now gaining full traction and the products that are used for SC applications are.
Historically inline with our margin rates were in our defense business of course, the unmanned the mix mixes us down with margins until we scale that so in the near term being the second quarter, Yes, we do see this demand in the STB offsetting headwinds we see in our more commercially center.
Businesses, how that demand continues to materialize and how we scale our supply chain again right now the governor on this is our supply chain, how we scale that supply chain into the second half will determine that second half performance.
But but there are still a lot of communications, we're having with customers that are looking at it very large scale deployments that have yet to materialize as folks want to return to work and ensure that.
They're workplaces, a safe place to operate.
Appreciate the color thanks, Jim.
Thank you.
Thank you. Our next question comes from the line of Andrew Buscaglia with Darrin Baird. Please proceed with your question.
Hi, guys quick question on.
No follow up on that yet see demand are you seeing yeah first off can you give an indication of it is our this stuff higher margin.
Relative to your stuff you're selling in the other instrumentation devices are selling and then.
And secondly is clearly a lot of other companies selling this stuff. So yes, we are.
Differentiated in that you have that FDA approval is that a very important aspect of this and other other other are there other competitive advantage as you can point out.
Sure Andrew Happy to first with regard to your question on margin.
Our a series P series and E series cameras as well as.
Our camera cores from our components business that we provide to others for their solutions.
Those margins are in line are accretive to the overall company.
You know as we mentioned earlier and I noted with Peter the rapid growth. We continue to see in the unmanned business of course has a dilutive margins. It scales, but these products are in line with with our historical margin rates or even accretive.
And with regard to the second part of your question.
You know again, we have two decades, almost two decades experienced 17 years of experience doing this.
And we've learned a lot of lessons over that period of time, a couple of points I want to emphasize this technology is getting a lot of attention.
And not all of it is accurate no one technology can combat. This virus, we can very effectively screen for elevated skin temperatures.
But that doesn't necessarily mean that you have the virus and they can't diagnose someone who does but used with secondary screening for 17 years. It has been extremely effective but in the course of those 17 years. We've learned a lot. For example, there are lot of ambient can do.
Missions that can make one skin temperature be elevated.
There are different parts of the face or body, where you can get a better rating than other parts of the face or body, you've got a constantly calibrate the technology and we revolutionized in pioneered applications looking at relatives body temperatures as opposed to.
App Salutes. An example, if you're in a hot parking lot entering a building every one who enters that building could have elevated skim temperature. So if you don't really deeply understand the technology and have the experience that we have to look at that relative temperature and that one individual that stands out.
You can get false ratings and that's so important now as we look at mass applications.
You know, it's one thing get a customs checkpoint for one person to present get an image study that image. It's a whole nother when you have factories or other large workplaces with shifts trying to transition and that's where it's hard to replace 17 years of experience.
In doing this some very confident in our capabilities and abilities to lead.
But we're also partnering with all sorts of other folks in the industry to make sure that is this technology is deployed it's deployed with the proper application in the proper environment and what the right training.
We do have concerns that we see a lot of folks pop up in the marketplace, making claims that frankly, the science can't support we rely deeply and consider ourselves thought leaders in that regard.
Yes, okay.
Okay and then.
As it pertains to re marine.
Hi, the it sounds like there was a change of heart or something between now and are between yes last quarter what are the conversations you've had that.
You are now deciding to keep it at the matter, just the valuation or or what's changed there.
So we've always considered our re marine branded marine electronics products.
Less than industry their industry, leading products and capabilities differentiated in the strong brand, but as we said on the earlier call. It does have commercial orientation, and we pivoted more and more to professional users is we look at Cove at night team that pivot to prefer.
National users was a very wise, one because by enlarge our defense segment. Our other industrial segments that are essential to work. During this period. Fortunately April the weather this store more than that more can commercial centric business exposure could have.
No one could have predicted the pandemic, we entered into a fulsome process, we got well down that process with several bidders, but with the pandemic I mean, we see the M&A market in general seizing up we're also very clear out about the value of that business. It's not a business that is on fire.
It is a good business in the industry that operates in with a lot of differentiated technology like Doc sense on assisted in autonomous docking solution, that's not really yet gotten into market.
So we thought it prudent the spin that process to run the business for the foreseeable future. It certainly does have more headwinds than more of the defense or professional industrial exposure that we have but we think with the actions that we're taking with project be ready and otherwise.
We understand and expect what those headwinds could be.
All right. Thanks Jen.
Thank you. Our next question comes from the line of Louie Dipalma with William Blair and company. Please proceed with your question.
Jim and Carol good morning.
Morning, Lloyd and good morning.
Well it seems as though elevated skin temperature momentum which was already.
Hi, tick on another life in April with Amazon or poor you said you achieved on E.S.T. bookings of 100 million.
In the first quarter, if I guess that right are you able to quantitatively or qualitatively provide color on how bookings.
And the pipeline tracked after the quarter ended just because it seems as though on demand has exploded after the quarter ended.
Yes, so right now again real out to about $100 million in booking split 70, 525 between full solutions and those camera cores that other companies are deploying into their solutions. We expect in the second quarter that trend to continue.
And we've yet to see some of the.
Let's say.
Wholesale implementations that would be associated with some of the return to work discussions that are having his industries open back up so in the near term being the second quarter. We certainly expect that demand curve to continue and we have a lot of internal debate.
Right now, we not only have an obligation to our shareholders to maximize this but our society to maximize this and we take that obligation very seriously in February as I mentioned is we look at pass Pandemics, we did not expect.
This level of demand so whether its capital that we are deploying whether it's what we're doing to bolster our supply chain. We are preparing internally for exponential demand now whether or not that realizes as we go through the second quarter second half the year, it's impossible for me to say.
But we are bracing for that so that we can help in our small way combat the spread.
Of this virus. So you're right. This is certainly a become front and center as I mentioned in the prepared remarks, we remain committed to our four strategic pillars.
That I've mentioned airborne asaro unmanned decision support et cetera.
But this right now.
He is our number one priority is a company to make sure we do all weekend.
Thanks, Jen and can you also discuss the impact as.
Well the pandemic on non program programmatic on Deo de spend.
You're involved with I know that you're drawn programs you know receives a lot of the limelight, but as a percentage of revenue I think your non programming matic no products.
Or more impactful can you just talked about how those are well sang and what the trajectory should be.
Sure absolutely if we look at it first quarter book to Bill for our defense technology business. It. It was just below one.
Since then we've received the soldier borne sensor tranche to award, which we did expect to get the first quarter delayed a little bit that got us above that book to Bill of 1.0, if you will.
I have to say the department of defense has been working very hard to make sure the industrial base stays intact. The modernization priorities that they are undertaking press forward.
We've seen just tremendous cooperation from the department of defense, but you know as they transition to work remotely to be safe.
As other licensing agencies have done the same we see a natural delay in some of the administrative processing decision making.
Et cetera.
Also mentioned emitters increment to with the Air Force the Navy the Marine Corps on the on the ground robot side. So to your point programs are moving forward, but we do expect there to be delays on the non programmatic side, a lot of which is our international business, we see a similar dynamic.
We see delays in decisions as again folks are working remote they're not perhaps prepared or it's not necessary to take delivery right now they can wait a month or quarter. If you will but we don't see the demand evaporating altogether.
So as I think about the defense technologies business.
I think it's going to.
Be relatively on track however.
I do think we're going to continue to see.
You know delays if you will but you know when we think about elevated skin temperature and you think about protecting forces.
We see elevated skin temperature also as a force protection technology.
No as the armed forces in foreign allies militaries need to protect their forces from these this sickness as well.
Thanks.
Thank you. Our next question comes from the line, Jim Ricchiuti with Needham and company. Please proceed with your question.
Hi, Thank you just on the I'll chime in with a few of my own. Yes. Two questions. You mentioned force protection are you seeing business yet.
Within your traditional defense customers for yes.
Yes, we are and I can't go into specifics of different areas, where orders we have seen.
But yeah, you know as you could imagine.
Maintaining a healthy enable in fighting forces is very important and so we very much look at this is a force protection effort. So yes, we are having those discussions.
Are you reallocating R&D resources, Jim to were.
Future product development in this area. This gives us an idea how you view this business opportunity maybe intermediate to longer term.
Oh, we absolutely are as I mentioned, our fourth strategic pillars remain intact, but we have not only rig allocated R&D effort. We've reallocated sales support we've reallocated training, we've reallocated capital, we've reallocated manufacturing capacity.
Yes, no question is the most immediate in real demand that we see in the company right now again, how it sustains itself into the second half no one could say I certainly didn't protect the predict this demand.
Couple of months ago, but.
But but we are literally all hands on deck and as I mentioned really working hard with our vendors and suppliers and I can't think them enough.
You know, sometimes its little things like an aluminum magnesium camera housing.
That that we get from a particular vendor that we just outstrip their demand or they were deemed not essential to come to work.
In the various authorities have been very proactive and working with us to help.
Make our supply chain essential as well so we can get this technology out there.
Is the decision took hold these guidance for the year is that almost entirely due to the uncertainty in the commercial business or to what extent sense business.
Delayed contributing to that as well would you have pulled the guidance otherwise.
I would say certainly the commercial impact is dramatic and we don't know where it's going to go.
I mean, we look at maritime right now up folks aren't rushing out in buying new boats, and that's probably not going to change you know in in the near term also commercial security applications.
No data centers and others, while they are deemed essential upgrades and such they can be delayed if you will postponed or foregone. We also look at our traditional instruments channels that would sell into industry a lot of those industries closed.
Those factories shut down so that demand dropped as well and we're not sure exactly where or when they'll we reopened again. He has he has been a bright spot to cover a lot of those headwinds and we think it will build.
And then on the defense side.
We don't see.
A radical drop in demand, but we do expect continued delays and how that impacts future quarters or how it falls inside of calendar year or the government fiscal year. It's just so uncertain.
I couldn't really articulate it with real surety. So we thought it prudent to give some insight to what we see immediately second quarter, we think it's going to improve to the first we've got not just the demand we mentioned, but project be ready.
You know, we executed a significant effort to save costs to address the expected margin rates, we had in the first quarter.
30 to 45 million Bucks that we expect to capture and while we didnt realize much of that in the first quarter, because we're really doing the work to prep. It. It will begin the impact you know the second quarter and going forward.
Thank you.
Your next question comes from the line of Michael Thermally with Suntrust Robinson Humphrey. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the question.
Maybe just on.
You've obviously got this big Spike in demand here, but you know if we look at that 100 million in bookings I guess I'm just trying to get a sense you know the core backlog down pretty significantly I mean can you talk about what you're seeing I mean, you kind of were just alluding to it with the instrument channel the commercial but.
You know any any kind of expectations for you know the industrial automation building inspection petrochemicals kind of.
What you're seeing from from an ordering environment from those those commercial industrial customers and maybe what the expectation is going forward.
Yes, that's a great question and it's sorta not trying to Dodge at all but it's sort of all over the place then in very erratic. So we look at machine vision. For example, we've seen a bounce back a bit in machine vision in Asia Pac as now and.
In Japan, and Korea, and China. Some of those factories are getting back to work how sustainable that is or is it just some pent up demand that sort of popping really don't know the answer to that and then on the inverse we've got a a people counting camera business. That's a part of that machine vision busy.
Yes, that's in the components group and that services retail and that literally dropped to zero as retail operations.
Stop you mentioned petrochemical and such.
Our optical gas imaging cameras cooled and Uncooled had been a driver of growth and strong margin in that space for.
The prior for six quarters, if you will and we have seen the slowdown there.
But the indications that we're getting is that it's not a fundamental change in demand, but folks are working to preserve cash in and sometimes those are purchased as a capital investment and so they still want them, but they are delayed and making decision that everyone's trying to figure out how this plays out.
So that's a very clumsy way to try to answer your question I guess I'd say it differently in that that that that is we look at these demand patterns.
Certainly those industries that are deemed non essential we've seen a demand drop to to near zero, how that comes back and manifests itself when and if folks returned to work.
Later in the second quarter third quarter fourth quarter.
Who knows but we do expect there will be some.
Pent up demand.
But those core industrial first responder.
Defense demand patterns.
Our relatively intact if delayed.
Got it and then just back on to the.
Picture, a scanners the body temperature elevated skin temperature.
Can you talk about what Youre.
Piece or for both the cameras and the course and then you know.
It's hard to tell I don't know if you have a market share that you guys. Thank you have four or any of your partners that had been out there I think I think I see I was one that made headlines you know potentially selling to Amazon you sell cores to them because the it looks like they have to treat products become LC carrier course can you just give us a little bit more call.
Overall, I'm I'm sort of ASP increase market share and maybe who you're competing or who your partnership with out there.
Sure right now our average selling prices range between 5000 and $15000.
They can be much more expensive than that depending on what the customer wants for very sophisticated integrations.
If you will.
We are working also actively on much lower cost applications, but we're very cautious and we really want to make sure everybody understands.
You can't just take any thermal camera and pointed at someone in get an effective screening tool for their surface temperature without tremendous amount of false alarming a that really wouldn't affect what we want and that as people to move freely back into the workspace.
And or other.
Applications public areas in be safe.
We are the market leader with this we have been doing this for the better part of 17 years and over that period of time, we've learned a lot of different ways pitfalls applications and trade crafton and how this is used as I mentioned earlier.
We've created.
And led with some of the thought leadership about the way to do it you can measure ones absolute surface temperature with the thermal camera that doesn't necessarily mean that they have a fever and could be a risk and you've got a constantly calibrate weve divine technologies to self Cal.
Rubright and look at relative body temperatures. So 10, 2030 people coming in through a door as ambient conditions change from early morning to the heat of mid day identifying that one person or two or those that have a body temperature other than higher than others.
It is so important so we really caution people to look at and understand the real technology before they put just any thermal camera the door and they think that they're safe.
Because there is in our a lot of folks that popped up overnight.
We think are marketing solutions that don't do what they are intended to do.
But as I said, we do consider ourselves some market leader here. This has been something we've done for a long time and some of these other solutions you see from really good in reputable companies that are out there working I can't mention them by name.
Without their permission, but they do utilize our thermal course again as I mentioned of the $100 million of bookings, we got in the first quarter about 25% of that we're cores that we're providing the other companies and are being sold under their brand.
Got it thanks a lot.
Thank you final question come from the line as Pete Skibitski with alone that Global Advisors. Please proceed with your question.
Yeah. Good morning, guys couple of questions.
Just on the management changes.
They seem pretty meaningful in the basically you've eliminated the three former sector heads and now you have the product line kind of general managers reporting directly to you is that kind of what's happened and.
Would it make us nervous in terms of we've lost a lot of tenured people right and.
It sounds like maybe.
You kind of have more responsibility than you did maybe a year ago in terms of direct product line management. So can you walk us through that a little bit.
Yeah, Mike I'm glad you brought that up that was a tough decision.
David Ray Frank Pennisi, Great leaders contributed a lot.
Frank had been with the business for over four years, David almost three we announced in the first quarter with the combination of the commercial business unit in the industrial business unit. The Travis Merrell would be departing Travis Merrell had been with the business for I think the better part a seven years.
They were trusted leaders they contributed a lot on each one of them whether it be their technical competence their leadership et cetera, I can't say enough good things about them.
That was tough decision.
As we as we entered into this pandemic.
And we looked at our performance in the first quarter.
We expected it to be is it a historical or at least a recent.
Margin low that's why we executed project be ready to drive margins and rightsize the business, we looked at where the revenue was in in the slow growth that we had seen and we studied spans and layers of the organization.
We're organized into segments each that have two lines of businesses.
Those lines of businesses are led by a very seasoned and 10 year General managers Rijkaard for example, who leads our solutions line of business were the primary effort free SP is he's been with the company over 17 years.
He was with the company lead in R&D during the Sars outbreak in in one H, one and a bowl lot.
Paul Clayton, who leads the components business almost the decades worth of experience. So we were very fortunate.
We have well tenured seasoned leaders at the low be level that have a deep technical knowledge and that's how we interact with our customers. That's how we interact with our supply base and we're not changing that how we go to market, how we contact customers, how we interact with our.
Vendor base all unchanged.
This essentially is eliminating a layer of leadership between me and those ellow be leaders as given the uncertainty of the times that were in I felt I needed to move to be closer to the businesses, but it was a tough decision and of course, we regret it because they are valued members of our team and we wish them all the all that.
Going forward.
Just so you asked about.
Gen level of direct report and everything he he has the same number director for other.
Organizational changes.
That we've made.
It doesn't create an extra burden for him and allow can be closer to the businesses and to the customers.
I appreciate the color guys. Thank you.
Thank you well.
Go ahead, Mr., Ken and you have any closing remarks.
Yes, I want to thank.
Thank you all for joining our call today, I, especially want to thank the FLIR team. If you would have told me six months ago that two thirds of our workers would work promote in a third come in and work every day in the midst of a pandemic like this and maintain the productivity and output. It would have amaze me, but the resilience of our team.
I cannot be more proud of and on behalf of the entire FLIR team and the board of directors I want to thank our first responders and our healthcare workers on the frontline. Thank you all.
Thank you that concludes today's teleconference. You may disconnect. Your lines. This time. Thank you for your participation and have a wonderful day.
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