Q2 2020 FLIR Systems Inc Earnings Call
Second quarter 2020 results conference call.
At the top off this would start to listen only mode. A question that special follow the phone presentation, depending on what's required operator systems. During the call. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I would now like turn the conference over to your hosts lots of glass I don't Investor Relations. Thank you may begin good morning, everyone and thank you for joining the call.
Please note that our earnings press release on presentation slides referred to on lets call are available in your bouncy presentation section.
It was investor relations website at Www Dot FLIR dot com forged lash investor.
Before we begin I'd like to remind you that statements made on this call. Other historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act at my 295.
Based on our current expectations.
Words, such as anticipates estimates expects intends believes 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 as squares FCC filings for a description of the factors that could cause actual results to differ materially from these statements, including among others risks related to cope with my team.
All information discussed on this call is as of today and fear does not intend and undertakes no duty to update for future events or circumstances.
During the call, we will discuss GAAP and non-GAAP financial measures.
A full reconciliation from GAAP to non-GAAP measures is available in this morning's earnings press release.
With that it's now my pleasure turn the call over to Jim Canon, President and CEO clear systems Joe.
Thank you lost a good morning, everyone and thank you for joining FLIR second quarter 2020 earnings conference call.
Here with me today on the call as Carol low, our Chief Financial Officer, and Sonia Galindo General Counsel.
My remarks will cover the highlights of our second quarter operational performance.
Including an update on the critical role our products and technology.
Playing around the world the help combat the spread of covert 19.
Carol will follow with additional details on our second quarter financial results and commentary on the remainder of the year.
First I would like just like all of our FLIR employees, especially those on the front line, who worked tirelessly to ensure we maintain a safe and healthy workplace in light of cope at 19, while continuing to serve our customers across the globe.
I appreciate your dedication to safety, which remains our number one priority.
Humbled and inspired by your commitment and dedication to our mission to say blogs and livelihood during that is crucial time.
Please turn to slide three.
I'm pleased to report that through consistent operational execution, we delivered solid performance in the second quarter, despite an extremely challenging and volatile environment.
Highlights include continued franchise program wins.
Record total backlog.
Improving margins and earnings growth.
Importantly, I believe the underlying fundamentals of our core business are improving from a low point earlier in the year.
As we move forward, we are confident that the diversity of our product portfolio within industrial and defense applications will continue to provide a defensible strategy amidst dynamic macroeconomic conditions.
Looking at our financial performance in more detail, we reported second quarter revenue of $482 million.
Reflecting growth of 7% compared to the first quarter of 2020 and flat with the prior year quarter.
Total bookings of $546 million.
19% over the prior year quarter resulted in a book to bill ratio of 1.13.
And were driven by demand for products in our industrial technology segment in particular applications related to elevated skin temperature or E. S. T screening and a large order not related to E. S. T from an we haven't customer.
Our defense Technology segment also experienced continued demand for our unmanned systems and solutions, which will discuss in more detail shortly.
Additionally at quarter end, our total backlog was a record $913 million comprised of $25 million for E.S.P. products and $888 million for non E. S T.
Products across a wide variety of end markets.
Our total backlog reflects an increase of 13% compared to the balance at the end of the second quarter 2019.
Adjusted gross profit increased 6% year over year.
Merely due to a shift in product mix within the industrial technology segment.
As volume reductions in a lower margin consumer centric businesses were offset by higher margin eat SP revenue.
Adjusted operating income increased 32%.
And adjusted operating margin was up by 629 basis points year over year, largely due to higher revenue and gross profit in the industrial technology segment as well as lower operating expenses.
With that as a backdrop I would now like to provide more color on the tailwind and the headwinds resulting from the pandemic the related impact on our business and how we saw this play out in the second quarter.
Please turn to slide four.
Starting first with the Tailwinds as I've mentioned before we continue to experience demand for thermal E.S.T. camera applications from a wide variety of industries.
Although these thermal cameras cannot detect or diagnosed covert 19, they do serve as a first line of defense and an effective tool to measure the skin surface temperature of large groups of people entering facilities such as hospitals air.
Ports train terminals military installations businesses in factories.
After booking approximately $100 million and E. S. T orders during the first quarter, we recorded approximately $70 million during the second quarter.
Revenue contributions from SP products and solutions in the second quarter were approximately $95 million.
And we ended the period with yes, t. related backlog of approximately $25 million.
I'm pleased to report that most of the supply chain disruptions that we experienced earlier in the year from the initial surgeon customer demand have essentially been resolved.
Let me share with you some insights into the trends we've seen in our MSP business since the onset of the cobot crisis.
In the early days of the pandemic through much of May we saw demand surge. During this time a wide array of enterprise.
Across both essential and non essential businesses placed initial orders for our solutions is they explored strategies to 40 reopened as quickly and safely as possible.
Towards the second half of the quarter certain customers began shifting their behavior.
Opting instead to first implement our technology on a smaller scale to test their approach in advance of eventual large scale enterprise wide deployments.
This more measured approach to deployment led to a deceleration of E.S.T. demand as the quarter progressed.
As we look at head to the second half for the year, we expect demand for NFC applications to stabilize.
Likely at levels below what we experienced in the second quarter, though there are a number of variables that will ultimately dictate the level and duration of customer adoption.
The demand for our MSP products in the first half of the year helped offset the headwinds driven by the pandemic.
Within the industrial technology segment, we experienced weaker demand compared to prior year levels for our commercially centric businesses.
However, we are cautiously optimistic about signs for those businesses that may indicate the start to a recovery and the second half of the year.
Our defense Technology segment has also encountered some administrative related process delays in securing customer sign offs and licenses for foreign sales.
Although we do not believe we have lost orders. These delays have essentially resulted in the shifting of timing of some portion of revenues and bookings later into twentytwenty.
We believe our long term strategy and strategic priorities, including the intentional diversification of our business has been instrumental in our ability to produce solid results in a difficult operating environment.
Our strategic priorities outlined on slide five of the presentation continue to emphasize professional in market customers with a focus on leadership in sensor solutions.
Unmanned and autonomous solutions intelligence surveillance reconnaissance and targeting or I SRT and decision support.
Both segments continued to execute against these key longer term priorities in the second quarter generating momentum with significant new program wins and record backlog for the company as we exited the second quarter.
Now turning to slide six within the industrial technology segment, New orders came from a healthy balance of non S. T related products and customers as well as continued demand from thermal cameras for E.S.T. related applications.
We received a significant order from a large OEM customer and approximately $70 million in E.S.T. related bookings from customers across a wide variety of industries.
Turning to our defense technology segment on slide seven demand for our unmanned solutions remains strong.
During the quarter, we were awarded a 21 million dollar contract from the U.S. Army to deliver the FLIR Black Hornet, three personal reconnaissance system or Prs.
This contract built upon initial 40 million dollar contract for Black Hornet Threes. The U.S. Army awarded FLIR Bakken 2019 to support the soldier borne sensor program.
The advanced nano unmanned aerial vehicles support platoon and small unit level surveillance and reconnaissance capabilities.
We're currently executing on these contracts and we're has already delivered more than 12000 Black Hornet nano you a these to defense and security forces worldwide.
In addition, during the second quarter, we were awarded a $10 million contract to deliver our our 80 D. Sky writer unmanned aerial system to the U.S. Marine Corps.
Developed for Us defense and federal government customers. The FLIR, our Eightd Sky Raider offers long range high resolution electro optical infrared imaging sensors that provides day and night situational awareness.
The airframe king carry and deliver external loads up to 4.4 pounds for forward resupply asset extraction and other specialized missions.
Skywriter also features some of the most powerful embedded artificial intelligence processing available on a small unmanned aerial system.
Finally, we also received two separate orders from the US Army and Navy for a combined $23.5 million to deliver more than 160, a FLIR censtar unmanned ground vehicles.
Plus related spares and accessories.
Sentara is remotely operated medium sized UGC system.
Provides a standoff capability to detect confirm identify and dispose of hazards.
The two contracts are being sourced through the Army's man transportable robotic system increment to or mentors Inc. two program.
So far this year FLIR has announced orders totaling more than $65 million for nearly 500, Symitar UGI fees from the United States Army Navy Air Force and Marine.
We continue to release, new products to drive and support growth of our strategic priorities, while simultaneously improving safety and efficiency for professionals.
A few of our recent product releases are outlined on slide eight.
During the quarter the industrial technology segment introduced the FLIR C. Five.
A new pocket portable thermal camera and in addition to our popular Cdx series of cameras.
The C. Five is the first in the series to offer the FLIR ignite cloud solution.
When connected to why Fi allows professionals to directly upload store and backup images to the cloud.
We also announced several FLIR, yes, the thermal cameras that have been enhanced for fast and safe noncontract elevated skin temperature screening.
There are easy as cameras to set up and operate which helps increase the speed of deployment for frontline screening.
To complement our yes, the hardware offerings, we launched our FLIR screen SP software, which is designed to work with both our existing and new yes, the model cameras.
The software provides the automatic measurement tools that increase the speed and accuracy of frontline screenings.
The defense Technology segment announced the Star Sapphire, three Adx hardware firmware and software update to support imitating features for our deployed star Sapphire Gimbaled systems, including our most broadly deployed.
Models, the Threeeighty HD in Threeeighty Hdc.
The upgrade offers new user interface.
Better visual clarity and allows operators to view multiple video sources simultaneously.
The three Adx upgrade is designed for future augmented reality mapping overlays.
To improve situational awareness and help operators make better smarter decisions.
Overall, I'm very pleased with the momentum we're generating as evidenced by our record backlog and innovative products, we continue to bring to the marketplace.
To ensure our ability to capitalize on the opportunities in front of US we continue to execute the previously announced projects be ready highlighted here on slide nine.
Enabling FLIR to compete when and deliver in the quarters and years ahead.
Project 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.
As you May recall, we launched project be ready late in 2019 with the objective of reducing annual operating expense, but $30 million to $45 million.
In the first quarter of this year, we identified the areas, where these savings could be achieved and began execution of actions to realize meaningful operational expense savings.
During the second quarter, we were able to build upon that momentum.
Which has helped contribute to the 629 basis point year over year improvement in adjusted operating margins this quarter.
Additionally, with two thirds of our employees continuing to work remotely along with significantly reduced travel and entertainment and trade show activity, we're identifying and realizing additional savings and ways to operate more efficiently in the long term.
As a result, we feel extremely confident that will achieve an annual run rate savings at the high end of our previously announced $30 million to $45 million range.
We expect to reinvest a portion of these savings back into the business to drive long term growth across the enterprise.
I'm happy with our team's progress in identifying and now harvesting project be ready savings, we look forward to sharing our ongoing progress on this front in future calls.
I'm very pleased with our performance in the second quarter made possible by the solid operational execution of our management team and employees across the globe.
Our results amidst unprecedented macroeconomic challenges validates our strategy to focus on professional end users and demonstrates the strength of our technology across diverse end markets.
This coupled with our consistent strength of our operating cash flow speaks to the resiliency of our business.
Our commitment to driving value for shareholders remains at the forefront of everything we do.
And I feel confident that FLIR as well positioned to continue to execute against our key strategic priorities.
With that I'll now turn the call over to Carol for additional details on the second quarter financials Carol.
Thank you Jim looking at Slide 10, you'll find a summary of our second quarter financial result.
Please note with the exception of revenue all of these financial are on a non-GAAP basis.
Reconciliation to GAAP data is included in the appendix.
Supplemental presentation.
We generated $482 million in revenue for the second quarter.
Revenue was negatively impacted by foreign currency exchange rate, which reduced great by approximately $7 million or 1%.
Second quarter bookings of $546 million grew by 19% compared to the prior year driven by strength in both our defense and industrial technology segment.
Positive demand trend delivered our second consecutive quarter of record backlog totaling $930 million at quarter end of which approximately 80% or $731 million is current.
Our total backlog increased 13% relative to the prior year quarter, primarily driven by new win an unmanned system and a large OEM order.
Adjusted gross profit increased by $16 million year over year to $262 million, resulting in adjusted gross margin of 54%.
Adjusted gross margin improved 322 basis points compared to the prior year quarter, reflecting favorable product mix in our industrial technologies segment.
While we are pleased with second quarter performance, we do not expect it to be indicative of gross margin trend in the second half of 2020 as product mix begins to normalize with the recovery of commercially centric businesses and the slowdown at E T demand.
Adjusted operating income was $126 million, resulting in an adjusted operating income margin of 26% and improvement of 629 basis points compared to the prior year quarter.
The increase reflects the impact of higher revenue and gross profit in industrial technology as well as an overall reduction in operating expenses driven by a reduction in deferred compensation costs.
Lower selling general and administrative expenses, such as marketing and travel costs during cobot 19, and cost savings achieved from project be ready initiatives.
After adjusting for discrete items flowing through GAAP income tax expense, our adjusted effective tax rate for the second quarter was 22% compared to 19% in the first quarter of 2020.
Our tax rate increased as the result of the timing of expected amortization benefit in certain jurisdictions.
We currently expect our full year tax rate for fiscal 2020 to be 21%.
Adjusted diluted earnings per share was 64 cents in the second quarter.
Turning to slide 11, I will highlight the second quarter performance of our two business segments.
Beginning with industrial technology.
Second quarter revenue was $300 million up 6% year over year due primarily to the increased demand for thermal cameras for F. T screening application.
Revenues were partially offset by lower volume in commercial end markets, such as maritime and security products as a result of code that 19.
Segment operating income was $107 million up 50% year over year, driven by a combination of higher sales volume favorable product mix and lower travel marketing and deferred compensation expenses.
As a result segment operating margin increased 10, and a half percentage points year over year.
In the second quarter industrial technologies bookings were $334 million, reflecting a book to bill ratio of 1.11 total backlog was $351 million at June Thirtyth 2020, reflecting a 48%.
Increase compared to the prior year quarter based on award timing for an OEM customer and the demand for ft cameras.
Defense Technology segment revenues were $182 million in the second quarter, a decrease of 8% year over year.
The year over year revenue decline is primarily attributable to the completion of certain large contracts that contributed to revenue in the second quarter of 2019, partially offset by increased volume for unmanned system.
As Jim mentioned, we're also experiencing administrated related process delays in securing customer sign off and licenses for foreign sales.
These delays have resulted in shifting the timing of some portion of defense revenues than booking into the back half of the year.
Segment operating income for defense technologies declined $4.6 million year over year due to the lower revenue volume.
As a result segment operating margin declined 55 basis point.
In the second quarter defense technologies booking for $212 million, reflecting a book to bill ratio of 1.17.
Total backlog with $562 million at June Thirtyth, 2020 down 2% year over year.
Turning to our balance sheet and cash flow.
On slide 12.
Cash provided by operations was $63 million in the second quarter down slightly from the prior year quarter, primarily due to higher inventory levels, which were partially offset by higher net cash earning.
That said I am pleased with the overall trends, we're seeing and working capital as turns improved to approximately 3.1 times in the quarter.
Up from 2.9 times a year ago.
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 shareholders, we invested $15 million and capital expenditures and return capital shareholders through the payment of 20.
$90 million in dividends.
At June Thirtyth 2020, our cash balance was approximately $333 million and we had approximately $365 million and borrowing capacity under our credit facility.
After the end of the quarter as previously announced we completed an offering a $500 million 2.5% note. Due August 1st 2032 proactively address the $425 million three in a note.
Do you June 15 2021.
We expect to redeem our 2021 note this month.
We remain comfortable with our current liquidity position and believe our emphasis on cash optimization has provided us with financial flexibility as we enter the second half of the year in light of the ongoing uncertainty we will maintain our capital allocation emphasis.
On near term cash optimization.
However, we remain committed to our investments supporting our four strategic priorities that will drive long term revenue growth as well as providing return to our shareholders in the form quarterly dividend.
And share repurchases, while we remain committed to returning excess capital to shareholders over time, we have no plan to re initiate share repurchases for the foreseeable future in light of the significant uncertainty driven by the code that 19 panned out.
Right.
Before turning the call back over to the operator for the question and answer session I would like to discuss our near term outlook.
As previously announced given the continued macroeconomic uncertainty, resulting from 'cause. It 19, we have withdrawn our previously provided outlook for fiscal year 2020.
We also will not be providing specific revenue or adjusted earnings per share guidance for the third quarter or full year 2020. At this time. However, we would like to share thoughts on key trends for the second half of 2020 based on current.
Expectation and market conditions as of today.
While we expect demand for our E. S T products and solutions to continue we believe it will be at somewhat lower level than in the first half of the year, resulting in a change in product mix and downward pressure on our gross margin in the industrial technology.
Segment in the coming quarters.
As Jim noted, we believe our core industrial and defense technologies businesses are showing signs of recovery.
We anticipate this recovery will continue during the balance of the year and we are experiencing record backlog as we move forward in the second half of 2020.
While uncertainties remain based on what we know today, we expect the second half of the year to show modest revenue growth compared to the first half with adjusted operating margin relatively in line compared to the first half of fiscal 2012.
Okay.
I'd like to emphasize that our second half expectation for both revenue and earnings are more heavily weighted towards the fourth quarter of 2020.
That concludes our prepared remarks, thank you for your time and attention with that we'd now like to open the call for questions.
Operator.
At this time will be conducted a question and answer session. We ask that you limit yourself to one next question and one follow up.
If you would like that's a question. Please press star one on your telephone keypad.
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For participants using speaker equipment, and maybe in the Sue to pick up your head simple for Christmas Sarkies. One moment, please as we pull for questions.
Our first question comes on line of Peter Arment with Baird. Please proceed with your question.
Yes, good morning, Jim Carol Jimmy Thanks.
Thanks for all the details on the is T. and Thats very helpful. You mentioned that some of the order.
Trends there started to come in in a smaller scale or deceleration.
Can you just maybe just described kind of the.
Types of examples there what what exactly that that that implies in terms of central larger scale orders.
Sure Peter So I would really describe the demand curve for S&P and kind of three pieces. There was the initial wave of demand that came towards the end of the first quarter and that demand as we talked about on the last earnings call really came from every song.
Third of market, an industry imaginable from essential businesses nonessential businesses and when you look at the types of products that were in demand. They were much more of our key series camera. Our E series camera those are handheld cameras and or trial.
Mounted cameras, they can be used and implemented quickly.
And in many cases on a temporary or AD hoc basis. If they are being used handheld are set up on a tripod and then removed.
So we saw that initial flurry of demand as we mentioned on the last call about $100 million in the back end of Q1, and then as we entered the second quarter.
We saw the demand shift to the new H series camera, which is more of a fixed mount camera and the customer profile change somewhat as well from a very very wide.
Collection of customers across all sorts of industry to much more focused larger and essential operations. So large manufacturing organizations large commercial real estate organizations hospitals or even.
Military installations and they were looking for a much different solution, one that enterprise level solution much more elegant integrated in becoming a part of how business would be conducted for the long term. So we saw the.
Man shift to bed and then demand slow as these customers were purchasing smaller orders, but didn't conducting very.
Very deliberate diligence on how they'll use the technology more importantly, how little integrated into other procedures and technologies. They do are used to have a safe workplace and now we're kind of in this third tranche where.
These customers again, many of them very large and widespread implementations are making decisions about you know when were or if they do these implementations. On example would be the Canadian Ts say and then with stories.
Earlier in the month last week that the Canadian PPSA is pick for major airports to implement our full offering from hardware to software AI et cetera, and after those for larger airports, they're looking to rollout across Canada at a screen for passengers at airports and that's.
The dynamic we're seeing now.
Organizations.
Going from very quickly how can we get anything on the ground to a much more deliberate implementation of more fixed solutions that are a part of how they do business. We also announced earlier we entered into a partnership with one now Leonelle is the most.
Market leader when it comes to access control and if you think about entering a factory or a large commercial office building or something like that having an integrated EPCI peak solution. That's a part of the access control. So that when you approach the turn stop or whatever the guy.
80 mechanism is to get in as you swipe your batch card or whatever your devices to gain access you are also being screened but it's not a completely separate step. It's a really integrated solution. So now as we're in the back half of the year in this kind of third tranche. If you will have how the demands evolve.
You know there is we mentioned real variables to to how wide spread and how large some of these deployments can be because again some of them are not just multiple sites their global in nature, what the implementations could be if that if that answers. Your question no. It does thanks, Thank you for that and.
But as a follow up Carol on the second half kind of commentary I know, you're not giving specific guidance, but it sounds like revenues should be a little bit better than the first half can you parse that out is that going to be you know that we see defense still transitioning down in industrial is higher any color there be help.
So I guess, where.
Not prepared to break it out by the two segments I, we can provide just a little bit more color on what we mean by moderate increase so we think about this tours in the mid.
Single digit range in total.
Firstly or.
Thank you.
Our next question comes a lot of Jim Acuity Needham and company. Please proceed with your question.
Hi, Thanks, you talked about a large OEM order on.
Several instances and I wonder if you could just if theres any color you can provide on that that's in the industrial segment is there some.
Additional information that can give us a sensors, so when we might see deliveries or.
Perhaps what the applications it looked like.
Yes that is in our components line of business.
And it's for products that ultimately are integrated into an aerospace and defense applications I'm not at Liberty to disclose the actual customer.
And the product will ship through 2021.
Okay.
Thanks for clarifying that and then if you talked in the past on the.
Unmanned side of the business that this business has in the early stages of the ramp.
Would be a drag on on gross margins.
Can you provide sort of update as to how we see that business.
Developing and.
The margin profile, we should be thinking about as it starts to scale, our presumably you're also expecting some accelerating deliveries second half from this.
Thats right. So the only in business and again, when we think about our full ondemand offering that we have now it's little over a year old. So really began with the acquisition of products in the nano drone. The Black Hornet, then of course area on the Sky Ranger Skywriter ultimately endeavor this a little more.
On a year old being a part of FLIR in the ground robots and.
These are very new technologies, when I say, new their new to be adopted in a wholesale or widespread way by our users in their quickly quickly.
Gaining you know really excited adoption I'll point to the follow on soldier borne sensor Black Hornet award for $21 million in the quarter, we mentioned additional since our.
Adoption for man transportable ground robots about 23, and a half million dollars of orders came in the quarter with adoption across all branches of service in the U.S. and is you know from last quarter, our largest current ground robot the common robotic system heavy adopted by the.
Army and the German army and the robotic combat vehicle, where we partnered with Textron continues and if you think about the margin profile I would describe it in three pieces and it's really as we come up the learning curves so beginning with the black Hornet.
That was incredibly expensive when it was first fielded because nothing like it has ever been produced certainly not ever produced at scale, but as we got more adoption and commercial success. We came up learning curves working aggressively with the FLIR method to implement lean automation.
In the production flow gaining scale in the supply chain. So the black Hornet now is accretive to the line averages it FLIR and we expected to continue to maintain that position of accretion from a gross margin standpoint for the company second and following.
Closely behind would be the Sky Raider in Sky Ranger. So you know the our HDD order is we mentioned earlier and its adoption Bob The Marine Corps. For example, we're doing the same thing we're coming up those learning curves were maturing the supply chain, we're able to.
Move it to accretion as we exit the year in continue to drive adoption. The most work that we have to do is on the ground robot side and right now the ground robots on whole are dilutive to our overall on average gross margin, but we're just now really big.
Getting to get into full production.
So the Midwest program. The subterranean program is those get into real production. The common robotic system heavy is not yet into full production of course, the robotic combat vehicle is very much in early prototyping stage gates and such but we expect to follow that same.
FLIR method playbook to implement lane to mature the supply chain. It is our expectation that our unmanned business moves to line average accretion or better through 2021 is we get that volume.
Thank you.
Our next question comes on line of Louie Dipalma William Blair. Please proceed with your question.
Jim Carol and lots of good morning.
Morning morning.
In general.
Trying to determine if there's anything to suggest that.
Defense technologies, whoever rebound year in 2021, and I guess related first to the.
The industrial technology OEM Division.
Over the past.
Several months Northrop Grumman has won two orders for its large aircraft infrared countermeasures program and I was wondering are you still have partnered with Northrop for that program and also do you think that a contract for for GE boss He will be awarded so.
I'm time in the next six months I know Youve previously indicated that was a program that you were interested in thanks.
Yes, I agree with regard to specifics in your question about Northrop Grumman I'm not at Liberty to talk about specific program content.
Or the.
Customers in that regard I can say, however, our components lot of business.
That houses that legacy OEM Division.
Very focused on advancing cutting edge technologies that we provide to aerospace and defense primes.
Airborne countermeasures missile warning systems.
Cameras for targeting systems, and such but I can't to specific customer.
Content.
In that regard in Lilly what was the second question again real quickly yeah, Jay any any update on GE bus E.
Thats right I don't have a specific update now no.
We know that there is some demand for you know force protection towers. So we're working hard to cultivate that demand and meet the need what we're seeing them right now on the defense side is it is things like GE, basi and or other opportunities that we've been pursuing for some time.
The demand still there, but the process has slowed significantly it slipped there's much of.
The Pentagon for example are working remote and they might not have access to systems and its decisions has slowed but also just the processing of orders in licensing to go through the contracting agencies deal layer, otherwise artists skier secure foreign lots and saying those cross.
Processes that slowed also we also see it on the international side. So as we said in the prepared remarks.
We have not seen.
Any significant losses or any significant programs are opportunities be cancelled or formally stopped.
But we certainly have seen just what you would expect.
Natural delays because of the impact of a pandemic.
Okay, and so for any in the large programs that you're pursuing do you expect.
Those programs to contribute or begin contributing in in 2021, such that your outlook for 2021 in defense would be.
Better than the current conditions.
Yes, I mean, we're not prepared to give specific guidance on what we think 2021 would look like now so I want to be cautious about but I'll say this if we look at it what we do in defense I look at it in a three pieces.
There is what we do that I mentioned earlier in our industrial technologies business. The components line of business given components to larger defense problems that are on major programs in 2021 that business will grow if we look at unmanned.
In the awards that we've had on programs that are now going through prototype in such those will begin to move into production. In 2021. We also expect that business to grow you'll see us as we go into 2021 launch more products in our legacy surveys.
Let's now our sensors line of business I mentioned in the prepared remarks, the three adx, which is a significant product upgrade to the widely adopted threeeighty HD in Hdc airborne gimbals, providing.
All sorts of of new button knowledge, he overlays cameras speeds.
Hi.
Except for.
Now as those get introduced exiting this year in 2021 will there be an immediate revenue impact probably not in the first half of 2021, but certainly as we progress and accelerate through the year.
Thanks, Okay. Thank you thanks.
Our next question comes on line of Andrew Buscaglia Sandberg. Please state your question.
Morning, guys.
Good morning.
A question.
Back to your eyes the margin.
Needless to say what what the contribution was specifically from PST cameras, just give us an idea.
So the magnitude of willful baked into the second half.
So we shipped about $90 million of E.S.T. related products in the second quarter.
Hard to parse out exactly what that margin contribution would be in and let me give you tell you why or explain.
As you know exiting Q1 going into Q2, we had supply chain constraints.
And so we really prioritized a lot of that DSP customers that we knew were specifically FC demand because we want to do all we can to help come back the spread of this virus. So while $90 million of the demand was the SP related is certainly accretive to what.
It would normally be arlon average it didnt contribute to the strong gross margins, but.
Those same cameras Ace theories E series Peak series cameras were also in demand from core industrial customers for non SP related business that went into backlog as we come into the second half again, because we prioritized efforts to combat the spread.
Pandemic first so it's a hard thing to carve out separately because again those products those cameras.
Our used also for core Thermark refi applications.
The real dynamic as we go into the second half now with the SP is you know I hope, but I don't think there will be a medical resolution to this pandemic certainly in the balance of this year. It is these larger customers with larger implementations.
Lots the Canadian TSH like you know a host of other manufacturing and large commercial real estate owners. How you know in when did they make decisions about these larger implementations because.
These then take us from orders ranging from five to 15 to $30000.
That we saw exiting Q1 come into Q2 into multimillion dollar orders.
For large it more permanent implementations and it's just very difficult of course for us to predict when those will will hit the business.
So that's sort of fighting to get some commentary that people are testing.
Testing it playing with.
The cameras.
But could come back to buy more at some point.
Thats right, that's right and again Theres, a whole continuum of kind of outcomes in and if we go back and look at past Pandemics, we've never seen demand curves like this that there would be a sharp demand curve like we saw.
Q1 early Q2, and then there would be a resolution right, whether it's a vaccine or are seasonally the the virus goes away in demand would fall off to kind of a lower run rate of replacements or if there was the airport expansion et cetera. Now you are seeing very.
Large organizations.
That want to put in technology, that's a part of how they will do business for the long term going forward not just the combat this.
But what can be a future outbreak, but as you could imagine.
Those are thoughtful decisions and they are integrated with other protocols and or technology.
So we see.
A lot of our business development effort shift to how we work with their technical teams their facilities teams Aki teams or otherwise.
Do these prototype in efforts is they have different trials and test beds that ultimately may or may not lead to them, making larger decisions to go forward.
But.
And you guys.
Thank you.
Our next question comes the line of Mike Sherman with Suntrust. Please state your question.
Hey, good morning, guys. Thanks for taking my question.
Maybe Jim or Carol not not to some snarky I guess, but you did you did pre announced the revenues here and I just a bogey everybody had been tracking with 100 million bookings that.
I came up a little bit lighted the expectation you guys talked about the demand environment here.
But I guess you Jim you're just talking about the bigger installations. What did you seem from the competition I mean, there are some big competitors like Honeywell.
They've obviously got existing building technology already existing airport infrastructure, where their solutions can hear seamlessly integrate already I mean are you are you losing.
Any opportunities out there I mean, you've talked about the couple of waves of this demand environment, but I mean as you're seeing customers can you talk about your closing rates or are they going elsewhere are they using cheaper solutions are they going with bigger integrators.
Yeah. That's a great question and you know to begin with there was a lot of discussion about price point lower cost options, particularly with some of the handheld competitors and such and as I've mentioned that demand is really shifted now to larger enterprise applications in that case men.
The times, we're being competed head to head against a whole host of different competitors.
The trials can be very competitive some of the work that we've done with some of the larger government organizations. For example, you know they'll have 10 or 12 different solutions, they're trying to evaluate its Tom.
So certainly I'm sure that there are customers that have chose to use our competitors' products I won't say that there is ever 100% close rate on effort that you want to do but we feel very confident very confident in our ability to win against competitors in the marketplace.
Basically a lot of it goes back to the fact that we didnt start doing this when the pandemic started we started this 17 years ago and there is a lot of lessons learned beginning with the core detector and camera and how and where you measure in the accuracy NFC of that reading that frankly in the core.
So five months no matter, how big you are it's hard to game that kind of experience. We do have you know very capable competitors now respect their solutions and we also you know encourage customers to go out and evaluate all the technology that's out there to make sure they get the right thing for them.
You know this market opportunity.
Like I said earlier is is really without precedent in the most important thing first and foremost we want to do our part with our competitors to help stopped the spread of this pandemic.
So I don't begrudge any customer that goes to a competitor if it's the right thing of course to protect their workforce and help stopped the spreads but ranging from a whole host of cameras handheld tripod fixed right through software solutions that can either bolt in August.
Matt or completely integrate into access control and other enterprise wide solutions, we have a full and complete offering and so you can order at all a card in pieces that you think are good from US example, bar camera and get someone else's software enterprise operating solutions or.
Is that same analogy you have a full tasting menu tip to tail, where we can implement everything from hardware software AI et cetera. So I guess, it's a clumsy way of saying, yes, theres big competition, but we're happy to compete with them.
Got it and then just the last one I mean, the underlying industrial you know.
Yes in the quarter was down about 28% I mean is that you think this quarter Mark the bottom and then specifically in maritime I mean, it sounded like some of the both manufacturers put up blow out quarters to just anything different in your pull through from maritime product you know, presumably if thats a good social distancing activity there.
I guess trying to figure out if this was bottom in its marine did anything disproportionate this quarter.
Right Great question with regard to the first question as I mentioned earlier.
It's hard to just strip out the $90 million of VSP revenue from the industrial business and look at what's remaining as a true indicator of the health of that business because again, we prioritized with the constrained supply chain DSP customers to help combating the spread of this pandemic. So.
So you know those those core Thermowell griffey plant preventative maintenance.
Demand in such.
That that is probably a bit stronger than just stripping out the business in looking at kind of what's remaining.
Is it going to recover from Q2, we hope so I'll tell you what we see right now regionally, we see Asia.
Recurring quickly when I say quickly you know this whole debate about you V shape recovery the demand there from Q1 going into Q2 has rebounded nicely in North America, We're guardedly optimistic that we're seeing some green shoots in the Americas of that that core industrial business bigger.
Turning to recover channel demand picking back up.
Essential operations, gaining more confidence or with project in Europe, though we still see a very slow.
Rebound of demand in Europe, so so regional very different dynamics with regard to re marine.
From the first quarter going into the second quarter a lot of boat builders were shut down we saw sharp declines.
In our revenue and through the second quarter, we steadily seeing that improve.
It began bought a smaller purchases is I think folks and corn team were shopping online are making decisions about minor upgrades to perhaps the boats they own to now.
Whats I won't say, it's fully recovered.
But compared to three months ago four months ago.
A very steady improvement in that Ray marine and maritime business.
Got it thanks that's helpful.
Thank you.
Our next question comes a lot of Ken Herbert with Canaccord. Please proceed with your question.
Hi, good morning.
Jim I just wondered a first see you specifically called out some delays within the defense business Tobin related it sounds like I'm, just sort of procurement process and administrative issues can you quantify what that was in in the quarter end and perhaps comment on to what extent or timing is.
Who as things normalize ideally here should you expect to catch those up here in the second after the year.
We certainly hope that they catch up in the second half the year, but really it's going to continue to be predicated upon work remote conditions and.
A lot of our government customers as they work remote they don't have access to the secured systems in such to be able to continue to to process.
The stuff they need to do or when we look at the licensing.
We know that DTC in the same fashion has anywhere from a six to eight week delay just in what would be the normal processing of their licensing. So you know hard to assign a number two it but we see anywhere from a one month.
We have naturally a two or two and half month, just delay in the process in decision making.
So it probably expect that.
To continue somewhat also as I mentioned earlier international customers. If we look at it March through May.
And really beginning into June.
You saw a lot of the international customers much like in America, all work remote in all but kind of shutdown decision making.
So now that's beginning to slowly open back up how quickly it opened back but opens back up and what exactly that means to us frankly, it be impossible for me at this time to to give you a firm outlook.
Okay. That's helpful and maybe Carol if I could for you just wanted to follow up on your comments significant inventory build in the quarter, obviously and then of course for the full year can you provide any more color on on exactly what that is and then timing is too.
How you expect to the.
Maybe the liquidation of the inventories maybe this year and into next year.
Yes so.
Thank you Ken and so some of the inventory build was as we were anticipating and wanting to be on the front side of addressing the supply chain issues. We had so we made specific decisions relative to supporting SP demand as Jim noted.
The cameras that are used for yes ti like the eighth series. For example, there are other uses in demand for for those as well so while S. T has dropped some in the level of demand will be able to shift and we should be able to have a run off in that specific inventory.
With within say six to nine month period.
Probably worse case, and then also we made decisions.
To buy and make sure we had security of supply.
To ramp some of the programs within.
You I area and to make sure we would not have any short shortfall of there that we're very comfortable with inventory levels and our ability to manage those.
Over the next six to nine month.
Okay, great. Thank you very much.
Our final question comes a lot of Jeff Kessler with Imperial capital. Please proceed with your question.
Thank you for and thank you were taking my question.
Can I just most of my questions have been answered Bob I will throw in there.
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On a dash obviously that has one that has been backed up bye bye bye coded.
Hi, coated priorities, but kit during this during this period, obviously a lot of planning has gone into this not just by the.
Not just by the chip manufacturers.
By the end, but by the ultimately the end users can you just can you describe.
What you are doing and what types of discussions are going on.
With regards with regard to with regard to aid to ask.
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Over the next two to three years as we move our priorities away from.
Just yet.
The acute health care toward perhaps longer term healthcare for people.
Not be.
Able to use use is getting giving greater assist in vehicle use.
Yes, absolutely as we've mentioned before.
Aid as is one of the most exciting addressable markets for us going forward and we really participate in several areas certainly thermal sensors on the car to help with higher levels of autonomy is driving but more and more what we're seeing is demand to.
Thermal technologies to help with existing safety features like automated emergency braking also a lot of the work that we're doing to work with commercial trucking companies or companies that are working on vehicle automation or the larger Oems those same lessons go into our unmatched.
And ground combat systems for use with military customers and lastly, our intelligent traffic business using vehicle to everything technology to communicate from the intersection to the vehicles to help create a safer roadway and pedestrian flow theres a lot of demand.
As well as you mentioned with the pandemic, our core automotive business, where we're providing thermal cameras now you know do a host of different Oems.
It is they have slowed production or in some cases ceased production.
We saw in the second quarter, a sharp decline in that automotive OEM business for us in our components business, but longer term, that's really again, the near term demand curves as lot of factories in such shut down longer term through the second quarter, we saw a lot.
A lot of continued in very aggressive R&D efforts across the board.
Whether it's with some of the larger autonomous driving customers. We can't name by name, but that we formally signed partnerships with to be there thermal provider studying how thermal is integrated with other sensor solutions and such whether it be with robo taxi companies or as I mentioned earlier, what I'm wrong.
Really excited about is you know current auto manufacturers looking at things like automatic emergency braking and all of the conditions, whether it be sun glare low light conditions, edra, where existing technologies in sensors to initiate a b.
Our not effective but thermal very much is so we're really encouraged by the kind of R&D effort and customer engagement, we've had through the second quarter on that front.
Is there obviously you can't give any any timing because this is this is out there but is this something that is is this something that you think is two to three or four years away or is it five to eight years away. So that we can we just started when should we start thinking about this being having some greater.
Effect on FLIR.
Right, Yes that is certainly the multimillion and million dollar question I think it's two to three to four years away now I, you know, where we're going to have level Fivei das when we're going to have it you know how it's going to be implemented in our community. There is if theres a lot of debate.
You know, but if we get a ample integrating on the eight.
So what we know that's not going to be inside a two year because it.
The.
Model.
Such but certainly beginning with standard safety features moving on to higher levels of autonomy.
No two to four years, we should we hope to see and certainly are working hard to develop the technology. So it's it's it's beginning to move revenue for the company.
Okay, great. Thank you very much appreciate it I appreciate being on the call.
Thank you.
We reached the end of our question answer session and I will like to turn the call back over to Mr., Ken for any closing remarks.
Well I'd like to thank all of you for joining the call today and your for your interest in our company also want to reiterate my thanks and appreciation to all of our FLIR employees and our supply chain around the world for their hard work passion dedication to safety in our mission. We look forward to updating you on our progress.
Yes, when we report our third quarter results later this fall. Thank you all please stay safe and healthy.
This concludes todays teleconference. You may now disconnect your lines at the time. Thank you for your participation and have a wonderful day.
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