Q3 2020 FLIR Systems Inc Earnings Call
Greetings and welcome to FLIR systems third quarter 2020, <unk> results conference call. At this time, all participants are in listen only mode <unk>.
<unk> question answer session will follow the formal presentation.
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I would now like to turn the conference over to your host today, So Ricky with Investor Relations. Please proceed ma'am.
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 of clear its investor Relations website at Www Dot Leer Dotcom backslash investor.
We begin I'd like to remind you that statements made on this call other than historical facts are forward looking statements with the meaning of the private Securities Litigation Reform Act of 1995 and are based on our current expectations.
Words, such as anticipate estimate.
I intend believe 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 clear as I see see filings for a description of factors that could cause actual results to differ materially from these statements, including among others risks really it's the Kobe night.
All information discussed on this call is as of today, and where does not intend and undertakes no duty to update or 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 my pleasure to turn the call over to Kim Canon President and CEO of their system.
Thank you Sarah good morning, everyone and thank you for joining FLIR <unk> third quarter 2020, <unk> earnings Conference call.
Here with me today on the call as Carol Lowe, Chief Financial Officer, and Sonja Good window General Counsel Mark.
My remarks will cover an update on our continued progress related to our strategic priorities.
Highlights of our third quarter operational performance.
Comments on our business outlook.
Carol will provide additional details on the Q3 financial results.
Before we begin I want to like everyone at FLIR further extra ordinary effort accomplishing our casket despite the challenges of the pandemic.
We are meeting our customer needs with integrity.
Our supply chain is strong and intact and our facilities are operating safely.
Additionally, FLIR is access to capital and strong balance sheet provide liquidity and stability to whether the continued and prolong the effects of this pandemic.
During this critical time your dedication to fierce mission, providing innovative technologies to help our customers around the globe make more informed decisions that save lives and livelihood is commendable and inspiring.
Overall, we posted quarterly results in line with our expectations.
Despite the difficult macroeconomic conditions arising from the pandemic across some of our end markets.
I was pleased with our ability to deliver important program with brain.
Bringing innovative new products to market.
Expand adjusted operating margins and drive earnings growth.
Our momentum continues to build.
And we are confident that the strategic pivot we embarked upon two years ago is working.
As you May recall in 28, taking we commenced a new strategic course for FLIR.
Purposefully pivoting away from commercial and consumer markets to focus on our differentiated sensing solutions on applications within the broader industrial and defense industries.
With this our mission is to develop and manufacture innovative technologies that increase awareness and insight to enable professionals to make more informed decisions more.
More and more I would describe our company as a decision support company.
Through these efforts, it's our intent to create a growth company with its best in class margins occur.
A key aspect of this strategy is winning large scale multi year franchise programs of record that will help us achieve more predictable long term revenue growth, while maintaining FLIR is best in class margins.
We believe this strategy provides a sustainable framework for us to continue to execute our vision, our task and purpose to revolutionize human perception exceed our commitments with integrity and innovate the world six cents to save lives.
And livelihood.
Our strategic priorities outlined on slide three of the presentation helped shape, our ongoing technology Roadmaps research and development efforts and go to market activities.
These priorities include.
Leadership and sensor solutions unmanned and autonomous solutions.
Intelligence surveillance reconnaissance and targeting or I SRT.
And decision support.
I'd like to review each one of these strategic priorities in more detail and how I read [laughter] advancements, we have achieved which are summarized on slide four of the presentation.
Let's begin with since her leadership.
During the third quarter, we delivered flares burst cooled long wave if the red sensors to weigh funded program of record.
These sensors are based on newly developed materials, which we believe are critical for the D.O.D. is modernization priorities such as future vertical lift and infrared searching track among others.
We've made notable progress with respect to on cool technology, and blending thermal sensing with radar and visible cameras for a tough that's driving applications.
Our work in this space has proven that thermal isn't a central component in the advanced driver assistance systems or eight das sensor suite.
We continue to believe that the automotive vertical promises to be one of the largest end markets for FLIR thermal sensors long term and.
And I've already one exclusive contracts with four leading autonomous companies.
In Ondemand and autonomous solutions, we leverage our leading market position and sensors platforms and systems integration by continuing to deliver multi domain integrated economist solutions.
Last year's acquisitions of Erion and endeavor has helped establish clear as a global leader in small group, one air and ground unmanned systems.
We're vertically integrated from the sensor to the payload to the air frame or robot to the software that delivers the end use application.
These solutions provide one of the most significant no.
Near term growth opportunities for the company.
This is highlighted by the franchise programs, we have recently been awarded.
For example, we won a 26 million dollar follow on award for the nuclear biological chemical reconnaissance vehicle sensor suite upgrades.
Or M B C or B S. S U program for the U.S. Army.
This program is on the hills of the initial $48 million Development Award we won last year.
The program provides the Army war fighters with they save Standalone solution.
To identify and assess chemical biological and radioactive threats and.
And uniquely incorporates clearly see Bernie detection expertise.
Unmanned air and ground systems and software integration.
Deliver a end to end solution.
Additionally, subsequent to quarter end, we received the $32 million follow on full rate production order to deliver more than 260.
Clears symitar unmanned ground vehicles.
As a reminder, centaur is a row, mostly operated medium sized you GE v. system that provides a standoff capability to the tech confirm identify.
And dispose of hazards.
This latest contract is being sourced under the Army's man transportable robotic system increment to or mid or zinc to program.
Including the 32 million dollar award received in Q4, FLIR has received orders totaling nearly $75 million year to date from all four branches of the armed forces.
Looking at unmanned aerial systems. So far this year, we have received approximately $50 million in awards to deliver our our 80 D. Sky rater to U.S. federal government customers.
The or 80, B. Sky Rader offers long range high resolution electro optical infrared imaging sensors that provide day and night situational awareness.
In addition to the Sky writer, we continue to see strong demand for our 33 Gram Black Hornet Threed nano you Avi that support platoon, <unk> and small unit level surveillance and reconnaissance capabilities.
We are currently delivering black Hornet to the U.S. Army under the soldier borne sensor program.
Another key franchise program, we won last year with follow on contracts this year.
As well as to other defense and security forces worldwide.
In addition, subsequent to the close of the third quarter, we received a $14 million award for our lightweight vehicle surveillance system from the U.S. customs and border protection mobile agent centric systems or M. A C. S program office.
Yes.
Turning next to is our key.
A cornerstone capability within the FLIR portfolio, where we are able to harness our unique vertical integration to deliver the most innovative solutions positioning FLIR well for future franchise program growth opportunities.
From detector to focal plain array to optics and in house Crystal growth.
Laser designation capability fleet.
Rigorous core confidences are well matched for the next generation of platforms, such as future vertical lift.
One example is within the 380 <unk>.
The newest addition to our 380 family of products.
The three Adx brings powerful decision support tools to our lot of 380 series Airborne gimbal products.
The three adx can be retrofitted or used as a new build system demonstrating the evolution of our product capabilities and highlighting the integration we provide from sensor to decision support.
Our fourth strategic priority is decision support.
Often times data acquired bar sensors can outpace the humans ability to digest that information.
To help address this we launched the first version of FLIR spectrum.
Core platform technology for integrating all FLIR sensing and analytics and developing domain specific decision support solutions.
Spectrum was subsequently deployed across E. S. P screening systems in all Canadian airports managed by the Canadian Air Transport Security Authority.
In addition, we're also in the process of deploying FLIR neural network target classifier.
For NMTC platform.
This platform can significantly reduce the workload.
The human operator by applying artificial intelligence to assist with target recognition and target classification.
Slide five demonstrates the sustainable opportunity that large multi year franchise programs bring to FLIR.
This slide depicts programs that we have won and are pursuing.
Color coded by the FLIR strategic priority under which the programs fall.
Today Weve updated this slide to reflect our most recent information.
On the pursuits that we expect to fuel growth in 2021 and well beyond.
Which represents the largest amount of program pursuits in flavors history.
Let's discuss key elements of our pipeline in more detail on slide six.
We have over $10 billion of opportunities we are pursuing.
Including over 30 franchise opportunities each valued at $100 million or more.
Approximately 25% or $2.6 billion of the opportunities relate to programs, where FLIR has been selected.
Or is in the initial stages of development or production.
Our defense technologies pipeline includes a diversified mix of U.S. government and for an allied opportunities.
And our industrial technologies pipelines include opportunities with large a in the problems and autonomous driving partners.
While we acknowledge the work ahead of us to win and execute.
We are excited and optimistic about these opportunities.
Now turning to our financial performance for the quarter highlighted on slide seven.
We reported revenue of $466 million.
At quarter end, our total backlog was $899 million, an 11% increase relative to the prior year quarter.
Reflecting several key long term program wins further.
Further demonstrating our successful execution against our strategic priorities.
On the bottom line adjusted net income expanded to $84.7 million or 64 cents per diluted share.
An increase of 7.9% from the third quarter last year.
Carol will provide more details on our financial performance shortly.
Earlier this year, we withdrew our 2020 full year outlook due to cope at 19.
However, based on what we've learned from operating in the COVID-19 environment, our results year to date and outlook for the remainder of the fourth quarter. Today, we are re initiating guidance for full year 2020, and expect to deliver year over year growth and adjusted earnings per.
For share.
In addition, I would like to provide our initial perspectives on 2021.
Based on current market conditions and expectations, we believe that 2021 revenues and adjusted earnings per share.
Well both grow in the low to mid single digits.
Let me provide some details on key assumptions behind our 2021 revenue expectations.
With regards to SP we.
We currently anticipate that approximately $200 million of revenue from SP products at 2020, well need to be backfield in 2021.
We are confident that the recovery of our core industrial technologies businesses will offset a significant portion of the year over year S. T com.
We continue to experience solid improvement from earlier in the year with demand rebounding, particularly from customers in Asia, which is further along in the recovery from the pandemic than parts of Europe and North America.
The balance of the offset is expected to come from defense technologies.
Where we expect solid year over year growth in 2021.
Principally by our unmanned programs.
While there is uncertainty with depot the spending there is a commitment to modernization.
And our four pillars are well aligned to the D. odious modernization priorities.
Additionally, we remain very focused on direct allied foreign military opportunities, which persists year.
Year to date, approximately one third of our revenue has dropped directly from the U.S. government.
Turning to slide eight.
I would like to briefly highlight recent activities under flares corporate social responsibility or CSR program.
CSR is an important part of our culture as FLIR is committed to making a difference around the globe.
We're focused on three key areas first creating corporate practices that ensure we operate in a sustainable and inclusive manner.
Second investing in philanthropic efforts with organizations that align with our mission and help us improve the world We live in.
And finally, working with our customers on using FLIR products to make a positive impact on both their operations and environmental footprint.
We understand the environmental reporting this vital the tracking progress toward a sustainable future.
Let's start by being aware of our impact.
We are conducted its first greenhouse gas audit for 2019.
As well as climate performance benchmarking to better monitor and manage climate related issues risks and opportunities in our operations.
FLIR is committed to employing sound environmental sustainability practices and investing the continuous improvements in our business and at home to recover in combat the impacts of climate change, including bringing our own solutions to market to monitor emissions.
FLIR hero represents our efforts to focus on community involvement in three areas planet purpose and potential.
In 2019, we began applying our technology to have a positive impact on our planet.
Through a partnership with the World Wildlife Fund, we developed a project called borrowed rising with a simple objective.
To stop illegal while BOP poaching of black Rhinos in Kenya, which arent imminent danger of extinction use.
Using full year technology.
For 20, Twond, we added a focus on purpose.
Specifically, how can we help veterans and first responders transition into a second career.
Together with higher heroes USA, we've launched the trade force program, which provides free thermometer fee train to U.S. veterans, who want to start or expand a career in the skilled trades.
For 2021, we're expanding on potential.
Specifically develop an ace denim program to attract and encourage our youth to explore the unseen world of thermal imaging and how it can make science technology engineering and mathematics subjects more interesting.
We are actively working on enhancing our corporate responsibility disclosures and look forward to updating you on our activities on future calls.
In summary, our results demonstrate the resiliency of our business model and I'm confident in the value that will be created by our long term strategy.
With that I'll now turn the call over to Carol for.
Additional details on the third quarter financials, and our 2020 outlook Carol.
Thank you Jim looking at slide nine you'll find a summary of our third quarter financial results.
With the exception of revenue all of these financials are on a non-GAAP basis.
A reconciliation to GAAP data is included in the appendix of the supplemental presentation.
We generated $466 million in revenue for the third quarter. The primary drivers of which were demand for STB and maritime product sales in our industrial technology segment.
As well as higher volume for unmanned system and our defense technologies segment.
These revenue contribution were offset by lower volume in commercial end markets and our industrial technology segment due to hope at 19 and timing of certain contracts that contributed to revenue in the prior year quarter and our defense technologies segment.
Following our record backlog in the second quarter of 2020 positive demand trends delivered another quarter of strong backlog totaling $899 million as of September thirtyth.
Which approximately 86% or 777 million is current.
Our total backlog increased 11% relative to the prior year quarter, primarily driven by increased volume of long term orders in our industrial technology segment and continued demand for unmanned system and our defense technologies second.
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Adjusted gross profit for the quarter was $238 million, resulting in adjusted gross margin of 51.1% an improvement of 23 basis points, reflecting favorable product mix and industrial technologies, which was.
Partially offset by lower margin business and defense technology.
Adjusted gross margin decreased 320 basis points compared to the second quarter of 2020 on the expected slowdown at S.T. demand and growth in our unmanned business.
Adjusted operating income was $105 million, resulting in an adjusted operating margin of 22.5% an improvement of 107 basis points compared to the prior year quarter.
The year over year increase in adjusted operating income and margin reflect an overall reduction in operating expenses driven by lower selling general and administrative expenses, such as marketing and travel call during todays at 19 and cost.
Savings achieved from our projects be ready initiative.
As a reminder, we launched project be ready during the fourth quarter of 2019 with the objective of reducing our annual operating expenses by $30 million to $45 million to support needed investment for the advancement of our strategic priorities.
While we anticipate some increase to operating expenses relative to third quarter level. Once travel activities return to a more normalized cadence. It is clear project be ready is yielding positive results we.
We are on track to achieve savings of $30 million in 2020 and reached $45 million in total gross savings in 2021, achieving the high end of our previously announced range.
Turning to slide 10, I will highlight the third quarter performance as our two business segments.
Beginning with industrial technology.
Third quarter revenue was $281 million up 9% year over year and.
Industrial technologies revenue performance was directly impacted by COVID-19 demand trends.
First demand for thermal cameras for S.T. screening application contributed $40 million to industrial technologies revenue in the third quarter.
We exited the quarter with an insignificant amount of E T related backlog in line with our expectations as we continue to expect demand for ft applications to stabilize at a significantly lower level than what we experienced in the first half.
For the year.
Also contributing to the increase in revenue was the rebound we saw and maritime product sales as boating activity has become increasingly popular in the current environment.
Revenues were partially offset by lower volumes and various commercial end markets, which are recovering but continue to be impacted by cove at 19.
Segment operating income was $88 million up 38% year over year, driven by a combination of higher sales volume favor.
Favorable product mix and operating expense reduction from project be ready as well as lower travel and marketing expenses.
As a result segment operating margin increased 650 basis points year over year in the third quarter industrial technology bookings were $274 million, reflecting a book to bill ratio of 0.97.
Total backlog was $342 million at September thirtyth, reflecting a 25% increase compared to the prior year quarter. As a result of award timing and an increased volume of long term orders.
Thats technology segment revenues were $185 million in the third quarter, a decrease of 13% year over year.
The year over year revenue decline is primarily attributable to the timing and completion of certain large contracts that contributed to revenue.
In the third quarter of 2019, and lower volumes in our sensor related businesses in the third quarter of 2012.
This was partially offset by increased volumes for unmanned system.
In the third quarter, we continued to experience an administrative delay in customer sign off for new orders as a result of COVID-19.
So far in the fourth quarter. We're pleased to have secured a number of these orders, which will support improved sequential revenue in the defense technologies segment.
Segment operating income for defense technologies was $39 million, a decline of 28% year over year due to the lower revenue volume, partially offset by improved operating expenses from project be ready as well as lower.
Marketing and travel call.
As a result segment operating margin declined 428 basis points year over year in the third quarter defense technologies bookings were $177 million, reflecting a book to bill ratio of 0.96.
Total backlog was $556 million at September Thirtyth, 2020 up 4% year over year, primarily as a result of increased orders and unmanned system.
Let's turn to our balance sheet and cash flow highlights on slide 11.
Cash provided by operations was $82 million in the third quarter down $71 million from the same period, a year ago due to less favorable timing of working capital changes, namely an increase in inventory related to the previously discussed defense technology.
Jeeze contract timing.
And the build up of safety stock for key products in light of prior COVID-19 supply chain issue to meet future demand.
This was partially offset by higher net earnings after adding back noncash adjustment.
Compared to the second quarter of 2012 cash provided by operations increased $19 million, we used our cash flow from operations to fund $10 million in capital expenditures and returned capital to shareholders through the payment of $22 million.
In dividends.
As previously announced during the quarter, we completed an offering of $500 million of 2.5% notes due August 1st 2030 the.
The proceeds from the sale of the 2030 note were used to redeem our outstanding $425 million senior unsecured notes due June 15, 2021 and for future General corporate purposes, which may include funding for working capital capital.
Expenditures acquisitions and stock repurchase.
We remain comfortable with our current liquidity position ending the quarter with a cash balance of approximately $320 million and approximately $443 million in borrowing capacity under our credit facility.
Before turning the call back over to the operator for the question and answer session I would like to discuss our outlook as noted on slide 12.
As Jim highlighted we have re initiated and updated our fiscal 2020 outlook based on our year to date financial results and projections for the fourth quarter.
While there continues to be macroeconomic uncertainty stemming from the COVID-19 pandemic based on the latest demand trends and market conditions as of today October Thirtyth arc.
Our current outlook for the full year ending December 30, Onest 2020 is as follows.
We expect full year revenue in the range of $1.88 billion to $1.90 billion.
Adjusted operating income margins of approximately 22%.
And adjusted diluted earnings per share in the range of $2.30 to $2.35.
We expect our full year non-GAAP effective tax rate to be 21% consistent with the tax rate year to date.
This concludes our prepared remarks, thank you for your time and attention with that we'd now like to open up the call for questions.
Operator.
Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from Peter Arment with Baird. Please proceed with your question.
Hi, Good morning, you actually have Eric routing online later this morning.
My question is just in regard to the 200 million you mentioned, yes.
Yes.
In 2021 right in regards to Backfilling some of that what are some of the other product buckets, how do you see as expected capital some blackout.
Sure Eric Absolutely I mean, this is really the principal question that we wanted to provide insight on.
As we are approaching 2021.
Much like past Pandemics, we solve that rapid increase although unprecedented increase in demand. This time due to the nature of the pandemic and we're seeing that trail off.
You know, we as we said shipped about $40 million in Q3 in right. Now is we are going into Q4 in backlog theres, probably $10 million to $15 million.
What's interesting is the quote log is actually building, but as we stated on prior calls it is building with enterprise level customers much larger implementations implementations that are associated with.
Access control and other controls for access and the facilities in building and those decisions are taking longer and there was a lot of uncertainty of course about how long the pandemic prolongs et cetera. So as we look at 2021.
We really look at it you know without any notable SP business to speak of and if we get.
S.T. demand.
That will be a tailwind and we have plenty of capacity, it's our core products to be able to produce so it won't detract from other core business, but to specifically.
Answer your question first if we look at the industrial businesses just those core businesses in in third mob refi in plant preventative maintenance in oil and gas imaging around refineries and other and controls we saw a sharp decline.
In those businesses.
We're beginning to see real green shoots and most notably as I've mentioned Asia.
As the business in Asia is kind of seemed to rebound quicker certainly then north American definitely more so than Europe, we've seen a lot of.
Capital expansion decisions postpone around plant preventative maintenance oil and gas imaging monitoring et cetera, but ultimately they do need to go forward.
A lot of these technologies, particularly our optical gas imaging technologies are really critical when it comes to safety monitoring a mission. So we do see.
Is that core industrial business come back. We also think were really at the bottom in 2020 of what commercial security can be we also see delays in our intelligent traffic business decision.
Decisions that were kind of held up going forward now into 2021 different and different regions, but but really a lot of that ceased up exiting Q1 into Q2, but the industrial business alone.
I'll be able to offset that headwind.
So the balance of that will come through our defense business. We do expect our defense business to grow next year now when we look at the defense business Theres.
Two distinct components inside the segment Theres the sensors Cielo b.
And then the unmanned they'll all be in no doubt the unmanned business.
Is growing exactly as we had hoped it would when we embarked upon the strategy. It's growing very quickly so its going to contribute the bulk of that growth. So the arbitrage between the rebound to what is core for industrial for us not fully offsetting and the balance coming from defense is how we feel we are.
Can cover that year on year comp, but but I'll be the first to qualify.
There's certainly still are a lot of of uncertainties ahead of us.
Okay. Thank you that's really helpful and maybe just a quick follow up staying on kind of a 2021.
When looking at margins for each of the segments.
It's kind of the right way to think about that trend going into next year, obviously, two really strong quarters from industrial.
How sustainable are those levels and then also just any commentary on how we should think about the defense margins.
Wrapping programs you've mentioned thanks.
Yes. So you know the first quarter for US was really a low water mark when it comes to margins across the company.
We had not yet gotten the.
The realization of the savings through project be ready, we've made a lot of investments to advance our technology Road map ban to pivot right I mean pivoting into new areas that require new skill sets Lucky I've such that mission. So in the second quarter, you saw a sharp rebound, but as we talked about.
A lot of that was SP mix driven the ASP mix for US of course is a very accretive mix you've seen that industrial business begin to normalize here in Q3, although there still is a strong SP component I mentioned that revenue earlier.
In the fourth quarter I feel like that industrial business will stabilize into what we kind of see that trajectory going into 2021.
To be and very much kind of in line with where it's been historically again I'll note. If there are follow on because we level growing quote log of VSP wins that would be purely tailwind. We look at the defense business and it's a business really right in the middle of this of this trend.
In addition, our legacy defense business was principally airborne is Saar in that market has been through a lot of change with future vertical lift defining what the next generation of airborne assante looks like more and more unmanned system smaller systems and a lot of.
Delays in that market place on decisions being made as some of these bigger longer term decisions about technology need to happen first now while that has created in 2020 and going into 2021 for that legacy airborne RSR business a bit of an air bubble. It's.
Also given us a lot of time to make investments and advance our technology Road map as we go into 2021.
We're going to launch more products on that since your side of our business then we launched in the prior five years combined.
But that won't contribute directly into that 2021 impact so it's really coming the growth from our unmanned systems in there as we said on earlier calls we've got small nano drones and an aerial systems that are accretive to the overall business and we've got work yet.
To do is we're just now scaling.
A lot of the unmanned ground systems, we mentioned in the prepared remarks now going into full rate production for the Centaur unmanned ground vehicle. If you will so we'll see that scale throughout the year.
Okay. Thanks, very much appreciate all the color I'll hop back in queue.
Fair.
Our next question comes from Jim Ricchiuti with Needham and company. Please proceed with your question.
Hi, Thank you.
And by the way thanks for some color that you're providing on 2021.
I wanted to just pursue that a little bit more it just as it relates to the growth you're anticipating and the defense business next year, Yeah, typically we see this business being heavily skewed.
Toward the back half of the year is it fair to assume that we would see similar cadence to the business next year.
Yeah, Jim I think you will but again very different stories, and we don't provide a lot of fidelity deeper into the defense segment, but we are going forward because I think it's important to kind of understand.
Where the different pieces of that defense businesses, our unmanned business is growing soundly.
It's exceeding our expectations. It's certainly ahead of what we put forward when we modeled the acquisitions of Prox erion in endeavour as they are scaling its actually creating market share and that's what we're really excited about we look at things like the black Hornet before that capable.
So the really came to fro another war program sort of addressable market because of the tech really didnt exist and so you know through out the year, we're going to see strong unmanned growth.
And we're going to continue to work to advance what's possible to create new market opportunities to create new market share you know for us to capture in that small.
Squad platoon level space.
In the more legacy products you know the airborne is our maritime gimbals weapon mounted or handheld systems.
You'll see through 2021, a bevy of new products coming to market.
And they are pretty well aligned with where a lot of the program opportunities are and right now they are more backend weighted so to answer your question directly yes, it will be most likely a bit more back end weighted.
Throughout the year on man will be much more smooth.
Got it and just with respect to the implied Q4 guidance.
Guidance that you're giving is that range of revenues is that impacted.
More directly from the industrial business.
No it's probably.
A bit everywhere the problem with it and the reason we provided that ranges.
We'll have orders that we have a high probability of winning and they can be significant orders you know three five.
10, 20 plus million dollar orders.
Right now, particularly with Covance.
We have real difficulty predicting when they come in and unfortunately, a lot of our customers really don't care much about our quarter end earnings calls right and they're working through their own in administrative delays in processes and such so.
We wanted to provide a bit of a range. There of course, we are you know well into the fourth quarter. We do have some confidence or we wouldn't have re initiated that of course, but.
But but on both the industrial but the larger single Bhandary opportunities are typically on the defense side.
Got it thank you.
Thank you.
Our next question comes from 10 Herbert with Canaccord. Please proceed with your question.
Hi, good morning, Jim and Carol.
Just just to follow up on the 21 and appreciate the additional detail as we think about.
I guess your actions in project be ready how much of sort of the 15 million incremental costs, you expect to take out will drop through to margins and 21 or or how much of that are you keeping effectively.
Yes, I'll take a stab at it and I'll, let Carol answer the question more more directly.
So you know we said with the project we wanted to do a couple of things one.
We needed to get our Opex back in line again in the first quarter was that low watermark Q4, Q1 going into this year, but it was because we were making very deliberate investments in some new and pretty compelling technologies as well as carrying a lot of cost to make sure we could execute on.
Programs, we expected to win.
Or that we had one that were not yet.
Through development phases, certainly not into full rate production now we're just beginning to see some of those to get into full rate production to have absorption and the investments that we needed to make I'll say largely are in place.
And delivering nice result, with for example, the neural network target classifier and other things so that that effort, where we said we wanted to self fund a lot of investment to meet the future technology Roadmaps, we feel like we've got those building blocks in place. So working now certainly to have.
A positive overall impact Carol so can and we're we're not breaking out a specific amount right now as you can imagine the.
Uncertainty around the timing with David 19, and knowing that as we move into 2021.
The kind of trending that Jim talked about for 2021, we've taken certain assumptions on how much travel marketing trade show expense full re occur.
Get back to normal type levels, and all of that factored in and obviously that would offset some of the the ready savings that will carry forward, but we are confident that our opex.
Run rate will continue to be lower if.
If you look at a more stabilized year is 29 realm.
Relative to 2019 definitely will be running favorable from here.
There are just so many puts and takes.
2020 that it's really hard to break out all that.
We feel like we've got a much.
Better mix and in terms of our senses and we'll have leveraged.
And create.
Positive momentum from an earnings per share standpoint, with lower operating expenses as we move forward.
Okay. That's helpful and then just as a follow up how.
How much of the sort of working capital build inventory in the third quarter or do you expect to realize in the fourth quarter or can you maybe just give any commentary on free cash flow assumptions for 2020.
Yes, Thats a great question I'm glad you brought that up we definitely want to know what happened there and in the second quarter exiting the first quarter in the second quarter. Our supply chain was severely interrupted as we mentioned we had vendors that were deemed non essential and shut down completely there were stressors with supply.
Chain issues with transportation internationally, we even had foundry shutting down when we were trying to ramp production in particular for that unprecedented DST demand that we had also you know we felt compelled to make sure. We got all the SP product out that we could to help fight the spread of this.
Pandemic to the best of our ability. So frankly, we made a lot of really aggressive commitments on inventory. We also made aggressive commitments to our vendors to bolster them up and to get to the front of the line to secure supply now as we come through the second quarter into the third quarter those supply chain issues are.
Our intact now we feel really comfortable with where we are from a supply chain standpoint, and we've got to work that whip down. So what you saw in the second quarter was really a reaction to supply chain interruption to protect our ability to ship and now we've got to work that number down in the coming in the coming.
What I would say.
Is that we would expect a minimum.
Action in that inventory build.
About a quarter of it.
About 25% to a third of it shouldnt be worked down in Q4, we will have some carry over in.
2021, but all the teams are working very focused on getting the levels down cash generation, we're not concerned about that.
Great all right. Thank you very much.
Thank you.
Our next question comes from Michael Ciarmoli with Truest. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the questions here.
I guess, Jim or Carol just looking at the 21 outlook.
Optics of it you know as we sit here today seem I guess pretty aggressive.
Good mid single digit growth and backfill you need you know.
300 million, 18% growth at the corporate level probably.
The percent within that core from Auger fee instrument line, and I guess, you're going to get margin expansion. Despite the mix down with less DST Board defense unmanned I mean, what's in the backlog, what what's giving you that confidence as we sit here today I mean, you know and we've got the old.
Section, we've got unknowns on the defense budget I mean, it just seems like there is a lot of unknowns right now to get that strong growth.
Oh, there's certainly a bevy of unknown no no doubt and we wanted to provide the best insight that we had like I said earlier qualify them that yeah. There certainly are a lot of unknowns, but you know as we look at the business now Yeah couple of things one as I mentioned, we do see our industrial just core industrial business.
This is kind of rebounding they won't offset a majority of that S. T com, but they'll take a big chunk out of it also then as I mentioned Vince business in particular unmanned systems and programs that are going to go into full rate production in the coming calendar year we.
I also feel better from a margin standpoint, just what the Opex controls that we mentioned earlier that are in place that we certainly don't see returning right away also I'll note. Your backlog is pretty strong our backlog year on year is up double digit.
We've got a trailing 12 month book to Bill in both industrial and defense, that's north of one and Q3, both a little bit below one, but we understand the timing of orders and such we also know that there has been a a lot of delays in important decisions on the defense.
Particularly with Allied foreign militaries the need is still there.
The requirement is still there and so in the coming months and quarters, we hope to have them happen, but as I mentioned you know unmanned is really the long pole in the tent when it comes to growth on that side now in the comment soft said the growth would be in the low to mid single digits. So you went right to the.
To the mid single digits and that was at the higher end of of what we said, we're seeing right now, but certainly you know in the coming earnings call as we learn more and going into next year, we expect to provide guidance with much more fidelity. The one thing I will note and I mentioned it in the remarks is.
Of course, the top line.
You know right now about a third of our business comes directly from the U.S. government, we do business for other a in the proms otherwise, but a lot of our business historically has been with those.
Direct relationship with Allied foreign militaries, but through events recently LACA USA.
There was a lot of discussion from senior leaders about okay, there's probably going to be topline pressure on the budget and no matter what happens with the election, but there is a real focus on preserving modernization the $3. They have to manage in strength readiness modernization in the past.
Modernization has been the one that got turned down.
But the message that was sent out to industry loud and clear is that you know after a.
For decades, largely without significant modernization transformation now is the time and if we look at the priorities that were aligned against than the work that we've been doing for the past two years.
I think we're well positioned there, but look I you know.
Great. There is a lot of uncertainty a lot of work yet for us to do but thats our perspective right now.
Just a follow up on that.
Modernization I mean have you guys stress tested the unmanned portfolio I mean army you know doesn't really have a seat at the table in the near peer modernization going forward. So ground systems future vertical lift soldier level systems. I mean, this could all potentially be bill payers with modernization for some of those.
Slowing is that is that sort of contemplated in your framework, even though you know soldier level unmanned ground by Matador priority.
They might have to give way to hypersonics.
Tom as other kind of strategic level systems.
So I look at it a bit differently I think thats, a great debate for for us to have.
One the market is being created now with the small unmanned systems and the impact they have as the squad in the platoon level around the Army's modernization effort, a soldier lethality is changing tactics techniques and procedures and things like the black Hornet are only now just getting fielded so is.
We look not just at soldier lethality, but if you look at next generation ground combat vehicle unmanned systems are a part of that sensor suite for early solidly in survivability or if you look at future vertical lift unmanned systems. The form of airborne launched effects all a part of it so what I like.
About unmanned, particularly what we're doing we're not doing a big bet huge unmanned systems cod. The one lot on them that could be struck an appropriations. There's a proliferation of these systems all around the battlefield and I think you'd be hard pressed to speak to any military leader that doesn't believe in any domain air land or sea.
There will be more and more unmanned systems being utilized at all echelons of of of warfare, but but no doubt there will be winners and losers in the budget to come I'm actually pretty pretty doggone confident about where we fit in the small group one air ground space.
Got it thanks guys.
Thank you.
Our next question comes from Jeffrey Kessler with Imperial Capital. Please proceed with your question. Thank.
Thank you and and thank you Jimmy Carol.
I'm interested in finding out obviously, the other areas of industrial technology.
Since that's been a slow point, but you, but you kind of mentioned that.
The pipeline the discussion pipeline is really where that is at right now without getting into the timing of that because it's impossible to know what are the what are the some of the some of the specific products. What does some of the specific areas that you see could open up.
Whatever it is in 2021 2012 to 2023.
That are being heavily in discussion now, but they're just being put off obviously for sure for current environmental reasons.
Yes, Jeff that's a great question the area I would point to immediately would be infrastructure around our intelligent traffic systems.
And that's you know a part of a very smart city initiatives, a part of US certainly safety in cities traffic flow in management.
As well as just safety and things like train tunnels tunnels in regions like Norway et cetera, but a lot of those decisions again have have been sort of put on hold.
A lot of them happen, depending on the country and region at the state and municipal level and budgets you know have been strained, but the requirement and demands are still there and it's also to do with infrastructure and there's a lot of support right you know across different government agencies and regions to continue to make investments.
In infrastructure and technology, you know is a big part of that not just building new roads, new bridges, the building them in a way that smart.
That can be safe and and effectively manage traffic flow and such going forward. So that would be probably the most immediate that I would point to on the industrial side, the biggest or one of the bigger laggards as we mentioned this year has been our commercial security business.
But that to have a lot of projects, whether they're tied to data centers, a rail or other infrastructure security, where we have differentiated solutions. They have been postponed delayed effectively eventually we feel like that demand is still there and and we'll come back and then the one that I mentioned.
Earlier is.
Optical gas imaging this.
This is a persistent and continued problem not just with aged infrastructure, a natural gas leaks and such but regulation and is there is there if there is more and more environmental regulation around emissions in such a demand for these products will will increase not just in the oil and gas.
Yes industry, but for example in things like the cruise industry is they go into protected environments Fiords in Norway or other places they need to quantify their missions and and with optical gas imaging. They can do that I hope thats informative, Jeff, Yes, and just quickly just quickly.
Directly related to that some of the some of the some.
Some of the chip manufacturers actually obviously, there's there's we went with folks like several equipped with folks like dahua and and and his vision.
Being kind of satisfied with U.S. government at this point.
Other should makers that are that are that are that are coming into the.
Into the mix here and they are talking about obviously Ada es is on their lives like every every two seconds.
But this is more than eight assets, it's somewhat related to what you just said about about unmanned.
Just unmanned systems.
In general in traffic flow and I'm wondering if.
You are you in discussions with any of these any of these chip makers and look there what they're bringing to you in terms of where they see the timing of all of this coming coming out.
Yeah, I don't want to mention any specific conversations that we're having in folks, but but there still is a tremendous amount of enthusiasm that's not been dampened at all by COVID-19 around the things you mentioned in particular, a das and we continue to form exclusive relationships with leading.
And as developers and work to.
Qualifier systems from a safety standpoint, such as I mentioned in prepared remarks, really believe that's going to be one of our largest long term addressable markets, but it's still you know two to four years away from.
From from a real impact on on revenue, but but certainly we're not the only person that is hyper focused on that space, but I think we've got the most longevity when it comes to thermal imaging expertise and in position to lead there.
Okay, great. Thank you very much.
Yes.
Our next question comes from Louis Dipalma with William Blair. Please proceed with your question.
Jim Count last a good morning.
Morning.
Jim and Carol you touched upon this in several answer is related to the contrast in growth rates between the legacy sensors and unmanned system. I was wondering if you could break out roughly how much of your $700 million in.
2020 defense revenue comes from the unmanned portfolio and what is the the growth rate for for 2020 versus 2019.
Yeah I.
I will not break out that level of fidelity.
I will make a couple of broad statements about at our unmanned portfolio is is significant and growing from what was a small base with just prox than aerie on that endeavor and then you know a nice clip of organic growth with that combined platform. Since then also a lot.
Of the program wins that we pointed to in this year that will begin to deliver you know in our delivery now, but really begin to ramp through next year on that unmanned side, So soldier borne system our sensor.
The man transportable robotic system the.
No.
That's mentors the sub T program MBC, our VSS you. Most all of those are on the unmanned side. So we're going to continue to see outsized growth there, but as I mentioned.
That doesn't mean, we're losing share, particularly on the sensor side a lot of those big decisions in programs related there in the near term aren't being made and you will see in the coming year and already with the three adx that I mentioned, a really compelling set of new products come out.
Now.
Again airborne I SRT and decision support that falls squarely there are.
Our our central pillars of our strategy.
Okay and it is like for for 2020 is like the implied growth rate for the legacy sensors is it like in the negative 20.
Percent range is it is it that extreme I know in the past you.
Broken about how most of your sensor products are not part of.
Specific programs of record and that has resulted in an pressure, but should that these new products that you're releasing 2021 should that like alleviate the this pressure associated with how they are still not going to be part of programs of record and less now.
When future.
Future vertical lift and some of these other.
Programs.
Right well, it's not that extreme I don't want to say exactly what that rate is but it's not as extreme as you mention new products position us to win future programs New products also position us to win a lot of that direct business, we do with Allied foreign military. So there is no one program future.
Vertical lift or other upgrades that growth on that side hinges. Upon it is pretty broad brush, but this year has been you know a dynamic in that for us. The a lot of those upgrades sensor decisions are dependent upon what happens with future vertical lift.
And then other legacy airframes and internationally with Cove in a lot of those decisions are delayed the requirements still there will go forward Theres a delay also what we're seeing with the new products that we're bringing to market is really the next generation of what's capable right.
Sensors.
I would argue up to now and just a few years ago out.
Our powered the person's ability to digest, an action on that information, what we're going to see more and more with these new products is more in to it of interfaces neural network target classification more help making that decision going from target identification classification ultimately to that decision that needs to be made.
I'll also note on the unmanned side in our unmanned an integrated systems business, that's where the Drs Kale order resided or program resided that went into life.
That side of the business has been able to comp and in growth through.
Sounds good then.
One last one with the rebound in array marine is divesting that asset back on the table.
So ray Marine has had a very strong couple of quarters with growth in and profitability, reaching not think near record levels were always evaluating what's the best fit for our portfolio right. Now we have no immediate decision to announce instead were for.
Focused on running that business continuing to innovate you know take market share for that for the near term.
Okay. Good thanks, and then Carol.
At this time I would like to turn the call back over to management for closing comments.
In closing I'd like to thank all of you for joining our call today and for your interest in our company I would also like to reiterate my thanks and appreciation to all FLIR employees around the world.
Their work to accomplish our task and purpose our task to.
Chief our commitments with integrity and purpose to innovate the world six cents in order to save lives and livelihoods is commendable, we look forward to updating you on our progress when we report our 2024th quarter results. Thank you and please stay safe and healthy.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines. This time and have a great day.