Q2 2019 Earnings Call
Well for the second half we.
We have 1.2 on the book to Bill and then for the quarter were at the.
Wait nine in total for the first half will be up for the first half and then the quarter is the lower amount.
Okay.
Okay.
Got it and then just maybe sticking with government.
Maybe could we get a little bit of color on the program pipeline.
Any opportunities that are out there either large or small domestic and international and kind of how you're viewing the current marketplace even with the.
What looks to be a two year budget deal in place.
Yes, David you want to address that question sure. So well work is we're continuing to see some expansion in our current rate program out of our core gimbal business. We think the modernization efforts now that the government has a budget in place is going to continue to flourish in the second half and we expect to see some benefit there their deals we have.
Internationally that we.
We expect to close in the second half, but also there is some franchise programs as part of our new acquisitions.
The the Chris age opportunity as well as robotic combat vehicle in endeavor that really a promising sort of longer term efforts that we will see some some opportunities for growth with respect to new bookings in the second half of the year. So on balance between those franchises in the backlog. We've built we've built in the first half of the year.
It's going to be a good mix of continuing to execute was expected in the second half with continuation of building that backlog into 2020.
And I'll just add David the.
The second half is really important to us with our soldier borne systems program.
As you know we were awarded that earlier in the year, we've been working really hard to field that program. It's now been fielded to the initial units to receive the Blackhornet and so we're working very hard through the second half of the year to make sure that program is successful is it so important to protect our soldiers on the battlefield.
Thank you. Our next question is coming from Jeff Kessler from Imperial Capital. Your line is now live.
Thank you.
I know youve.
You visited the the maritime situation before but.
Just wondering.
The you did have a.
A very large amount of new product introduction, particularly control control systems.
Control panels for for boats and Im wondering even even with the amount of new product you had out there the decline in registrations offs offset that is what you're saying.
That's correct, Jeff, Yes, we're again real pleased with the performance of our products and the share we've been able to capture with MF DS and and other controls I mentioned dachshunds earlier also.
I am pleased with the teams effort to shift into professional markets in the Maritime Arena, We mentioned maritime law enforcement border protection et cetera.
But those efforts still aren't quite mature enough to offset the decline that we see in new boat sales and with those new boat sales.
Typically that directly drops the adoption of our products. So so yes, Jeff you're correct with that within that state.
If we could move into some some of your.
Your sensors and the use of those sensors in what we'll call.
Well the cost save cities programs, because as you know since security theory, where.
I'm I'm most familiar.
No Im wondering what the progress you use you see there is I know this is it this is a very long.
A very very long tailed type of.
Type of development that goes on but.
But it's something that I ask you.
I asked the company that once once or twice a year just give me an idea of where we are in terms of the adoption of.
Various various various cores and including various compares cameras.
That includes your cores.
For.
For purposes of both civilian and security use in the clinical safe cities are secure cities model programs.
Yes, we see that adoption really in two areas right now I mentioned earlier in the prepared remarks.
The traffic data.
We've introduced with our intelligence.
Traffic systems, we see more and more of a fusion between traffic management intersection management and monitoring as well as connected and safe cities.
So with the acquisition that we did last year of a cyclical.
Having data in data asset management.
Along with that software along with the sensors and such in intersections help not just traffic management, let's say cities also I mentioned you know we had in the quarter our largest ever 17 million dollar award for our core security business.
Monitoring critical infrastructure, something Weve long focused on whether it's you know power water utilities.
In more and more we see strength in data centers.
Using thermal cameras really our bread and butter staple kind of products to secure data centers because of their obvious benefits. We've also been working to.
With the Sorrows camera introduced combined visible and IR few sensors with analytics that can determine whether it's a deer or a dog versus a pedestrian that's approaching a parameter and integrating low cost radars with those solutions as well.
So more and more.
Across the world, but also particularly in North America.
We see real brand strengthen our brand being a us company securing critical infrastructure.
Where concerns around cyber security and otherwise.
Continue to persist.
Thank you. Our next question today is coming from Josh Sullivan from Seaport Global Your line is now live.
Hey, good morning.
Good morning, Josh.
I'll just within that guidance for accelerated growth in Q4, the fence portfolio.
The two year deal here provides a backdrop, but if we still get even a short continuing resolution in Q4 does that impact your outlook anyway is that already factored in.
Well you know certainly we don't want to continued resolution or any form of the government shutdown that not that I, absolutely would impact our business.
Right now, though we do have some bookings we want to still go capture but with the backlog that we have again, we have confidence in the guidance that we've issued now again, if there is a sustained.
See our shutdown et cetera, I can't say, that's fully anticipated inside of our guidance, but we're cautiously optimistic and with the bookings that we have now with the backlog that we have now we have confidence in that guidance that we've issued.
Great and then just one on the industrial portfolio can you dig into the geographic performance where are the strengths any standouts products outperforming or underperforming in Asia.
This strength is really been in the us.
In Asia, we've seen some softness we've seen some softness in our machine vision business in Asia now that can partially be attributed to the boom that we had and smartphone.
Production that slowed if you will but also for our instruments business, we had a slowdown in the first half related to some import issues.
That we needed to address.
But in the us and in Europe , but particularly US are cooled cores have really seen a lot of strength. So the geographic performance Fry Bu, principally out say us or North America centric, but also Europe as well.
Thank you. Our next question is coming from Louie Dipalma from William Blair. Your line is now live.
Good morning, Jim Carol, David Travis and Sonya.
You got us all cover low to mid point of view good morning Maury.
Defense Media reports suggest that the U.S. Army's three year outlook for the soldier borne sensor program set the scale from.
Around 1150 system to over 9000 systems over the next three years and the publish president President's budget request for robotics, which includes soldier borne sensor and the endeavor MTR as two program shows the budget.
Increasing from 100 million and 2020 to 209 million in 2023 is that media report in the budget generally consistent with your expectations for how soldier borne sensor and.
Endeavor scales over the next three years.
Yeah, I'd say Directionally now again, we want to push much more adoption as I mentioned earlier, that's why right now the second half is so important to us when we look at the soldier borne system.
It has been fielded now it's been noted in the media with the third Brigade combat team of the 82nd Airborne Division and as they now are adopting tactics techniques and procedures and we're learning about its use.
You know again, we couldn't believe more in its life saving capability to give that non line of sight personal reconnaissance.
The squad level.
So, yes, I would say directionally that makes sense, but I think there's still a lot of discovery happening we know that one of the major modernization priorities of depot de is unmanned systems.
And as you know with the acquisitions of endeavor in area on we're very focused on that group one that small squad platoon company level organic unmanned capability.
And we know that that's going to continue to proliferate over the battlefield. So while we directionally sort of agree with those published comments that we have now I think what we're going to find in the coming quarters and years as these systems get deployed is tactics and techniques develop around them in their made apart of doctrine and as we continue to innovate and evolve to make them more capable accessible.
We hope to push that number higher.
Because again, it's got such a unique and defining capability that we can provide the warfighter.
Okay and on the subject of unmanned systems at a high level can you talk about the role that FLIR plays in.
Counter drone systems last week, where it might have been two weeks ago. There was a high profile incident and the middle East have had drawn being taken down by a counter drone system and at the CR in space show.
A lot of the different defense contractors talked about.
FLIR his involvement encountered drones, but.
You guys haven't really been vocal about it on on your earnings call on can you discuss I guess what systems are.
The general rule that you guys plan to counter you asked.
Sure well, we do in several areas first I'm proud to say the article that you mentioned.
It was our neutrino cooled core that was a part of that system that down that that that aircraft.
So we participate at the sensor level with other companies that we provide cooled cores and other sensors into their counter use solution. We also are working on our own counter U.S. solution and we've demonstrated it in several applications using our own radars our own E allow our systems now we focused on the Ditech loop.
We don't have any technologies or solutions around the defeat loop.
So our emphasis has been on providing cool components and other sensors to folks that are integrating into their.
Counter U.S. solutions as well as our own organic organic count are you a solution, but our solution is focused more on domestic applications to detect we don't have any technologies in right now are not pursuing any technologies on the defeat loop of that count are you I guess.
Solution.
Thank you. Our next question is coming from Noah Poponak from Goldman Sachs. Your line is now live.
Hey, good morning, everyone.
Good morning no.
Hi can you hear me, Okay, I'm hearing some feedback on a cellphone.
I've got you now you cut out for a minute, but I can hear you now well.
All right, maybe I'll just shelf.
I actually wanted to go back to the adjustments from GAAP to adjusted and also as it pertains to cash flow.
Because there is just more on their larger in the quarter.
And historically.
The cash flow has always been there.
But in the quarter the cash flow to the adjusted earnings.
Theres a little bit weak so.
The first part of the question is just one point in time.
I understand the intangible amortization is non cash you're getting to a cash number but at what point in time do we just not have the acquisition expenses the management transition expenses.
All of these other expense of one point in time, we have a cleaner number and then Carol on the free cash I know, it's lumpy quarter to quarter, but where should we expect free cash to come in for this year relative to your adjusted earnings guidance.
So.
Let's talk about the the GAAP and non-GAAP items first so as you noted we will continue to have the.
Amortization of the intangible assets related to acquisitions as one of the reconciling items because we report at adjusted operating income not EBITDA, that's how some company.
Address that different.
We expect the executive transition costs to be complete at the end of this year largely complete.
As well as it relates to acquisition related expenses.
Those will primarily depend on whether or not we are competing in an auction process or their investment bankers involved and that is largely.
Herman bonds the size of the deal and in terms of who we bring in for support for legal and other special services that are needed in terms of valuation that's required.
Those will continue to see and again, it's just going to be driven by the volume of M&A.
That we're doing and those are the larger items.
As as we relate to cash flow I guess, one thing just to provide a little bit more clarity about.
The.
When you first look at it the decline.
Year over year and cash flow, it's really driven by timing of when sales are realized and we had higher sales in June of 19 as compared to 18. When you then compare that to June of 18 compared to 17, so last year cash flow benefited.
By receivables and timing of sales it was a positive net 12 million to cash flow.
This year for the first half.
It's a negative 35 million again, just on timing so thats a net delta when you're comparing 18 cash flow to 19 cash flow of approximately $47 million, so that a big impact of it.
We've not really provided.
Guidance on cash flow, we expect to continue to be able.
To exceed the cash flow from operations level, we've always been at more than.
100% and we'll expect to continue to deliver that on a year on year basis.
Okay I appreciate that.
That's really helpful.
And then I just wanted to ask on the government margins.
You know kind of 31 and change.
You know at the end of last year.
27 and change in the first quarter, then 44 and change this quarter.
And I totally got it.
The acquired businesses and some of the new efforts there.
And the potential to grow revenue, so definitely from a number of them to dilute the margin.
But I don't know how much they dilute the margin sustainably and so.
Oh, I guess, which of the last four quarters is more indicative of the kind of normalized.
Two to three year out run rate margin in that business.
Well I mean, we don't want to you know.
God the future specific margins of our government and defense business unit, except to say as we've talked about before.
We're constantly managing that arbitrage between competing for larger programs that could have a dilutive effect as well as driving innovations in non programmatic business they can be accretive.
You mentioned the acquisitions and we talked about their dilution inside the quarter is they advance through the year, we expect them to begin to contribute.
No to positive margins in the government defense business.
So as we've said at the macro level, we're still committed to 23 points operating margin in the government and defense business is a key contributor to us maintaining or exceeding that guidance.
Thank you. Our next question is a follow up from Michael Ciarmoli from Suntrust. Your line is now live.
Hey, Thanks, guys. Thanks for taking the follow up here just to maybe stay on that I mean, you've got the the 29% 2021 bogey out there for government margin. So that's still good.
And then separately you've got that 2021 target of 30% for industrial margins and I mean on on that front.
You put up close to 33% sounds like you're even dealing with some headwinds in the instrument margins. So should we be thinking there could be.
Upside to that that industrial margins longer term and then.
Basically 29% still good for government.
Yes, I mean, as we talked about at our Investor Day, and we still remain committed you know directionally to those kind of margins you know in the businesses, but you know quarter to quarter, we have lumpiness across all of our business units.
That can drive margins a couple of hundred basis points, one way or the other so I wouldn't say you know after one quarter, that's sustained upside for industrial land or you know dilution for government and defense again as the business mix ebbs and flows but I will note.
Across all the businesses industrial in particular, but government defense and commercial as well.
We're also working really hard with the FLIR method to drive productivity and we've seen now well into 2019 that effort beginning to take effect. So whether it be you know some tariffs headwinds that we've seen in the commercial business unit or you know mix shifts or you know as we mentioned some of the dilutive effect of the recent acquisitions.
We've got a productivity engine that I'm real proud of right now that's beginning to fire. So you know again as we go back to what we communicated at Investor day, and what we're guiding to in the year now still very much aligned with that direction.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Well again I want to thank all of you for joining the call today as well as your interest in our company as always I, especially want to thank the over 4000 FLIR employees across the globe for their continued passion and dedication to our customers. We look forward to updating you on our third quarter 2019 financial results in October . Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.