Revenue from the Government Systems division fell 6%, to
These comments on Surveillance (where revenue was down 4%, due to a 23% decline in U.S. government customer revenues) from Bill Sundermeier nicely sums up Commercial results:
“As expected, the quarter proved difficult for our U.S. customers, who faced the sequestration and continuing resolution uncertainties for most of the quarter. At the end of the quarter, we had a last-minute delay of a major order for additional review that substantially impacted our bookings forecast. We expect the review will be completed, and we will see this order in Q2. We also saw customer-imposed delivery push outs caused by program integration delays during the quarter.”
Total sales to the U.S. government were 22.3% of the total in quarter one, down from 28.3% of revenue in the first quarter of last year. I assure you that anybody focused solely on the U.S. government business will look back in a few years and realize just how misguided that fixation really was.
CEO Earl Lewis summed up the combined results of Commercial & Government Systems with the following: "Despite the difficult funding and macro environment our customers are experiencing, both of our divisions have meaningfully higher backlog than they did a year ago and our focus on organizational efficiency and cost control resulted in increased margins and net earnings growth. In addition, we continue to generate operating cash at a rate that significantly exceeds net income, which will allow us to generate strong returns for our shareholders."
Operating income in the first quarter was
As is always the case with FLIR, I want to point out the fact that it has a track record on repurchases that is matched by few in corporate America; when it says “opportunistically,” it means it. Here’s CFO Anthony Trunzo discussing the quarter-one repurchase:
“I would expect that we'll continue to be active buying back shares during the course of the year. So the activity, obviously, depends on the price. Clearly, in Q1, you saw that we were willing to put capital against the share repurchase program in the mid-20s. And going forward, we'll keep a close eye on opportunities to take chunks of shares out of the market at what we think are attractive prices to drive a higher return on equity and help support the EPS going forward.”
In addition to buying back common stock, the company invested $37 million in research and development (10.6% of sales), paid $13 million in dividends, and made $12 million in capital expenditures; I think it’s quite relevant to consider this $37 million R&D spend in the context of what I wrote about in my recent article entitled “R&D Expense & Hewlett-Packard.”
FLIR reaffirmed its outlook for revenue ($1.5 to $1.6 billion) and earnings per share ($1.56 to $1.66 per share) for the full year 2013; the midpoint of the EPS guidance implies a 10% increase in year-over-year earnings.
The big announcement on the call was the resignation of CEO Earl Lewis (effective May 19), who will be replaced by Andrew Teich (currently the President of the Company’s Commercial Systems division). Here’s what Mr. Lewis said on the transition:
"This is the culmination of a process that began more than two years ago with three of my direct reports completing the Harvard Advanced Management Program. Approximately a year ago, we formed a special committee of the Board of Directors and hired outside consultants to begin the difficult process of selecting one person from among three excellent internal candidates in Bill Sundermeier, Tony Trunzo, and Andy. The difficulty in making a final decision was a result of the Board's strong belief that all three were highly competent and capable leaders."
Mr. Lewis will be missed; his 13-year tenure as CEO coincided with a period of strong revenue and earnings growth, culminating in considerable value creation for shareholders. The fact that the board has chosen Mr. Teich, who headed the Commercial Systems division to this point, is worth thinking about; this decision, in addition to the recent acquisitions of Lorex, Traficon, and Raymarine (in 2010), speaks volumes about where this company is heading in the next decade.
About the author:
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.