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The Science of Hitting
The Science of Hitting
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FLIR: Heating Up With EST

Some thoughts on the company's first quarter results

May 07, 2020 | About:

On Wednesday, FLIR Systems (FLIR) recently reported results for the first quarter of fiscal 2020.

Given the business headwinds presented by the impact of Covid-19, it was a reasonably strong start to the year for FLIR, with revenues up 1% to $451 million (and up 3% in constant currencies). This reflected a 1.9% increase in the Industrial Technologies segment (to $276 million), along with a 0.7% increase in the Defense Technologies segment (to $175 million).

As CEO Jim Cannon noted on the conference call, the company has started to see a benefit to its business from the sale of thermal cameras for elevated skin temperature (EST) screening:

“Although these thermal cameras cannot detect or diagnose COVID-19, the cameras do serve as an effective tool to measure the skin surface temperature of people entering public areas such as hospitals, airports, train terminals, businesses, and factories… In light of COVID-19, we are experiencing a dramatic and rapid increase in demand for thermal EST camera applications, which we expect will continue for the remainder of the year… We will continue to do everything we can to deliver this technology to all of those on the front line to help mitigate the spread of COVID-19 around the world. The tailwind provided by the strong demand for EST products helps to offset some of the headwinds that we have experienced as a result of COVID-19.”

As noted on the call, FLIR booked roughly $100 million in business related to EST products in the first quarter, equal to roughly 5% of FLIR’s total revenues in 2019. They ultimately shipped about 40% of that booked business in the first quarter. We’ll have to wait and see if FLIR is able to continue adding to its EST business in the coming months and quarters.

At the end of March, the company’s total backlog was $859 million (+3%), with a current backlog of $743 million (+11%). The backlog in the Industrial Technologies segment at quarter end was up nearly 30% from the year ago period, reflective of the growing demand that FLIR is seeing in EST.

The headwinds Mr. Cannon discussed above included weakness in some of its commercially centric businesses like Maritime, OTS and Security, along with tougher comparisons in Defense from the completion of certain contracts in the year ago period. In addition, the Defense business faced some administrative-related process delays that impeded their ability to secure certain deals (those delays should ultimately become revenues in a later quarter).

Collectively, FLIR reported $76 million in adjusted operating income, a decline of more than 20% from the year ago period (driven by a 520 basis point decline in operating margins). The significant contraction in margins reflected lower gross margins on mix shift headwinds in both segments, along with higher research and development spend as the company invests to support future franchise programs. It sounds to me like both of those headwinds will remain in the short-term. Non-GAAP earnings per share came in at $0.42 per share, down 21% year-over-year.

The company was relatively active in January and February, repurchasing $150 million of stock at an average price of $36 per share. Since that time, in order to preserve cash in the current environment, management has decided to pause any share repurchase activity for the foreseeable future. At quarter's end, the company had $309 million in cash and $849 million in total debt. In addition, the company withdrew its outlook for 2020, with Chief Financial Officer Carol Lowe noting that the trends to date in the second quarter are in-line with what the company saw in the first quarter.

Conclusion

As I wrote in April, I’ve recently become less interested in FLIR. I think there are better long-term opportunities elsewhere in the market (or likely to surface in the future). For that reason, with the stock reacting positively to first quarter results, I sold roughly two-thirds of my remaining position. I will probably continue to hold a few shares so I have a reason to stay up to date on the story, but this is now an immaterial position in my portfolio. That said, I still think there’s reason to be optimistic about the company’s future. I like the vision that CEO Jim Cannon has laid out and look forward to seeing what the company achieves over the coming years.

Disclosure: Long FLIR

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About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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