FLIR Systems (FLIR) Q2 Earnings Miss By A Penny, Down Y/Y

In sync with the previous misses, FLIR Systems Inc.’s (NASDAQ:FLIR) earnings failed to beat the Zacks Consensus Estimate in second-quarter 2016. Adjusted earnings per share of 34 cents lagged the Zacks Consensus Estimate by a penny. Earnings also deteriorated almost 5.5% on a year-over-year basis.

A rise in the cost of goods sold coupled with tepid top-line growth resulted in the bottom-line decline on a year-over-year basis.

Net income in the quarter came in at $45.4 million compared with $50.5 million in the year-ago quarter. Fall in net income was largely attributable to a $2 million write-down of a non-core minority investment.

Inside the Headlines

The company’s top line grew a modest 2.5% year over year to $402.7 million. Also, revenues beat the Zacks Consensus Estimate of $402 million by a whisker. An improvement in four of the company’s segments offset the decline in sales experienced in the Detection and Instruments segments.

As for the segments, Surveillance revenues recorded growth of 5.2% year over year to $113.4 million, while OEM & Emerging Markets revenues rose an impressive 23.1% over the prior-year quarter to $57.0 million.

Security segment revenues grew 5.7% year over year to $63.4 million. Also, Maritime revenues returned to the growth track with a rise of 6.1% year over year to $55.2 million, after two quarters of lackluster performance.

However, Detection revenues were down 2.2% year over year to $35.7 million. Also, revenues from the Instruments segment were a dampener, declining 13.4% over the prior-year quarter to $78.1 million due to persistent softness in mid-range handheld thermal products.

FLIR Systems' order backlog for the coming 12 months stands at around $629 million as of Jun 30, 2016, reflecting a solid year-over-year increase of 17.3%.

Operating income came in at $65.2 million, compared with $70.5 million in the prior-year quarter. Unfavorable product mix and rise in manufacturing and other costs associated with the ramp up of an internal low-cost optics capability affected operating income.

Liquidity & Cash Flow

As of Jun 30, 2016, the company's cash and cash equivalents were $903.2 million, compared with $560.2 million as of Jun 30, 2015. Long-term debt was $505.4 million, up from $350.7 million at the end Jun 30, 2015.

Cash flow generated from operating activities in the quarter came in at $81.7 million, significantly up from $48.9 million in the prior-year quarter. This is the company’s highest cash flow since 2013 and can be largely attributed to reductions in working capital.

Guidance

Incorporating the current market scenario, FLIR Systems narrowed its earnings guidance but reiterated the outlook for 2016. The company now expects net earnings within $1.60 to $1.65 as compared with the previous range of $1.60–$1.70 per share. However, the revenue guidance has been reiterated at the range of $1.6–$1.65 billion (representing growth of about 3–6% over 2015).

In addition, FLIR Systems expects its gross margins to expand in the second half of the year, as it undertakes operating cost control initiatives which will counter the near-term gross margin softness.

Going Forward

FLIR Systems is enthusiastic about its solid bookings and backlog during the second quarter and believes it will fuel future growth. Also, the company’s improved working capital utilization is resulting in robust cash flow that adds to its strength.

However, the company is currently pressurized with unusual product mix in the Surveillance segment as well as escalating costs in the Instruments and Security segment. If the product mix does not return to normal levels in the second half of the year, FLIR Systems’ prospects looks bleak. Also, profitability of this Zacks Rank #4 (Sell) company depends on its ability to check the rise in costs during the second half of the year.

Better-ranked stocks in the sector include Engility Holdings, Inc. (NYSE:EGL) , General Dynamics Corporation (NYSE:GD) and Huntington Ingalls Industries, Inc. (NYSE:HII) . All three stocks carry a Zacks Rank #2 (Buy).