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FLIR Systems Inc (FLIR)
Q3Â 2020 Earnings Call
Oct 30, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to FLIR Systems Third Quarter 2020 Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to your host today, Sara Keith, with Investor Relations. Please proceed, ma'am.
Sara Keith -- Investor Relations
Good 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 FLIR's Investor Relations website at www.flir.com/investor. Before we begin, I'd like to remind you that statements made on this call other than historical facts are forward-looking statements within meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Words such as anticipates, estimates, expects, intends, believes 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 FLIR's SEC filings for a description of factors that could cause actual results to differ materially from these statements, including, among others, risks related to COVID-19. All information discussed on this call is as of today, and FLIR does not intend and undertakes no duty to update for 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 Jim Cannon, President and CEO of FLIR Systems.
Jim Cannon -- President And Chief Executive Officer
Thank you, Sara. Good morning, everyone, and thank you for joining FLIR's Third Quarter 2020 Earnings Conference Call. Here with me today on the call is Carol Lowe, Chief Financial Officer; and Sonia Galindo, General Counsel. My remarks will cover an update on our continued progress related to our strategic priorities, highlights of our third quarter operational performance and comments on our business outlook. Carol will provide additional details on the Q3 financial results. Before we begin, I want to thank everyone at FLIR for their extraordinary effort, accomplishing our task 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's access to capital and strong balance sheet provide liquidity and stability to weather the continued and prolonged effects of this pandemic.
During this critical time, your dedication to FLIR's 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 quarter 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 wins, bring 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 2018, we commenced a new strategic course for FLIR, purposely 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 and more, I would describe our company as a decision-support company. Through these effort, it's our intent to create a growth company with best-in-class margins. A key aspect of this strategy is winning large scale, multiyear franchise programs of record that will help us achieve more predictable long-term revenue growth while maintaining FLIR's 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's Sixth Sense to save lives and livelihood. Our strategic priorities outlined on Slide three of the presentation help shape our ongoing technology road maps, research and development efforts and go-to-market activities. These priorities include: leadership in sensor solutions; unmanned and autonomous solutions; intelligence, surveillance, reconnaissance and targeting or ISRT; and decision support. I'd like to review each one of these strategic priorities in more detail and highlight recent advancements we have achieved, which are summarized on Slide four of the presentation. Let's begin with sensor leadership. During the third quarter, we delivered FLIR's first cooled, long-wave infrared sensors to a funded program of record. These sensors are based on newly developed materials, which we believe are critical for the DoD's modernization priorities, such as future vertical lift and infrared search and track, among others. We've made notable progress with respect to uncooled technology in blending thermal sensing with radar and visible cameras for autonomous driving applications.
Our work in this space has proven that thermal is an essential component in the advanced driver assistance systems, or ADAS, sensor suite. We continue to believe that the automotive vertical promises to be one of the largest end markets for FLIR's thermal sensors long term and have already won exclusive contracts with four leading autonomous companies. In unmanned and autonomous solutions, we leverage our leading market position in sensors, platforms and systems integration by continuing to deliver multidomain, integrated autonomous solutions. Last year's acquisitions of Aeryon and Endeavor have helped establish FLIR as a global leader in small group on air and ground unmanned systems. We are vertically integrated from the sensor to the payload, to the airframe or robot, to the software that delivers the end-use application. These solutions provide one of the most significant 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 follow-on award for the Nuclear, Biological, Chemical, Reconnaissance Vehicle Sensor Suite Upgrade, or NBCRV SSU, program for the U.S. Army. This program is on the heels of the initial $48 million development award we won last year. The program provides Army warfighters with a safe standoff solution to identify and assess chemical, biological and radioactive threats and uniquely incorporates FLIR's CBRNE detection expertise, unmanned air and ground systems and software integration to deliver a end-to-end solution. Additionally, subsequent to quarter end, we received a $32 million follow-on full-rate production order to deliver more than $260 million of FLIR's Centaur unmanned ground vehicles. As a reminder, Centaur is a remotely operated, medium-sized UGV system that provides a standoff capability to detect, confirm, identify and dispose of hazards.
This latest contract is being sourced under the Army's Man Transportable Robotic System Increment II, or MTRS Inc. II program. Including the $32 million 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 R80D SkyRaider to U.S. federal government customers. The R80D SkyRaider offers long-range, high-resolution, electrooptical, infrared imaging sensors that provide day-and-night situational awareness. In addition to the SkyRaider, we continue to see strong demand for our 33-gram Black Hornet three Nano UAV that support platoon and small unit-level surveillance and reconnaissance capabilities. We are currently delivering Black Hornets 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's Mobile Agent-Centric Systems, or MACS, program office. Turning next to ISRT, 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 plane array, to optics and in-house crystal growth, to laser designation capabilities, FLIR's core competencies are well matched for the next-generation of platforms such as future vertical lift. One example is within the 380 times, the newest addition to our 380 family of products. The 380 times brings powerful decision-support tools to our line of 380 series airborne gimbal products. The 380 times can be retrofitted or used as a newbuild 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. Oftentimes, data acquired by our sensors can outpace a human's ability to digest that information. To help address this, we launched the first version of FLIR Spectrum, a core platform technology for integrating all FLIR sensing and analytics and developing domain-specific decision-support solutions. Spectrum was subsequently deployed across EST 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's Neural Network Target Classifier, or NNTC, platform. This platform can significantly reduce the workload of a human operator by applying artificial intelligence to assist with target recognition and target classification. Slide five demonstrates the sustainable opportunity that large multiyear 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, we've 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 FLIR's 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 foreign allied opportunities. And our Industrial Technologies pipelines include opportunities with large A&D primes 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 demonstrating our successful execution against our strategic priorities. On the bottom line, adjusted net income expanded to $84.7 million or $0.64 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 COVID-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 reinitiating guidance for full year 2020 and expect to deliver year-over-year growth in adjusted earnings per 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 will 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 EST, we currently anticipate that approximately $200 million of revenue from EST products in 2020 will need to be backfilled in 2021. We are confident that the recovery of our core Industrial Technologies businesses will offset a significant portion of the year-over-year EST comp. 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, fueled principally by our unmanned programs. While there is uncertainty with DoD spending, there is a commitment to modernization, and our four pillars are well aligned to the DoD's modernization priorities.
Additionally, we remain very focused on direct allied foreign military opportunities, which persist. Year-to-date, approximately 1/3 of our revenue is derived directly from the U.S. government. Turning to slide eight. I would like to briefly highlight recent activities under FLIR's Corporate Social Responsibility, or CSR, program. CSR is an important part of our culture as FLIR's 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 environmental reporting is vital to tracking progress toward a sustainable future. That starts by being aware of our impact. FLIR 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 in continuous improvements in our business and at home to recover and 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 Kifaru Rising with a simple objective: to stop illegal wildlife poaching of black rhinos in Kenya, which are in imminent danger of extinction using FLIR technology. For 2020, we added a focus on purpose, specifically, how can we help veterans and first responders transition into a second career. Together with Hire Heroes USA, we've launched the TradeForce Program, which provides free thermography training to U.S. veterans who want to start or expand a career in the skilled trades.
For 2021, we're expanding on potential, specifically developing a STEM 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?
Carol Lowe -- Executive Vice President And Chief Financial Officer
Thank you, Jim. Looking at slide nine, you'll find a summary of our third quarter financial results. Please note, 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 EST and maritime product sales in our Industrial Technologies segment as well as higher volumes for unmanned systems in our Defense Technologies segment. These revenue contribution were offset by lower volumes in commercial end markets in our Industrial Technologies segment due to COVID-19 and timing of certain contracts that contributed to revenue in the prior year quarter in 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 30, of 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 Technologies segment and continued demand for unmanned systems in our Defense Technologies segment. 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 in Industrial Technologies, which was partially offset by lower-margin business in Defense Technologies. Adjusted gross margin decreased 320 basis points compared to the second quarter of 2020 on the expected slowdown of EST 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 reflects an overall reduction in operating expenses driven by lower selling, general and administrative expenses, such as marketing and travel costs during COVID-19 and cost savings achieved from our Project 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 investments for the advancement of our strategic priorities. While we anticipate some increase to operating expenses relative to third quarter levels once travel activities return to a more normalized cadence, it is clear Project Be Ready is yielding positive results. We are on track to achieve savings of $30 million in 2020 and reach $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 of our two business segments. Beginning with Industrial Technologies. Third quarter revenue was $281 million, up 9% year-over-year. Industrial Technologies revenue performance was directly impacted by COVID-19 demand trends. First, demand for thermal cameras for EST screening application contributed $40 million to Industrial Technologies revenue in the third quarter.
We exited the quarter with an insignificant amount of EST-related backlog, in line with our expectations, as we continue to expect demand for EST applications to stabilize at a significantly lower level than what we experienced in the first half of the year. Also contributing to the increase in revenue was the rebound we saw in maritime product sales, as boating activity has become increasingly popular in the current environment. Revenues were partially offset by lower volumes in various commercial end markets, which are recovering but continue to be impacted by COVID-19. Segment operating income was $88 million, up 38% year-over-year driven by a combination of higher sales volume, favorable product mix and operating expense reductions from Project Be Ready as well as lower travel and marketing expenses. As a result, segment operating margins increased 650 basis points year-over-year. In the third quarter, Industrial Technologies bookings were $274 million, reflecting a book-to-bill ratio of 0.97.
Total backlog was $342 million at September 30, reflecting a 25% increase compared to the prior year quarter as a result of award timing and an increased volume of long-term orders. Defense Technologies 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 2020. This was partially offset by increased volumes for unmanned systems. In the third quarter, we continued to experience an administrative delay in customer sign-offs 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 revenues 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 costs.
As a result, segment operating margins 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 30, 2020, up 4% year-over-year, primarily as a result of increased orders in unmanned systems. 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 Technologies contract timing and the buildup of safety stock for key products in light of prior COVID-19 supply chain issues to meet future demand. This was partially offset by higher net earnings after adding back noncash adjustments. Compared to the second quarter of 2020, 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 1, 2030. 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 repurchases. 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 reinitiated 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 30, our current outlook for the full year ending December 31, 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?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Peter Arment with Baird. Please proceed with your question.
Eric Ruden -- Baird -- Analyst
Hi, good morning. You actually have Eric Ruden on the line for Peter this morning. My question is just in regard to the $200 million you mentioned and EST headwind in 2021. In regards to backfilling some of that, what are some of the other product buckets you see as expected to kinda fill some of that gap?
Jim Cannon -- President And Chief Executive Officer
Sure, Eric. Absolutely. I mean, this is really the principal question that we wanted to provide insight on as we're approaching 2021. Much like past pandemics, we saw that rapid increase, although unprecedented increase in demand this time due to the nature of the pandemic, and we're seeing it trail off. We, as we said, shipped about $40 million in Q3. And right now as we're going into Q4, in backlog, there's probably $10 million to $15 million. What's interesting is the quote log is actually building. But as we stated on prior calls, it's building with enterprise-level customers, much larger implementations, implementations that are associated with access control and other controls for access in the facilities and buildings. And those decisions are taking longer. And there's 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 without any notable EST business to speak of. And if we get EST 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 thermography, in plant preventative maintenance, in oil and gas imaging around refineries and other controls, we saw a sharp decline in those businesses that we're beginning to see real green shoots in, most notably, as I mentioned, Asia, as the business in Asia has kind of seemed to rebound quicker, certainly than North America and definitely more so than Europe.
We've seen a lot of capital expansion decisions postponed around plant preventative maintenance, oil and gas imaging, monitoring, et cetera. But ultimately, they do need to go forward. And a lot of these technologies, particularly our optical gas imaging technologies, are really critical when it comes to safety monitoring emissions. So we do see just that core industrial business come back. We also think we're really at the bottom in 2020 of what commercial security can be. We also see delays in our intelligent traffic business, decisions that were kinda held up going forward now into 2021. Different in different regions, but really, a lot of that seized up exiting Q1 into Q2. But the industrial business alone won't 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, there's two distinct components inside the segment. There's the sensors LOB and then the unmanned LOB. And no doubt, the unmanned business is growing exactly as we had hoped it would when we embarked upon this strategy. It's growing very quickly. So it's gonna contribute the bulk of that growth. So the arbitrage between the rebound of what is core for industrial for us not fully offsetting and the balance coming from defense is how we feel we can cover that year-on-year comp. But I'll be the first to qualify. There certainly still are a lot of uncertainties ahead of us.
Eric Ruden -- Baird -- Analyst
Okay. Thank you, that's really helpful. And then maybe just a quick follow-up, staying on kinda the 2021 trend. When looking at margins for each of the segments, what'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 with the ramping programs you've mentioned? Thanks.
Jim Cannon -- President And Chief Executive Officer
Yes. So the first quarter for us was really a low watermark when it comes to margins across the company. We had not yet gotten the realization of the savings through Project Be Ready. We had made a lot of investments to advance our technology roadmap and to pivot, right? I mean, pivoting into new areas that required new skill sets, like AI and such that I've mentioned. So in the second quarter, you saw a sharp rebound. But as we talked about, a lot of that was EST mix-driven. The EST 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 EST component, I mentioned that revenue earlier. In the fourth quarter, I feel like that industrial business will stabilize into what we kinda 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 -- cause we do have a growing quote log of EST wins, that would be purely a tailwind. We look at the defense business, and it's a business really right in the middle of this transition.
Our legacy defense business was principally airborne ISR. And that market has been through a lot of change with future vertical lift defining what the next-generation of airborne ISRT looks like, more and more unmanned systems, smaller systems, and a lot of delays in that marketplace 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 ISR 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 gonna launch more products on that sensor side of our business than we've 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. And there, as we've said on earlier calls, we've got small nano drones and aerial systems that are accretive to the overall business. And we've got work yet to do as 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.
Eric Ruden -- Baird -- Analyst
Okay, thank you very much. I appreciate all the color. I'll hop back in queue.
Jim Cannon -- President And Chief Executive Officer
Thanks, Eric.
Operator
Our next question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.
Jim Cannon -- President And Chief Executive Officer
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, just as it relates to the growth you're anticipating in the defense business next year. Typically, we see this business being heavily skewed toward the back half of the year. Is it fair to assume that we would see a 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 cause I think it's important to kinda understand where the different pieces of that defense business is. 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, Aeryon, and Endeavor as they are scaling. It's actually creating market share, and that's what we're really excited about. We look at things like the Black Hornet before that capability really came to fro. There weren't programs or an addressable market cause the tech really didn't exist. And so throughout the year, we're gonna see strong unmanned growth. And we're gonna continue to work to advance what's possible to create new market opportunities, to create new market share for us to capture in that small squad, platoon-level space. In the more legacy products, the airborne ISR, 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 back-end weighted. So to answer your question directly, yeah, it'll be most likely a bit more back-end weighted. But throughout the year, unmanned will be much more smooth.
Jim Ricchiuti -- Needham & Company -- Analyst
Got it. And just with respect to the implied Q4 guidance that you're giving, is that range of revenues? Is that impacted more directly from the industrial business?
Jim Cannon -- President And Chief Executive Officer
No, it's probably a bit everywhere. The problem with -- and the reason we provided that range is we'll have orders that we have a high probability of winning, and they can be significant orders. $3 million, $5 million, $10 million, $20-plus million orders that right now, particularly with COVID, we have real difficulty predicting when they come. 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 administrative delays and processes and such. So we wanted to provide a bit of a range there. Of course, we're well into the fourth quarter. We do have some confidence or we wouldn't have reinitiated that, of course. But on both the industrial -- but the larger single binary opportunities are typically on the defense side.
Jim Ricchiuti -- Needham & Company -- Analyst
Got it. Thank you.
Jim Cannon -- President And Chief Executive Officer
Thank you.
Operator
Our next question comes from Ken Herbert with Canaccord. Please proceed with your question.
Ken Herbert -- Canaccord -- Analyst
Hi, good morning, Jim and Carol. 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 in '21? Or how much of that are you keeping effectively?
Jim Cannon -- President And Chief Executive Officer
Yeah. I'll take a stab at it, and I'll let Carol answer the question more directly. So we said with the project, we wanted to do a couple of things. One, we needed to get our OpEx back in line. Again, 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 won 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 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?
Carol Lowe -- Executive Vice President And Chief Financial Officer
So Ken, and we're not breaking out a specific amount right now. As you can imagine, the uncertainty around the timing of COVID-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 will reoccur and get back to some normal-type levels and all of that factored in. And obviously, that would offset some of the Be Ready savings that will carry forward. But we are confident that our OpEx run rate will continue to be lower, if you look at a more stabilized year as 2019. So relative to 2019, definitely we'll be running favorable from a comparison standpoint. There are just so many puts and takes for 2020 that it's really hard to break out all the pieces that we feel like we've got a much better mix in terms of our expenses, and we'll have leverage and create positive momentum from an earnings per share standpoint with lower operating expenses as we make forward.
Ken Herbert -- Canaccord -- Analyst
Okay, that's helpful. And then just as a follow-up, how much of the sort of working capital build inventory in the third quarter do you expect to realize in the fourth quarter? Or can you maybe just give any commentary on free cash flow assumptions for 2020?
Jim Cannon -- President And Chief Executive Officer
Yeah. That's a great question, I'm glad you brought that up. We definitely wanna note what happened there. In the second quarter -- exiting the first quarter and the second quarter, our supply chain was severely interrupted. As we mentioned, we had vendors that were deemed nonessential 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 EST demand that we had. Also, we felt compelled to make sure we got all the EST 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 intact now. We feel really comfortable with where we are from a supply chain standpoint, and we've got to work that web 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 on the coming -- in the coming quarters.
Carol Lowe -- Executive Vice President And Chief Financial Officer
And what I would say is that we would expect a minimum reduction in that inventory build of about 1/4 of it. About 25% to 1/3 of it should be worked down in Q4. We will have some carryover into 2021, but all the teams are working and very focused on getting the levels down for the cash generation. We're not concerned about it.
Ken Herbert -- Canaccord -- Analyst
Great. Alright, thank you very much.
Jim Cannon -- President And Chief Executive Officer
Thank you.
Operator
Our next question comes from Michael Ciarmoli with Truist. Please proceed with your question.
Michael Ciarmoli -- Truist -- Analyst
Hey. Good morning, guys. Thanks for taking the questions here. I guess, Jim or Carol, just looking at the '21 outlook, the optics of it, as we sit here today, seem, I guess, pretty aggressive. To get mid-single-digit growth and backfill, you need $300 million, 18% growth at the corporate level, probably 30% within that core thermography instrument line. And I guess you're gonna get margin expansion despite the mix down with less EST, more defense unmanned. I mean, what's in the backlog? What's given you that confidence as we sit here today? I mean -- and we've got the election. We've got unknowns on the defense budget. I mean, it just seems like there's a lot of unknowns right now to get that strong growth.
Jim Cannon -- President And Chief Executive Officer
Well, there's certainly a bevy of unknowns, no doubt. And we wanted to provide the best insights that we had. Like I said earlier, qualify them that, yeah, there certainly are a lot of unknowns. But as we look at the business now, a couple of things. One, as I mentioned, we do see our industrial -- just core industrial businesses kind of rebounding. They won't offset a majority of that EST comp, but they'll take a big chunk out of it. Also then, as I mentioned, defense business, in particular, unmanned systems and programs that are gonna go into full-rate production in the coming calendar year. We also feel better from a margin standpoint, just with the OpEx controls that we mentioned earlier that are in place that we certainly don't see returning right away. Also, I'll note our 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 1 in Q3, both a little bit below 1. But we understand the timing of orders and such. We also know that there have been a lot of delays in important decisions on the defense side, 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, unmanned is really the long pole in the tent when it comes to growth on that side.
Now, in the comments I said, the growth would be in the low to mid-single digits. So you went right to the mid-single digits, and that was at the higher end of what we said we're seeing right now. But certainly, 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, DoD top line. Right now about 1/3 of our business comes directly from the U.S. government. We do business for other A&D primes otherwise. But a lot of our business historically has been with those direct relationship with allied foreign militaries. But through events recently like AUSA, there was a lot of discussion from senior leaders about, OK, there's probably gonna be top line pressure on the budget in defense no matter what happens with the election. But there is a real focus on preserving modernization.
The three dials 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 after four decades largely without significant modernization transformation, now is the time. And if we look at the priorities that we're aligned against and the work that we've been doing for the past two years, we think we're well-positioned there. But look, agree. There's a lot of uncertainty, a lot of work yet for us to do, but that's our perspective right now.
Michael Ciarmoli -- Truist -- Analyst
Just on a follow-up on that modernization. I mean, have you guys stress tested the unmanned portfolio? I mean, Army 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, these could all potentially be bill payers with modernization for some of those slowing. Is that sort of contemplated in your frameworks even though soldier-level unmanned, ground unmanned are priority, they might have to give way to hypersonics, autonomous, other kinda strategic-level systems?
Jim Cannon -- President And Chief Executive Officer
So I look at it a bit differently. I think that's a great debate for us to have. One, the market is being created now with these small unmanned systems. And the impact they have at the squad and the platoon level around the Army's modernization effort of soldier lethality is changing tactics, techniques and procedures. And things like the Black Hornet are only now just getting fielded. So as 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 lethality and survivability. Or if you look at future vertical lift, unmanned systems in 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 big, bet, huge unmanned systems tied to one line item that could be struck in 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 warfare. But no doubt, there'll be winners and losers in the budget to come. I'm actually pretty doggone confident about where we fit in this small group on air/ground space.
Michael Ciarmoli -- Truist -- Analyst
Got it. Thanks, guys.
Jim Cannon -- President And Chief Executive Officer
Thank you.
Operator
Our next question comes from Jeffrey Kessler with Imperial Capital. Please proceed with your question.
Jeffrey Kessler -- Imperial Capital -- Analyst
Thank you. And thank you, Jim and Carol. I'm interested in finding out, obviously, in the other areas of industrial technology since that's been a slow point, but you've 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 some of the specific products, what are some of the specific areas that you see could open up, whenever it is, in 2021, 2022, 2023 that are being -- that are heavily in discussion now, but are just being put off, obviously, for current environmental reasons?
Jim Cannon -- President And Chief Executive Officer
Yeah. Jeff, that's a great question. The area I would point to immediately would be infrastructure around our intelligent traffic systems. And that's a part of various smart city initiatives, a part of certainly, safety in cities, traffic flow and 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 been sort of put on hold. A lot of them happen, depending on the country and region at the state municipal level, and budgets have been strained. But the requirement demands are still there, and it's also to do with infrastructure. And there's a lot of support right across different government agencies and regions to continue to make investments in infrastructure, and technology is a big part of that. Not just building new roads, new bridges, but building them in a way that's smart, that can be safe 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, too, have a lot of projects, whether they're tied to data centers, rail or other infrastructure security, where we have differentiated solutions, they've been postponed, delayed effectively Eventually, we feel like that demand is still there and will come back. And then the one that I mentioned earlier is optical gas imaging. This is a persistent and continued problem, not just with aged infrastructure and natural gas leaks and such, but regulation. And as there -- is there -- if there is more and more environmental regulation around emissions and such, demand for these products will increase. Not just in the oil and gas industry, but, for example, in things like the cruise industry. If they go into protected environments, fjords in Norway or other places, they need to quantify their emissions. And with optical gas imaging, they can do that. I hope that's informative, Jeff.
Jeffrey Kessler -- Imperial Capital -- Analyst
Yeah. And just quickly and directly related to that. Some of the chip manufacturers, actually, obviously, there's -- with folks like Dahua and Hikvision being kind of sidelined by the U.S. government at this point, there are other chip makers that are coming into the mix here. And they are talking about -- obviously, ADAS is on their lips like every two seconds. But it's more than ADAS. It's somewhat related to what you just said about unmanned -- just unmanned systems in general, and traffic flow. And I'm wondering if you are -- you're in discussions with any of these chip makers, and what they're bringing to you in terms of where do they see the timing of all of this coming out.
Jim Cannon -- President And Chief Executive Officer
Yeah. I don't want to mention any specific conversations that we're having in folks, 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, ADAS. And we continue to form exclusive relationships with leading ADAS developers and work to qualify our systems from a safety standpoint and such. As I mentioned in the prepared remarks, really believe that's gonna be one of our largest long-term addressable markets. But it's still two to four years away from a real impact on revenue. But certainly, we're not the only person that's 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.
Jeffrey Kessler -- Imperial Capital -- Analyst
Okay, great. Yeah, thank you very much.
Operator
Our next question comes from Louie DiPalma with William Blair. Please proceed with your question.
Louie DiPalma -- William Blair -- Analyst
Jim, Carol, and [Unidentified Speaker], good morning.
Jim Cannon -- President And Chief Executive Officer
Good morning, Louie.
Louie DiPalma -- William Blair -- Analyst
Jim and Carol, you touched upon this in several answers related to the contrast in growth rates between the legacy sensors and your unmanned systems. 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 growth rate for 2020 versus 2019?
Jim Cannon -- President And Chief Executive Officer
Yeah. I will not break out that level of fidelity. I will make a couple of broad statements about it. Our unmanned portfolio is significant and growing from what was a small base with just Prox, then Aeryon, then Endeavor. And then 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, and are delivering now, but really begin to ramp through next year on that unmanned side. So Soldier Borne System -- or Sensor; the Manned Transportable Robotic System, the -- that's MTRS; the SubT program; NBCRV SSU, most all of those are on the unmanned side. So we're gonna 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 and programs related there in the near term aren't being made. And you'll see in the coming year, and already with the 380 times that I mentioned, a really compelling set of new products to come out. Again, airborne ISRT and decision to support that falls squarely there are central pillars of our strategy.
Louie DiPalma -- William Blair -- Analyst
Okay. And is -- like for 2020, is like the implied growth rate for the legacy sensors, is it like in the negative 20% range? Is it that extreme? I know in the past, you've spoken about how most of your sensor products are not part of specific programs of record, and that has resulted in pressure. But should these new products that you're releasing in 2021, should that like alleviate this pressure associated with how -- like there's still not gonna be part of programs of record unless you win future vertical lift in some of these other programs?
Jim Cannon -- President And Chief Executive Officer
Right. Well, it's not that extreme. I don't wanna cite exactly what that rate is, but it's not as extreme as you mentioned. 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 militaries. So there's no one program, future vertical lift or other upgrades, that growth on that side hinges upon. It is pretty broad-brushed. But this year has been a dynamic in that for U.S. DoD, a lot of those upgrades sensor decisions are dependent upon what happens with future vertical lift and then other legacy airframes. And internationally, with COVID, a lot of those decisions are delayed. The requirement still there will go forward, there's 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, outpowered the person's ability to digest an action on that information. What we're gonna see more and more with these new products is more intuitive 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 and integrated systems business, that's where the DR-SKO order resided -- or program resided that went into life. That side of the business has been able to comp and grow through.
Louie DiPalma -- William Blair -- Analyst
Sounds good. And one last one. With the rebound in Raymarine, is divesting that asset back on the table?
Jim Cannon -- President And Chief Executive Officer
So Raymarine has had a very strong couple of quarters with growth and profitability reaching, I think, near record levels. We're always evaluating what's the best fit for our portfolio. Right now, we have no immediate decision to announce. Instead, we're focused on running that business, continuing to innovate, take market share for the near term.
Louie DiPalma -- William Blair -- Analyst
Sounds good. Thanks, Jim and Carol.
Operator
At this time, I would like to turn the call back over to management for closing comments.
Jim Cannon -- President And Chief Executive Officer
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 achieve our commitments with integrity and purpose to innovate The World's Sixth Sense in order to save lives and livelihood is commendable. We look forward to updating you on our progress when we report our 2020 fourth quarter results. Thank you, and please stay safe and healthy.
Operator
[Operator Closing Remarks]
Duration: 73 minutes
Call participants:
Sara Keith -- Investor Relations
Jim Cannon -- President And Chief Executive Officer
Carol Lowe -- Executive Vice President And Chief Financial Officer
Eric Ruden -- Baird -- Analyst
Jim Ricchiuti -- Needham & Company -- Analyst
Ken Herbert -- Canaccord -- Analyst
Michael Ciarmoli -- Truist -- Analyst
Jeffrey Kessler -- Imperial Capital -- Analyst
Louie DiPalma -- William Blair -- Analyst
