FLIR Systems, Inc.
FLIR SYSTEMS INC (Form: 10-Q, Received: 08/07/2006 16:37:21)
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _______________ to _________________

Commission file number 0-21918

FLIR Systems, Inc.

(Exact name of Registrant as specified in its charter)

 

Oregon   93-0708501
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

27700A SW Parkway Avenue, Wilsonville, Oregon   97070
(Address of principal executive offices)   (Zip Code)

(503) 498-3547

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x     No   ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer   x              Accelerated filer   ¨              Non-accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   ¨     No   x

At July 31, 2006, there were 68,635,146 shares of the Registrant’s common stock, $0.01, par value, outstanding.

 



Table of Contents

INDEX

 

PART I. FINANCIAL INFORMATION   
Item 1.   

Financial Statements

  
  

Consolidated Statements of Income – Three Months and Six Months Ended June 30, 2006 and 2005 (unaudited)

   1
  

Consolidated Balance Sheets – June 30, 2006 and December 31, 2005 (unaudited)

   2
  

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2006 and 2005 (unaudited)

   3
  

Notes to the Consolidated Financial Statements (unaudited)

   4
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   19
Item 4.   

Controls and Procedures

   19
PART II. OTHER INFORMATION   
Item 1.   

Legal Proceedings

   20
Item 1A.   

Risk Factors

   20
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   20
Item 3.   

Defaults Upon Senior Securities

   20
Item 4.   

Submission of Matters to a Vote of Shareholders

   20
Item 5.   

Other Information

   21
Item 6.   

Exhibits

   21
   Signature    22


Table of Contents

PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2006     2005     2006     2005  

Revenue

   $ 138,550     $ 130,966     $ 255,889     $ 239,283  

Cost of goods sold

     64,639       59,639       121,130       109,370  
                                

Gross profit

     73,911       71,327       134,759       129,913  

Operating expenses:

        

Research and development

     15,166       13,970       30,395       27,225  

Selling, general and administrative

     29,696       25,031       56,449       49,227  
                                

Total operating expenses

     44,862       39,001       86,844       76,452  

Earnings from operations

     29,049       32,326       47,915       53,461  

Interest expense

     1,953       1,972       3,877       3,967  

Other income, net

     (2,725 )     (2,852 )     (3,426 )     (3,586 )
                                

Earnings before income taxes

     29,821       33,206       47,464       53,080  

Income tax provision

     8,410       8,634       13,394       13,801  
                                

Net earnings

   $ 21,411     $ 24,572     $ 34,070     $ 39,279  
                                

Net earnings per share:

        

Basic

   $ 0.31     $ 0.35     $ 0.49     $ 0.56  
                                

Diluted

   $ 0.28     $ 0.31     $ 0.45     $ 0.50  
                                

Weighted average shares outstanding:

        

Basic

     69,109       69,519       69,136       69,536  
                                

Diluted

     80,801       81,990       81,001       82,273  
                                

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

     June 30,
2006
  

December 31,

2005

 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 143,321    $ 107,057  

Accounts receivable, net

     125,894      142,782  

Inventories, net

     121,903      103,837  

Prepaid expenses and other current assets

     36,975      33,153  

Deferred income taxes, net

     18,709      18,709  
               

Total current assets

     446,802      405,538  

Property and equipment, net

     74,629      59,479  

Deferred income taxes, net

     8,636      8,415  

Goodwill

     159,634      158,065  

Intangible assets, net

     44,172      46,901  

Other assets

     15,783      15,981  
               
   $ 749,656    $ 694,379  
               
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 35,559    $ 34,477  

Deferred revenue

     11,849      10,297  

Accrued payroll and related liabilities

     20,383      20,374  

Accrued product warranties

     5,283      5,059  

Advance payments from customers

     5,029      5,013  

Other current liabilities

     9,530      11,626  

Accrued income taxes

     5,815      3,148  

Current portion of long-term debt

     7      56  
               

Total current liabilities

     93,455      90,050  

Long-term debt

     206,589      206,155  

Deferred tax liability, net

     10,641      10,779  

Pension and other long-term liabilities

     19,210      18,413  

Commitments and contingencies

     

Shareholders’ equity:

     

Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2006, and December 31, 2005

     —        —    

Common stock, $0.01 par value, 200,000 shares authorized, 69,290 and 69,216 shares issued at June 30, 2006, and December 31, 2005, respectively, and additional paid-in capital

     213,240      212,005  

Retained earnings

     197,718      163,648  

Accumulated other comprehensive earnings (loss)

     8,803      (6,671 )
               

Total shareholders’ equity

     419,761      368,982  
               
   $ 749,656    $ 694,379  
               

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

    

Six Months Ended

June 30,

 
     2006     2005  

Cash flows from operating activities:

    

Net earnings

   $ 34,070     $ 39,279  

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

     9,446       5,914  

Disposals and write-offs of property and equipment

     (115 )     (27 )

Deferred income taxes

     (988 )     (2,801 )

Stock-based compensation arrangements

     4,970       —    

Income tax benefit of stock options

     3,176       7,025  

Excess tax benefit from stock-based compensation arrangements

     (1,984 )     —    

Changes in operating assets and liabilities (excluding effect of acquisitions):

    

Decrease in accounts receivable

     20,989       1,645  

Increase in inventories

     (14,570 )     (8,243 )

Increase in prepaid expenses and other current assets

     (2,955 )     (679 )

Decrease (increase) in other assets

     203       (254 )

Increase in accounts payable

     336       1,304  

Increase in deferred revenue

     1,229       1,258  

Decrease in accrued payroll and other liabilities

     (3,394 )     (8,324 )

Increase (decrease) in accrued income taxes

     2,739       (5,803 )

Increase in pension and other long-term liabilities

     405       894  
                

Cash provided by operating activities

     53,557       31,188  
                

Cash flows from investing activities:

    

Additions to property and equipment

     (19,467 )     (17,698 )

Proceeds from sale of property and equipment

     390       56  

Business acquisitions, net of cash acquired

     (99 )     (4,157 )

Other investments

     (17 )     (1 )
                

Cash used by investing activities

     (19,193 )     (21,800 )
                

Cash flows from financing activities:

    

Repayment of capital leases and other long-term debt

     (53 )     (52 )

Repurchase of common stock

     (15,419 )     (25,524 )

Proceeds from exercise of stock options

     6,313       14,789  

Proceeds from shares issued pursuant to employee stock purchase plan

     1,704       1,485  

Excess tax benefit from stock-based compensation arrangements

     1,984       —    
                

Cash used by financing activities

     (5,471 )     (9,302 )
                

Effect of exchange rate changes on cash

     7,371       (12,796 )
                

Net increase (decrease) in cash and cash equivalents

     36,264       (12,710 )

Cash and cash equivalents, beginning of period

     107,057       120,692  
                

Cash and cash equivalents, end of period

   $ 143,321     $ 107,982  
                

Schedule of non-cash financing activities:

    

License rights acquired

   $ —       $ 4,146  
                

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Basis of Presentation

The accompanying consolidated financial statements of FLIR Systems, Inc. (the “Company”) are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2006.

 

Note 2. Stock-based Compensation

The Company has a stock-based compensation program that provides equity incentives for employees, consultants and directors. This program includes incentive and non-statutory stock options and nonvested stock awards (referred to as deferred stock awards) granted under three plans, the FLIR Systems, Inc. 1992 Stock Incentive Plan (the “1992 Plan”), the FLIR Systems, Inc. 1993 Stock Option Plan for Non-Employee Directors (the “1993 Plan”) and the FLIR Systems, Inc. 2002 Stock Incentive Plan (the “2002 Plan”). Prior to January 1, 2006, all stock options granted were time-based with vesting schedules ranging from immediate vesting to vesting over three years and generally expire ten years from the grant date. The Company has discontinued issuing option awards out of the 1992 Plan and the 1993 Plan, but previously granted options under those plans remain outstanding until their expiration.

During 2006, the Company also began granting performance-based options and deferred stock awards. The performance-based options’ vesting is contingent upon meeting certain diluted earnings per share growth targets in three independent tranches over a three year period and the options expire ten years from the grant date. The vesting of each tranche is not dependent on the other tranches. Deferred stock awards are time-based and generally vest over a three year period.

Additionally, the Company has an Employee Stock Purchase Plan (the “ESPP”) which allows employees to purchase shares of the Company’s Stock at 85% of the fair market value at the lower of either the date of enrollment or the purchase date.

Shares issued as a result of stock option exercises, deferred stock and ESPP purchases are new shares.

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), requiring the Company to recognize expense related to the fair value of its stock-based compensation awards. The Company has elected to use the modified prospective transition method as permitted by SFAS No. 123(R) and therefore has not restated the financial results for prior periods.

 

4


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Stock-based Compensation—(Continued)

 

Under the modified prospective transition method, stock-based compensation expense is recognized for the remaining requisite service of all stock-based compensation awards granted prior to January 1, 2006, (determined under SFAS No. 123, “Accounting for Stock-based Compensation”) and all stock-based compensation awards granted subsequent to January 1, 2006, based on the grant date estimated fair value (determined under SFAS No. 123(R)). The Company uses the Black-Scholes option pricing model to estimate the fair value of all stock-based compensation awards on the date of grant, except for deferred stock awards which are valued at the fair market value on the date of grant. The Company recognizes the compensation expense for time-based options and deferred stock awards on a straight-line basis over the requisite service period of each award. The compensation expense for each tranche of performance-based options is recognized during the year the related performance criteria is met because each tranche is independent of the others and if the performance criteria in a particular year is not met, the related tranche does not vest.

The following table sets forth the stock-based compensation expense and related tax benefit recognized in the Consolidated Statement of Income (in thousands):

 

     Three Months Ended
June 30, 2006
   

Six Months Ended

June 30, 2006

 

Cost of goods sold

   $ 20     $ 375  

Research and development

     809       1,409  

Selling, general and administrative

     2,042       3,186  
                

Stock-based compensation expense before income taxes

     2,871       4,970  

Income tax benefit

     (690 )     (1,015 )
                

Total stock-based compensation expense after income taxes

   $ 2,181     $ 3,955  
                

Stock-based compensation costs of $491,000 were capitalized in inventory as of June 30, 2006. As of June 30, 2006, the Company had $25,756,000 of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 1.9 years.

Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” No significant stock-based compensation expenses were recognized prior to the adoption of SFAS No. 123(R) since options granted under the Company’s plan had an exercise price equal to the market value of the underlying stock on the date of grant.

 

5


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Stock-based Compensation—(Continued)

 

The following table presents the impact of the adoption of SFAS No. 123(R) on selected line items from the Company’s consolidated financial statements for the three months and six months ended June 30, 2006 (in thousands, except per share amounts):

 

    

Three Months Ended

June 30, 2006

  

Six Months Ended

June 30, 2006

 
     As reported
under SFAS
No. 123(R)
   If reported
under
APB 25
   As reported
under SFAS
No. 123(R)
   

If reported
under

APB 25

 

Consolidated Statement of Income:

          

Earnings from operations

   $ 29,049    $ 30,930    $ 47,915     $ 51,441  

Earnings before income taxes

   $ 29,821    $ 31,702    $ 47,464     $ 50,990  

Net earnings

   $ 21,411    $ 22,951    $ 34,070     $ 37,081  

Basic earnings per share

   $ 0.31    $ 0.33    $ 0.49     $ 0.54  

Diluted earnings per share

   $ 0.28    $ 0.30    $ 0.45     $ 0.48  

Consolidated Statement of Cash Flows:

          

Net cash provided by operating activities

         $ 53,557     $ 55,541  

Net cash used by financing activities

         $ (5,471 )   $ (7,455 )

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months and six months ended June 30, 2005 (in thousands, except per share amounts):

 

     Three Months Ended
June 30, 2005
   

Six Months Ended

June 30, 2005

 

Net earnings – as reported

   $ 24,572     $ 39,279  

Deduct: Total stock-based compensation expense determined under fair value method, net of tax

     (2,357 )     (9,222 )
                

Net earnings – pro forma

   $ 22,215     $ 30,057  
                

Earnings per share:

    

Basic – as reported

   $ 0.35     $ 0.56  

Diluted – as reported

   $ 0.31     $ 0.50  

Earnings per share:

    

Basic – pro forma

   $ 0.32     $ 0.43  

Diluted – pro forma

   $ 0.29     $ 0.39  

 

6


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Stock-based Compensation—(Continued)

 

The fair value of the stock-based awards, as determined under the Black-Scholes model, granted in the three months and six months ended June 30, 2006 and 2005 reported above was estimated with the following weighted-average assumptions:

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2006     2005     2006     2005  

Stock Option Awards:

        

Risk-free interest rate

   4.9 %   3.7 %   4.7 %   3.5 %

Expected dividend yield

   0.0 %   0.0 %   0.0 %   0.0 %

Expected term

   3.5 years     3.0 years     2.6 years     3.0 years  

Expected volatility

   39.9 %   42.8 %   39.9 %   43.8 %

Employee Stock Purchase Plan:

        

Risk-free interest rate

   5.0 %   2.7 %   5.0 %   2.7 %

Expected dividend yield

   0.0 %   0.0 %   0.0 %   0.0 %

Expected term

   6 months     6 months     6 months     6 months  

Expected volatility

   38.3 %   39.4 %   38.3 %   39.4 %

The Company uses the US Treasury (constant maturity) interest rate on the date of grant as the risk-free interest rate and uses historical volatility as the expected volatility. The Company’s determination of expected term is based on an analysis of historical and expected exercise patterns. In 2006, over 80 percent of stock options granted were performance-based options whereas prior to 2006, all stock options were time-based options. The difference in the nature of these awards has been taken into consideration in determining the expected term.

The weighted-average fair value of stock-based compensation awards granted and vested, and the intrinsic value of options exercised during the period were (in thousands, except per share amounts):

 

     Three Months Ended
June 30,
  

Six Months Ended

June 30,

     2006    2005    2006    2005

Stock Option Awards:

           

Grant date fair value per share

   $ 8.95    $ 8.51    $ 7.49    $ 9.62

Total fair value of awards granted

   $ 1,526    $ 1,363    $ 9,436    $ 22,358

Total fair value of awards vested

   $ 783    $ 1,498    $ 4,854    $ 14,541

Total intrinsic value of options exercised

   $ 4,707    $ 1,562    $ 8,166    $ 17,630

Deferred Stock Awards:

           

Grant date fair value per share

   $ 25.02      —      $ 25.12      —  

Total fair value of awards granted

   $ 2,402      —      $ 12,474      —  

Employee Stock Purchase Plan:

           

Grant date fair value per share

   $ 6.30    $ 5.40    $ 6.30    $ 5.40

Total fair value

   $ 571    $ 762    $ 571    $ 762

The total amount of cash received from the exercise of stock options in the three months and six months ended June 30, 2006 was $3,869,000 and $6,313,000, respectively, and the related tax benefit realized from the exercise of the stock options was $1,839,000 and $3,176,000 respectively.

 

7


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Stock-based Compensation—(Continued)

 

Information with respect to stock option activity is as follows:

 

     Shares     Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term
  

Aggregate
Intrinsic Value

(in thousands)

Outstanding at December 31, 2005

   8,395,674     $ 18.09    6.4   

Granted

   1,272,500       25.20      

Exercised

   (596,395 )     10.58      

Forfeited

   (68,063 )     30.53      
                    

Outstanding at June 30, 2006

   9,003,716     $ 19.50    6.4    $ 56,675
                        

Exercisable at June 30, 2006

   6,943,807     $ 17.19    5.6    $ 56,383
                        

1,056,200 performance-based options were granted, net of forfeitures, during the six months ended June 30, 2006 and were outstanding at June 30, 2006.

Information with respect to deferred stock activity is as follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value
   Weighted
Average
Remaining
Contractual
Term
  

Aggregate
Intrinsic Value

(in thousands)

Outstanding at December 31, 2005

   —       $ —        

Granted

   496,620       25.12      

Vested

   —         —        

Forfeited

   (12,430 )     25.14      
                    

Outstanding at June 30, 2006

   484,190       25.12    9.7    $ —  
                        

Exercisable at June 30, 2006

   —       $ —      —      $ —  
                        

There were 97,659 shares issued under the Employee Stock Purchase Plan during the six months ended June 30, 2006. There were 4,621,264 shares available at June 30, 2006 for future issuance under the Employee Stock Purchase Plan.

 

Note 3. Net Earnings Per Share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive, and from the assumed conversion of the $210 million convertible notes. The number of additional shares from the assumed exercise of stock options is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. The conversion of the convertible notes is assumed to have taken place on the date of issuance. In addition, net earnings used for purposes of computing diluted earnings per share is reported net earnings adjusted for interest costs of the convertible notes, net of statutory tax, as if the conversion had taken place when the convertible notes were issued.

 

8


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3. Net Earnings Per Share—(Continued)

 

The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):

 

     Three Months Ended
June 30,
  

Six Months Ended

June 30,

     2006    2005    2006    2005

Numerator for earnings per share:

           

Net earnings, as reported

   $ 21,411    $ 24,572    $ 34,070    $ 39,279

Interest associated with convertible notes, net of tax

     1,094      1,094      2,189      2,189
                           

Net earnings available to common shareholders – diluted

   $ 22,505    $ 25,666    $ 36,259    $ 41,468
                           

Denominator:

           

Weighted average number of common shares outstanding

     69,109      69,519      69,136      69,536

Assumed exercises of stock options and vesting of nonvested shares, net of shares assumed reacquired under the treasury stock method

     2,229      3,008      2,402      3,274

Assumed conversion of convertible notes

     9,463      9,463      9,463      9,463
                           

Diluted shares outstanding

     80,801      81,990      81,001      82,273
                           

The effect of stock options for the three months ended June 30, 2006 and 2005 that aggregated 2,507,000 and 2,178,000 shares, respectively, and for the six months ended June 30, 2006 and 2005 that aggregated 2,458,000 and 1,745,000, respectively, has been excluded for purposes of diluted earnings per share since the effect would have been anti-dilutive.

 

Note 4. Inventories

Inventories consist of the following (in thousands):

 

     June 30,
2006
   December 31,
2005

Raw material and subassemblies

   $ 75,089    $ 66,553

Work-in-progress

     33,498      23,994

Finished goods

     13,316      13,290
             
   $ 121,903    $ 103,837
             

 

Note 5. Accrued Product Warranties

The Company generally provides a one-year warranty on its products. A provision for the estimated future costs of warranty, based upon historical cost and product performance experience, is recorded when revenue is recognized. The following table summarizes the Company’s warranty liability and activity (in thousands):

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2006     2005     2006     2005  

Accrued product warranties, beginning of period

   $ 4,603     $ 5,345     $ 5,059     $ 5,465  

Amounts paid for warranty services

     (2,108 )     (1,131 )     (3,370 )     (1,897 )

Warranty provisions for products sold

     2,788       1,367       3,594       2,013  
                                

Accrued product warranties, end of period

   $ 5,283     $ 5,581     $ 5,283     $ 5,581  
                                

 

9


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 6. Credit Agreements

On April 28, 2004, the Company signed an amended and restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., Union Bank of California, N.A., and U.S. Bank National Association. The agreement provides for a $50 million, five-year revolving line of credit with an option for an additional $50 million until April 28, 2008. Under the Credit Agreement, borrowings will bear interest based upon the prime lending rate of the Bank of America or Eurodollar rates with a provision for a spread under/over such rates based upon the Company’s leverage ratio. At June 30, 2006, the interest rate ranged from 6.35% to 7.75%. The Credit Agreement contains four financial covenants that require the maintenance of certain leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth and a maximum level of capital expenditures, and is collateralized by substantially all assets of the Company. At June 30, 2006, the Company had no amounts outstanding under the Credit Agreement and was in compliance with these four financial covenants. The Company had $4.7 million of letters of credit outstanding under the Credit Agreement at June 30, 2006, which reduces the total available credit.

The Company, through two of its subsidiaries, has a 30 million Swedish Kroner (approximately $4.1 million) line of credit at 2.95% and a $2 million line of credit at 6.00% at June 30, 2006. At June 30, 2006, the Company had no amounts outstanding on these lines. The 30 million Swedish Kroner line of credit is secured primarily by accounts receivable and inventories of the Company’s Sweden subsidiary and is subject to automatic renewal on an annual basis. The $2 million line of credit is secured by substantially all assets of the Company’s United Kingdom subsidiary and is subject to renegotiation annually.

 

Note 7. Long-Term Debt

In June 2003, the Company issued $210 million of 3.0% senior convertible notes due 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933. The issuance was made through an initial offering of $175 million of the notes made on June 11, 2003, and the subsequent exercise in full by the underwriters of their option to purchase an additional $35 million of the notes on June 17, 2003. The net proceeds from the issuance were approximately $203.9 million. Interest is payable semiannually on June 1 and December 1. The holders of the notes may convert all or some of their notes into shares of the Company’s common stock at a conversion rate of 45.0612 shares per $1,000 principal amount of notes prior to the maturity date in certain circumstances. The Company may redeem for cash all or part of the notes on or after June 8, 2010. The proceeds were used primarily for general corporate purposes, which included the acquisition of Indigo Systems Corporation and other working capital and capital expenditure needs.

During the quarter ended September 30, 2004, one of the terms that allow for conversion of the Company’s convertible notes, as described in the prospectus, was met. As of June 30, 2006, no note holders have elected to convert their notes into Company stock.

 

10


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 8. Comprehensive Earnings

Comprehensive earnings include changes in cumulative translation adjustments and additional minimum pension liability adjustments, if any, on the Company’s pension plans that are reflected in shareholders’ equity instead of net earnings. The following table sets forth the calculation of comprehensive earnings for the periods indicated (in thousands):

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2006    2005     2006    2005  

Net earnings

   $ 21,411    $ 24,572     $ 34,070    $ 39,279  

Translation adjustment

     11,558      (13,834 )     15,474      (22,382 )
                              

Total comprehensive earnings

   $ 32,969    $ 10,738     $ 49,544    $ 16,897  
                              

Translation adjustments represent unrealized gains/losses in the translation of the financial statements of the Company’s subsidiaries in accordance with SFAS No. 52, “Foreign Currency Translation.” The Company has no intention of liquidating the assets of the foreign subsidiaries in the foreseeable future.

 

Note 9. Pension Plans

The Company previously offered most of the employees outside the United States participation in a defined benefit pension plan that has been curtailed. In addition, the Company offers a Supplemental Executive Retirement Plan for certain US executive officers of the Company. These plans are more fully described in Note 14 in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Components of net periodic benefit costs are as follows (in thousands):

 

     Three Months Ended
June 30,
  

Six Months Ended

June 30,

     2006    2005    2006    2005

Service costs

   $ 54    $ 61    $ 108    $ 123

Interest costs

     186      164      370      330

Net amortization and deferral

     106      70      214      138
                           

Net periodic pension costs

   $ 346    $ 295    $ 692    $ 591
                           

 

Note 10. Contingencies

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company believes it has recorded adequate provisions for any probable and estimable losses.

 

11


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 11. Operating Segments and Related Information

Operating Segments

The Company has determined its operating segments to be the Thermography, Government Systems and Commercial Vision Systems market segments.

The Thermography segment addresses a broad range of commercial and industrial applications utilizing infrared cameras to provide precise temperature measurement or other analytic information. Examples of markets served include predictive and preventive maintenance; process control; building inspection; electrical inspection; research and development; scientific analysis and gas detection.

The Government Systems and Commercial Vision Systems markets are both comprised of applications focused on providing enhanced vision capabilities utilizing infrared energy and in many cases additional sensor technologies such as visible cameras, low light cameras and lasers.

The Government Systems segment addresses mainly government markets such as military; paramilitary; homeland security and other program driven markets both within the United States and internationally. Most products contain multiple sensors and are deployed on airborne, maritime, land-based and man-portable platforms. Applications include search and rescue; force protection; surveillance; drug interdiction; maritime patrol and targeting.

The Commercial Vision Systems segment addresses mainly commercial markets including perimeter security, firefighting, marine, automotive and other transportation. These markets are characterized by rapidly growing volumes driven by declining costs for uncooled infrared technology.

During the three months ended June 30, 2006, the Company separated the Imaging segment into the Government Systems and Commercial Vision Systems segments described above. Accordingly, the Company has restated previously reported periods on a comparable basis.

The accounting policies of each of the segments are the same. The Company evaluates performance based upon revenue and earnings from operations. On a consolidated basis, this amount represents earnings from operations as represented in the Consolidated Statement of Income. Other consists of corporate expenses and certain other operating expenses not allocated to the operating segments for management reporting purposes.

Accounts receivable and inventories for operating segments are regularly reviewed by management and are reported below as segment assets. All remaining assets, liabilities, capital expenditures and depreciation are managed on a Company-wide basis.

 

12


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 11. Operating Segments and Related Information—(Continued)

 

Operating Segments—(Continued)

Operating segment information is as follows (in thousands):

 

     Three Months Ended
June 30,
   

Six Months Ended

June 30,

 
     2006     2005     2006     2005  

Revenue – External Customers:

        

Thermography

   $ 51,774     $ 45,153     $ 97,213     $ 86,515  

Government Systems

     62,012       65,993       115,406       114,687  

Commercial Vision Systems

     24,764       19,820       43,270       38,081  
                                
   $ 138,550     $ 130,966     $ 255,889     $ 239,283  
                                

Revenue – Intersegments:

        

Thermography

   $ —       $ —       $ —       $ —    

Government Systems

     4,424       11,060       6,452       21,037  

Commercial Vision Systems

     5,526       3,103       11,535       6,257  

Eliminations

     (9,950 )     (14,163 )     (17,987 )     (27,294 )
                                
   $ —       $ —       $ —       $ —    
                                

Earnings from operations:

        

Thermography

   $ 15,456     $ 12,980     $ 27,357     $ 25,421  

Government Systems

     15,160       23,822       24,692       36,765  

Commercial Vision Systems

     4,047       1,266       6,266       1,813  

Other

     (5,614 )     (5,742 )     (10,400 )     (10,538 )
                                
   $ 29,049     $ 32,326     $ 47,915     $ 53,461  
                                

 

     June 30,
2006
  

December 31,

2005

Segment assets (accounts receivable and inventories):

     

Thermography

   $ 64,430    $ 67,094

Government Systems

     148,412      142,318

Commercial Vision Systems

     34,955      37,207
             
   $ 247,797    $ 246,619
             

Revenue and Long-Lived Assets by Geographic Area

Information related to revenue by significant geographical location is as follows (in thousands):

 

     Three Months Ended
June 30,
  

Six Months Ended

June 30,

     2006    2005    2006    2005

United States

   $ 71,145    $ 76,050    $ 132,311    $ 133,009

Europe

     44,753      32,792      79,116      67,063

Other foreign

     22,652      22,124      44,462      39,211
                           
   $ 138,550    $ 130,966    $ 255,889    $ 239,283
                           

 

13


Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 11. Operating Segments and Related Information—(Continued)

 

Revenue and Long-lived Assets by Geographic Area—(Continued)

Long-lived assets are primarily comprised of net property and equipment and net identifiable intangible assets and goodwill. Long-lived assets by significant geographic locations are as follows (in thousands):

 

     June 30,
2006
  

December 31,

2005

United States

   $ 257,482    $ 250,430

Europe

     36,736      29,996
             
   $ 294,218    $ 280,426
             

Major Customers

Revenue derived from major customers is as follows (in thousands):

 

     Three Months Ended
June 30,
  

Six Months Ended

June 30,

     2006    2005    2006    2005

US Government

   $ 43,848    $ 49,890    $ 76,613    $ 82,964
                           

 

Note 12. Business Acquisitions

On May 12, 2005, the Company acquired for cash the net assets of Brysen Optical Corporation (“Brysen”), a maker of advanced optical coatings. The acquisition was accounted for as a purchase and the portion of the $4.2 million purchase price, which includes professional fees and other costs directly associated with the acquisition, that is in excess of the net assets acquired is reported in intangible assets and goodwill. The operations of Brysen are not material to the Company’s consolidated financial statements.

On November 23, 2005, the Company acquired for cash the outstanding stock of Scientific Materials Corporation (“SMC”), a supplier of laser assemblies, laser components and materials. The acquisition was accounted for as a purchase and the portion of the $13.6 million purchase price, which includes professional fees and other costs directly associated with the acquisition, that is in excess of the net assets acquired is reported in intangible assets and goodwill. The operations of SMC are not material to the Company’s consolidated financial statements.

 

14


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on current expectations, estimates and projections about the Company’s business, management’s beliefs, and assumptions made by FLIR’s management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports, including the Annual Report on Form 10-K for the year ended December 31, 2005. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date on which they were made and FLIR does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If the Company updates or corrects one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations

Revenue. Revenue for the three months ended June 30, 2006 increased by 5.8 percent, from $131.0 million in the second quarter of 2005 to $138.6 million in the second quarter of 2006. The Company’s revenue for the six months ended June 30, 2006 increased 6.9 percent, from $239.3 million in the first six months of 2005 to $255.9 million in the first six months of 2006.

Thermography revenue increased 14.7 percent, from $45.2 million in the second quarter of 2005 to $51.8 million in the second quarter of 2006. Thermography revenue increased 12.4 percent to $97.2 million for the first six months of 2006, from $86.5 million in the first six months of 2005. Higher Thermography revenue in the second quarter and first six months of 2006 was primarily due to unit sales of the InfraCAM ® product which was launched in 2006 and increased unit sales of E-Series products.

During the quarter ended June 30, 2006, the Company separated the Imaging segment into the Government Systems and Commercial Vision Systems segments. Accordingly, the Company has restated previously reported periods segment information on a comparable basis.

Government Systems revenue decreased $4.0 million, or 6.0 percent, from $66.0 million in the second quarter of 2005 to $62.0 million in the second quarter of 2006. The decrease in Government Systems revenue in the second quarter of 2006 compared to the same period in 2005 was primarily due to a decrease in sales of land-based products, partially offset by an increase in airborne products. Government Systems revenue for the six months ended June 30, 2006 increased slightly to $115.4 million from $114.7 million in the first six months of 2005.

Commercial Vision Systems revenue increased 24.9 percent, from $19.8 million in the second quarter of 2005 to $24.8 million in the second quarter of 2006. Commercial Vision Systems revenue for the six months ended June 30, 2006 increased 13.6 percent to $43.3 million, from $38.1 million in the first six months of 2005. The increase in Commercial Vision Systems revenue for the three months and six months ended June 30, 2006 compared to the same period in 2005 was due to increased unit sales across all product lines of the segment.

 

15


Table of Contents

The timing of deliveries against large contracts, especially for our Government Systems and Commercial Vision Systems products, can give rise to quarter-to-quarter and year-over-year fluctuations in the mix of revenue. Consequently, year-over-year comparisons for any given quarter may not be indicative of comparisons using longer time periods. While we currently expect an overall increase in total annual revenue for 2006 of between 12 percent and 14 percent, the mix of revenue between our three business segments and within certain product categories in our business segments will vary from quarter to quarter.

As a percentage of revenue, international sales were 48.7 percent and 41.9 percent for the quarters ended June 30, 2006 and 2005, respectively, and 48.3 percent and 44.4 percent for the six months ended June 30, 2006 and 2005, respectively. While the percentage of revenue from international sales will continue to fluctuate from quarter to quarter partially due to the timing of shipments under international and domestic government contracts, management anticipates that revenue from international sales as a percentage of total revenue will continue to comprise a significant percentage of revenue.

Gross profit. Gross profit for the quarter ended June 30, 2006 was $73.9 million compared to $71.3 million for the same quarter last year. As a percentage of revenue, gross profit decreased from 54.5 percent in the second quarter of 2005 to 53.3 percent in the second quarter of 2006. Gross profit for the six months ended June 30, 2006 was $134.8 million, or 52.7 percent of revenue, compared to $129.9 million, or 54.3 percent of revenue for the same period of 2005. The decrease in gross profit as a percentage of revenue was primarily due to a decline in Government Systems gross margin related to program and product mix. The gross profit for the six months ended June 30, 2006, included stock-based compensation expense of $375,000.

Research and development expenses. Research and development expenses for the second quarter of 2006 totaled $15.2 million, compared to $14.0 million in the second quarter of 2005. Research and development expenses for the six months ended June 30, 2006 totaled $30.4 million, compared to $27.2 million for the same period of 2005. The increase in research and development expenses was due to the continued investment in new product development in all business segments to enable future growth and the impact of stock-based compensation expense of $809,000 and $1.4 million recognized in the three months and six months ended June 30, 2006, respectively. As a percentage of revenue, research and development expenses were 10.9 percent and 10.7 percent for the three months ended June 30, 2006 and 2005, respectively, and 11.9 percent and 11.4 percent for the six months ended June 30, 2006 and 2005, respectively.

Selling, general and administrative expenses. Selling, general and administrative expenses were $29.7 million for the quarter ended June 30, 2006, compared to $25.0 million for the quarter ended June 30, 2005. Selling, general and administrative expenses were $56.4 million and $49.2 million for the six months ended June 30, 2006 and 2005, respectively. The increase in selling, general and administrative expenses was due to the continued growth in the business, including costs associated with the launch of the InfraCAM and other new products as well as stock-based compensation expense of $2.0 million and $3.2 million recognized in the three months and six months ended June 30, 2006. Included in selling, general and administrative expense are charges related to legal and professional fees associated with our indemnification and cost advancement payments on behalf of former officers who are the subject of criminal and civil enforcement actions. Such indemnification and cost advancement expenses totaled $18,000 and $1.3 million for the quarters ended June 30, 2006 and 2005, respectively, and $295,000 and $2.0 million for the six months ended June 30, 2006 and 2005, respectively. Selling, general and administrative expenses as a percentage of revenue were 21.4 percent and 19.1 percent for the quarters ended June 30, 2006 and 2005, respectively, and 22.1 percent and 20.6 percent for the six months then ended.

Interest expense. Interest expense for the second quarter and first six months of 2006 was $2.0 million and $3.9 million, respectively, compared to $2.0 million and $4.0 million for the same periods of 2005. Interest expense is primarily attributable to the accrual of interest on the convertible notes that were issued in June 2003 and the amortization of costs related to the issuance of the notes.

Other income/expense. For the quarter and six months ended June 30, 2006, we recorded other income of $2.7 million and $3.4 million, respectively, compared to $2.9 million and $3.6 million for the same periods of 2005. The other income in 2006 consists primarily of interest income earned on short-term investments and foreign currency transaction gains.

 

16


Table of Contents

Income taxes. The income tax provision of $13.4 million for the six months ended June 30, 2006, represents an effective tax rate of 28.2 percent. The effective tax rate for the first six months of 2005 was 26.0 percent. The higher effective tax rate for 2006 is due primarily to the impact of certain stock-based compensation expenses for financial reporting for which a tax deduction would not be allowed, and the inability to recognize tax credits for research and development as tax legislation related to the credits expired at the end of 2005. We expect the annual effective tax rate for the full year of 2006 to be approximately 26.5 percent to 27.5 percent, assuming the tax legislation on research and development tax credits is renewed in 2006. The effective tax rate is lower than the US Federal tax rate of 35% because of lower foreign tax rates, the effect of the current foreign tax structure and estimated tax credits.

Liquidity and Capital Resources

At June 30, 2006, we had cash and cash equivalents on hand of $143.3 million compared to $107.1 million at December 31, 2005. The increase in cash and cash equivalents was primarily due to cash provided from operations and proceeds from the exercise of stock options offset by capital expenditures and the repurchase of approximately 610,000 shares of our common stock.

Accounts receivable decreased from $142.8 million at December 31, 2005 to $125.9 million at June 30, 2006. The decrease was primarily attributable to collection of receivables generated from higher sales volumes during the quarter ended December 31, 2005, compared to sales volumes in the quarter ended June 30, 2006.

At June 30, 2006, we had inventories of $121.9 million compared to $103.8 million at December 31, 2005. The increase was primarily due to an increase in inventory in anticipation of planned increases in shipments in the second half of 2006.

Investing activities, principally related to capital expenditures, totaled $19.5 million and $17.7 million for the six months ended June 30, 2006 and 2005, respectively. Capital expenditures during the first six months of 2006 include the purchase and installation of new production equipment in Sweden and building expansion and improvements in Boston, Portland and Sweden and capitalization of software. Capital expenditures during the first six months of 2005 include the purchase of the Wilsonville, Oregon property and the acquisition of Brysen Optical Corporation.

Prepaid expenses and other current assets increased from $33.2 million at December 31, 2005 to $37.0 million at June 30, 2006. The increase was primarily due to an increase in sales demonstration units.

On April 28, 2004, the Company signed an amended and restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., Union Bank of California, N.A., and U.S. Bank National Association. The agreement provides for a $50 million, five-year revolving line of credit with an option for an additional $50 million until April 28, 2008. Under the Credit Agreement, borrowings will bear interest based upon the prime lending rate of the Bank of America or Eurodollar rates with a provision for a spread under/over such rates based upon the Company’s leverage ratio. At June 30, 2006, the interest rate ranged from 6.35% to 7.75%. The Credit Agreement contains four financial covenants that require the maintenance of certain leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth and a maximum level of capital expenditures, and is collateralized by substantially all assets of the Company. At June 30, 2006, the Company had no amounts outstanding under the Credit Agreement and was in compliance with these four financial covenants. The Company had $4.7 million of letters of credit outstanding under the Credit Agreement at June 30, 2006, which reduces the total available credit.

The Company, through two of its subsidiaries, has a 30 million Swedish Kroner (approximately $4.1 million) line of credit at 2.95% and a $2 million line of credit at 6.00% at June 30, 2006. At June 30, 2006, the Company had no amounts outstanding on these lines. The 30 million Swedish Kroner line of credit is secured primarily by accounts receivable and inventories of the Company’s Sweden subsidiary and is subject to automatic renewal on an annual basis. The $2 million line of credit is secured by substantially all assets of the Company’s United Kingdom subsidiary and is subject to renegotiation annually.

 

17


Table of Contents

In June 2003, we issued $210 million of 3.0% senior convertible notes due 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933. The issuance was made through an initial offering of $175 million of the notes made on June 11, 2003, and the subsequent exercise in full by the underwriters of their option to purchase an additional $35 million of the notes on June 17, 2003. The net proceeds from the issuance were approximately $203.9 million. Interest is payable semiannually on June 1 and December 1 of each year. The holders of the notes may convert all or some of their notes into shares of our common stock at a conversion rate of 45.0612 shares per $1,000 principal amount of notes prior to the maturity date in certain circumstances. We may redeem for cash all or part of the notes on or after June 8, 2010. The proceeds were used primarily for general corporate purposes, which included the acquisition of Indigo and other working capital and capital expenditure needs.

During the quarter ended September 30, 2004, one of the terms that allow for conversion of the convertible notes, as described in the prospectus, was met. As of June 30, 2006, no note holders have elected to convert their notes into our common stock. We do not anticipate any conversions before 2010.

We believe that our existing cash combined with the cash we anticipate to generate from operating activities and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant capital commitments for the coming year nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109 “Accounting for Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold of more-likely-than-not and a measurement attribute on all tax positions taken or expected to be taken in a tax return in order to be recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Company will adopt FIN 48 on January 1, 2007 and the Company is currently assessing the impact FIN 48 will have on the financial statements.

Critical Accounting Policies and Estimates

The Company reaffirms the critical accounting policies and our use of estimates as reported in our Form 10-K for the year ended December 31, 2005. In addition, the Company adopted SFAS No. 123(R) on January 1, 2006 which changed the Company’s accounting policies for the recognition of stock-based compensation. As described in Note 2 to the Consolidated Financial Statements, the determination of fair value for stock-based compensation awards requires the use of management’s estimates and judgments.

Contractual Obligations

There have been no significant changes to our contractual obligations since December 31, 2005.

 

18


Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the Company’s reported market risk since the filing of the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2006.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect these controls including any corrective actions with regard to significant deficiencies and material weaknesses during the period covered by this report.

 

19


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies,” the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management believes it has recorded adequate provisions for any probable and estimable losses.

 

Item 1A. Risk Factors

There has been no material change in the Company’s reported risk factors since the filing of the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 6, 2006.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In February 2006, the Board of Directors authorized the repurchase of up to an additional 5.0 million shares of our outstanding shares of common stock in the open market through February 7, 2007. All share repurchases are subject to applicable securities law, and are made at times and in amounts management deems appropriate.

During the three months ended June 30, 2006, the Company repurchased the following shares:

 

Period

   Total Number
of Shares
Purchased (1)
   Average
Price Paid
per Share
   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
  

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs

As of June 30, 2006

April 1 to April 30, 2006

   278,328    $ 25.09    278,328   

May 1 to May 31, 2006

   —        —      —     

June 1 to June 30, 2006

   —        —      —     
                   

Total

   278,328    $ 25.09    278,328    4,721,672
                     

(1) All of these shares were purchased in open market transactions.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Shareholders

The Company’s annual meeting of shareholders was held on April 26, 2006, at which the following persons were elected to the Board of Directors by a vote of shareholders, by the votes and for the terms indicated:

 

Director

   Vote   

Term

Ending

   For    Withheld
Authority
  

William W. Crouch

   63,737,895    328,316    2008

Earl R. Lewis

   59,107,383    4,958,828    2009

Steven E. Wynne

   63,264,779    801,432    2009

 

20


Table of Contents

In addition, the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2006 was approved by a vote of shareholders, by the following votes:

 

For

  

Against

  

Abstain

63,899,157

   132,590    34,464

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Number   

Description

31.1    Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
31.2    Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
32.1    Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
32.2    Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.

 

21


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

FLIR SYSTEMS, INC.

Date    August 7, 2006     /s/ S TEPHEN M. B AILEY
    Stephen M. Bailey
    Sr. Vice President, Finance and Chief Financial Officer
    (Principal Accounting and Financial Officer and Duly Authorized Officer)

 

22

Exhibit 31.1

I, Earl R. Lewis, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FLIR Systems, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control of financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date    August 7, 2006     /s/ E ARL R. L EWIS
    Earl R. Lewis
   

President and Chief Executive Officer

Exhibit 31.2

I, Stephen M. Bailey, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FLIR Systems, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control of financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date    August 7, 2006     /s/ S TEPHEN M. B AILEY
    Stephen M. Bailey
    Sr. Vice President, Finance and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FLIR Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Earl R. Lewis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date    August 7, 2006     /s/ E ARL R. L EWIS
    Earl R. Lewis
   

President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FLIR Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen M. Bailey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date    August 7, 2006     /s/ S TEPHEN M. B AILEY
    Stephen M. Bailey
   

Chief Financial Officer