FLIR Systems, Inc.
FLIR SYSTEMS INC (Form: 10-Q, Received: 08/06/2010 14:42:43)
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, 2010

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.)

27700 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 check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes   x     No   ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

At July 30, 2010, there were 158,113,330 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, 2010 and 2009 (unaudited)    1
   Consolidated Balance Sheets – June 30, 2010 and December 31, 2009 (unaudited)    2
   Consolidated Statements of Cash Flows – Six Months Ended June 30, 2010 and 2009 (unaudited)    3
   Notes to the Consolidated Financial Statements (unaudited)    4
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    14
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    17
Item 4.    Controls and Procedures    17
   PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    18
Item 1A.    Risk Factors    18
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    18
Item 3.    Defaults Upon Senior Securities    18
Item 5.    Other Information    18
Item 6.    Exhibits    19
   Signature    20


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,
     2010     2009    2010     2009

Revenue

   $ 331,133      $ 277,978    $ 618,431      $ 549,974

Cost of goods sold

     147,810        116,030      269,754        230,311
                             

Gross profit

     183,323        161,948      348,677        319,663

Operating expenses:

         

Research and development

     28,309        23,232      53,112        45,641

Selling, general and administrative

     65,199        54,055      121,407        105,995
                             

Total operating expenses

     93,508        77,287      174,519        151,636

Earnings from operations

     89,815        84,661      174,158        168,027

Interest expense

     900        1,727      2,124        4,505

Other (income) expense, net

     (1,926     1,092      (2,233     68
                             

Earnings before income taxes

     90,841        81,842      174,267        163,454

Income tax provision

     31,387        26,189      58,918        53,529
                             

Net earnings

   $ 59,454      $ 55,653    $ 115,349      $ 109,925
                             

Net earnings per share:

         

Basic

   $ 0.38      $ 0.37    $ 0.75      $ 0.75
                             

Diluted

   $ 0.37      $ 0.35    $ 0.72      $ 0.70
                             

Weighted average shares outstanding:

         

Basic

     154,495        149,948      153,702        146,901
                             

Diluted

     161,643        161,354      161,626        162,041
                             

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

 

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Table of Contents

FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

     June 30,
2010
    December 31,
2009
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 284,521      $ 422,047

Accounts receivable, net

     268,470        234,974

Inventories

     243,246        216,500

Prepaid expenses and other current assets

     89,433        93,276

Deferred income taxes, net

     13,337        13,231
              

Total current assets

     899,007        980,028

Property and equipment, net

     178,159        139,112

Deferred income taxes, net

     11,415        5,322

Goodwill

     267,491        262,331

Intangible assets, net

     59,679        59,180

Other assets

     155,657        48,571
              
   $ 1,571,408      $ 1,494,544
              
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 71,349      $ 53,319

Deferred revenue

     17,177        20,986

Accrued payroll and related liabilities

     34,789        39,809

Accrued product warranties

     17,299        9,438

Advance payments from customers

     9,222        8,616

Accrued expenses

     29,728        25,941

Accrued income taxes

     7,794        15,504

Other current liabilities

     11,849        13,273
              

Total current liabilities

     199,207        186,886

Long-term debt

     —          57,991

Deferred tax liability, net

     1,432        2,222

Accrued income taxes

     5,176        4,550

Pension and other long-term liabilities

     42,982        39,146

Commitments and contingencies

    

Shareholders’ equity:

    

Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2010, and December 31, 2009

     —          —  

Common stock, $0.01 par value, 500,000 shares authorized, 157,934 and 152,826 shares issued at June 30, 2010, and December 31, 2009, respectively, and additional paid-in capital

     433,033        389,316

Retained earnings

     922,652        807,303

Accumulated other comprehensive (loss) earnings

     (33,074     7,130
              

Total shareholders’ equity

     1,322,611        1,203,749
              
   $ 1,571,408      $ 1,494,544
              

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

 

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FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net earnings

   $ 115,349      $ 109,925   

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

    

Depreciation and amortization

     25,065        20,223   

Disposal and write-offs of property and equipment

     47        283   

Deferred income taxes

     (1,483     (2,501

Stock-based compensation plans

     12,922        11,517   

Cash inducement on exchange offer for convertible notes

     —          1,997   

Other non-cash items

     4,314        (1,536

Changes in operating assets and liabilities (net of acquisitions):

    

(Increase) decrease in accounts receivable

     (7,190     26,839   

Increase in inventories

     (12,141     (10,166

Decrease (increase) in prepaid expenses and other current assets

     7,218        (5,607

Increase in other assets

     (6,925     (2,673

Increase in accounts payable

     4,676        10,855   

Decrease in deferred revenue

     (3,599     (3,683

Decrease in accrued payroll and other liabilities

     (12,229     (29,495

(Decrease) increase in accrued income taxes

     (5,429     742   

Increase in pension and other long-term liabilities

     4,296        5,341   
                

Cash provided by operating activities

     124,891        132,061   
                

Cash flows from investing activities:

    

Additions to property and equipment

     (44,069     (29,723

Proceeds from sale of property and equipment

     210        2,884   

Business acquisition, net of cash acquired

     (174,695     (13,148

Other investments

     (1,000     (1,000
                

Cash used by investing activities

     (219,554     (40,987
                

Cash flows from financing activities:

    

Repayment of capital leases and other long-term debt, net

     (17     (16

Cash inducement on exchange offer for convertible notes

     —          (1,997

Repurchase of common stock

     (33,290     (49,205

Proceeds from shares issued pursuant to stock-based compensation plans

     6,351        8,965   

Excess tax benefit from stock-based compensation plans

     2,960        4,395   

Capital contribution

     55        165   
                

Cash used by financing activities

     (23,941     (37,693
                

Effect of exchange rate changes on cash

     (18,922     3,579   
                

Net (decrease) increase in cash and cash equivalents

     (137,526     56,960   

Cash and cash equivalents, beginning of period

     422,047        289,442   
                

Cash and cash equivalents, end of period

   $ 284,521      $ 346,402   
                

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

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (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 Company’s 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, 2009.

The accompanying consolidated 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, 2010.

Reclassification

A reclassification of $9.3 million has been made from other current assets to other current liabilities on the December 31, 2009 balance sheet to properly classify the balance of value added taxes payable as a current liability. This reclassification had no impact on previously reported results of operations or shareholders’ equity.

Note 2. Accounting for Convertible Debt

In June 2003, the Company issued $210 million of 3.0 percent senior convertible notes due in 2023. The net proceeds from the issuance were approximately $203.9 million. The Company determined that the expected life of the notes should be seven years since the notes were first redeemable in June 2010. The Company estimates that its nonconvertible borrowing rate for debt with a seven year maturity issued in June 2003 was 6.0 percent. Accordingly, the value of the liability component of the notes at the time of issuance was $174.4 million and the value of the equity component was $35.6 million.

In June 2010, $58.8 million of the outstanding convertible notes were converted into 5.3 million shares of the Company’s common stock in non-cash transactions.

The carrying amounts of the convertible notes are as follows (in thousands):

 

     June 30,
2010
    December 31,
2009
 

Liability component:

    

Principal amount

   $ —        $ 58,782   

Unamortized discount

     —          (706

Unamortized issuance costs

     —          (85
                
   $ —        $ 57,991   
                

Equity component

   $ (119,724   $ (119,724
                

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Accounting for Convertible Debt – (Continued)

 

The unamortized discount and issuance costs were amortized through May 2010. The effective interest rate of the convertible notes was 6%. Interest and amortization expense of the convertible notes recognized in the Consolidated Statements of Income are as follows (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Cash interest (3% coupon)

   $ 294    $ 687    $ 735    $ 1,948

Amortization of discount

     279      635      706      1,720

Amortization of issuance costs

     33      79      84      217
                           
   $ 606    $ 1,401    $ 1,525    $ 3,885
                           

Note 3. Stock-based Compensation

Stock-based compensation expense and related tax benefit recognized in the Consolidated Statements of Income are as follows (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Cost of goods sold

   $ 980      $ 822      $ 1,867      $ 1,602   

Research and development

     1,254        1,172        2,521        2,342   

Selling, general and administrative

     4,555        4,344        8,534        7,573   
                                

Stock-based compensation expense before income taxes

     6,789        6,338        12,922        11,517   

Income tax benefit

     (2,134     (1,946     (4,092     (3,421
                                

Total stock-based compensation expense after income taxes

   $ 4,655      $ 4,392      $ 8,830      $ 8,096   
                                

Stock-based compensation costs capitalized in inventory are as follows (in thousands):

 

     June 30,
     2010    2009

Stock-based compensation costs capitalized in inventory

   $ 764    $ 806
             

As of June 30, 2010, the Company had $41.3 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.1 years.

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3 . 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, 2010 and 2009 was estimated with the following weighted-average assumptions:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Stock Option Awards:

        

Risk-free interest rate

   1.5   1.5   1.5   1.5

Expected dividend yield

   0.0   0.0   0.0   0.0

Expected term

   4.3 years      4.3 years      4.3 years      4.3 years   

Expected volatility

   45.1   46.9   45.1   46.9

Employee Stock Purchase Plan:

        

Risk-free interest rate

   0.3   0.3   0.3   0.3

Expected dividend yield

   0.0   0.0   0.0   0.0

Expected term

   6 months      6 months      6 months      6 months   

Expected volatility

   23.0   60.9   23.0   60.9

The 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,
     2010    2009    2010    2009

Stock Option Awards:

           

Weighted average grant date fair value per share

   $ 11.52    $ 10.01    $ 11.52    $ 10.01

Total fair value of awards granted

   $ 7,299    $ 10,395    $ 7,299    $ 10,395

Total fair value of awards vested

   $ 3,036    $ 1,249    $ 7,200    $ 6,709

Total intrinsic value of options exercised

   $ 7,858    $ 3,136    $ 11,593    $ 11,171

Restricted Stock Unit Awards:

           

Weighted average grant date fair value per share

   $ 30.27    $ 25.64    $ 30.14    $ 25.60

Total fair value of awards granted

   $ 14,447    $ 15,678    $ 14,913    $ 15,975

Total fair value of awards vested

   $ 15,023    $ 11,944    $ 15,350    $ 16,810

Employee Stock Purchase Plan:

           

Weighted average grant date fair value per share

   $ 6.73    $ 8.37    $ 6.73    $ 8.37

Total fair value of shares estimated to be issued

   $ 786    $ 1,073    $ 786    $ 1,073

The total amount of cash received from the exercise of stock options in the three months ended June 30, 2010 and 2009 was $2.2 million and $2.0 million, respectively, and the related tax benefit realized from the exercise of the stock options was $2.5 million and $1.3 million, respectively. The total amount of cash received from the exercise of stock options in the six months ended June 30, 2010 and 2009 was $3.4 million and $6.4 million, respectively, and the related tax benefit realized from the exercise of the stock options was $2.9 million and $4.3 million, respectively.

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3 . Stock-based Compensation – (Continued)

 

Information with respect to stock option activity is as follows:

 

     Shares
(in thousands)
    Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value

(in  thousands)

Outstanding at December 31, 2009

   8,387      $ 15.81    5.6   

Granted

   633        30.27      

Exercised

   (525     6.55      

Forfeited

   (5     19.33      
                  

Outstanding at June 30, 2010

   8,490      $ 17.46    5.6    $ 102,473
                        

Exercisable at June 30, 2010

   7,139      $ 15.35    5.0    $ 100,274
                        

Vested and expected to vest at June 30, 2010

   8,422      $ 17.37    5.6    $ 102,363
                        

Information with respect to restricted stock unit activity is as follows:

 

     Shares
(in thousands)
    Weighted
Average
Grant Date
Fair Value

Outstanding at December 31, 2009

   1,226      $ 27.41

Granted

   495        30.14

Vested

   (508     26.16

Forfeited

   (19     28.56
            

Outstanding at June 30, 2010

   1,194      $ 29.06
            

There were approximately 124,000 shares issued under the 2009 Employee Stock Purchase Plan (the “2009 ESPP”) during the six months ended June 30, 2010. There were approximately 4,749,000 shares available at June 30, 2010 for future issuance under the 2009 ESPP.

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Net Earnings Per Share

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,
     2010    2009    2010    2009

Numerator for earnings per share:

           

Net earnings, as reported

   $ 59,454    $ 55,653    $ 115,349    $ 109,925

Interest associated with convertible notes, net of tax

     371      786      935      2,795
                           

Net earnings available to common shareholders – diluted

   $ 59,825    $ 56,439    $ 116,284    $ 112,720
                           

Denominator for earnings per share:

           

Weighted average number of common shares outstanding

     154,495      149,948      153,702      146,901

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

     3,189      3,155      3,300      3,409

Assumed conversion of convertible notes

     3,959      8,251      4,624      11,731
                           

Diluted shares outstanding

     161,643      161,354      161,626      162,041
                           

The effect of stock options and restricted stock units for the three and six months ended June 30, 2010 that aggregated 406,000 and 514,000, respectively, and for the three and six months ended June 30, 2009 that aggregated 704,000 shares and 834,000 shares, respectively, has been excluded for purposes of calculating diluted earnings per share since the effect would have been anti-dilutive

Note 5. Fair Value of Financial Instruments

As of June 30, 2010, the Company had $172.0 million of cash equivalents, which were primarily investments in money market funds. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets, in accordance with Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” The fair value of the Company’s forward currency contracts as of June 30, 2010 was not significant. The Company does not have any other financial assets or liabilities that are measured at fair value.

Note 6. Foreign Currency Exchange Rate Risk

The Company purchases derivative financial instruments on a limited basis to manage well-defined foreign currency risks. The Company enters into forward exchange contracts to hedge the value of material non-functional currency monetary asset and liability balances. The net effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions would not be material to the Company’s financial position or the results of operations.

The table below summarizes, by currency, the notional amounts of the forward exchange contracts in US dollars as of June 30, 2010 (in thousands):

 

     Buy    Sell

United States Dollar

   $ 10,100    $ 23,700

Euro

     42,265      7,055

British Pound Sterling

     938      1,563

Australian Dollar

     —        899

The “Buy” amounts represent the net US dollar equivalents of commitments to purchase foreign currencies, and the “Sell” amounts represent the net US dollar equivalent of commitments to sell foreign currencies. The foreign currency amounts have been translated into the US dollar equivalent value using the exchange rate at the reporting date.

Note 7. Accounts Receivable

Accounts receivable are net of an allowance for doubtful accounts of $3.0 million and $2.0 million at June 30, 2010 and December 31, 2009, respectively.

Note 8. Inventories

Inventories consist of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Raw material and subassemblies

   $ 160,422    $ 144,555

Work-in-progress

     43,761      37,732

Finished goods

     39,063      34,213
             
   $ 243,246    $ 216,500
             

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 9. Property and Equipment

Property and equipment are net of accumulated depreciation of $114.7 million and $102.9 million at June 30, 2010 and December 31, 2009, respectively.

Note 10. Goodwill

The carrying value of goodwill by reporting segment and the activity for the six months ended June 30, 2010 is as follows (in thousands):

 

     Government
Systems
    Thermography     Commercial
Vision
Systems
    Total  

Balance, December 31, 2009

   $ 37,584      $ 105,501      $ 119,246      $ 262,331   

Business acquisitions

     —          —          14,019        14,019   

Currency translation adjustments

     (345     (7,554     (1,037     (8,936

Other

     —          77        —          77   
                                

Balance, June 30, 2010

   $ 37,239        98,024        132,228        267,491   
                                

Note 11. Intangible Assets

Intangible assets are net of accumulated amortization of $60.4 million and $53.0 million at June 30, 2010 and December 31, 2009, respectively.

Note 12. Accrued Product Warranties

The following table summarizes the Company’s warranty liability and activity (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Accrued product warranties, beginning of period

   $ 9,196      $ 7,925      $ 9,438      $ 7,826   

Amounts paid for warranty services

     (1,415     (1,418     (4,148     (4,552

Warranty provisions for products sold

     1,896        1,437        4,387        4,670   

Accrued product warranties acquired

     7,622        151        7,622        151   
                                

Accrued product warranties, end of period

   $ 17,299      $ 8,095      $ 17,299      $ 8,095   
                                

Note 13. Credit Agreements

At June 30, 2010, the Company had no borrowings outstanding under its Credit Agreement, dated October 6, 2006, with Bank of America, N.A., Union Bank of California, N.A., U.S. Bank National Association and other Lenders, and $12.4 million of letters of credit outstanding, which reduces the total available credit.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 14. Long-Term Debt

Long-term debt consists of the following (in thousands):

 

     June 30,
2010
   December 31,
2009
 

Convertible notes

   $ —      $ 58,782   

Issuance cost and discount of the convertible notes

     —        (791
               
   $ —      $ 57,991   
               

Note 15. Shareholders’ Equity

The following table summarizes the common stock and additional paid-in capital activity during the six months ended June 30, 2010 (in thousands):

 

Common stock and additional paid-in capital, December 31, 2009

   $ 389,316   

Income tax benefit of common stock options exercised

     2,899   

Common stock issued pursuant to stock-based compensation plans, net

     2,566   

Stock-based compensation expense

     12,790   

Repurchase of common stock

     (33,290

Conversion of convertible debt

     58,752   
        

Common stock and additional paid in capital, June 30, 2010

   $ 433,033   
        

During the three months ended June 30, 2010, the Company repurchased 1,206,718 shares of the Company’s common stock under the February 2009 repurchase authorization by the Company’s Board of Directors pursuant to which the Company is authorized to repurchase up to 20.0 million shares of the Company’s outstanding common stock. This authorization will expire in February 2011.

Note 16. Comprehensive 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,
     2010     2009    2010     2009

Net earnings

   $ 59,454      $ 55,653    $ 115,349      $ 109,925

Translation adjustment

     (26,556     27,997      (40,204     7,140
                             

Total comprehensive earnings

   $ 32,898      $ 83,650    $ 75,145      $ 117,065
                             

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Contingencies

The Company and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.), (together, the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007, in the United States District Court for the Eastern District of Texas. On August 11, 2008, Raytheon Company was granted leave to file a second amended complaint. The complaint, as amended, asserted claims for tortious interference, patent infringement, trade secret misappropriation, unfair competition, breach of contract and fraudulent concealment. The FLIR Parties filed an answer to the second amended complaint and counterclaims on September 2, 2008, in which they denied all material allegations. On August 31, 2009, the court entered an order granting the FLIR Parties’ motion for summary judgment on Raytheon’s trade secret misappropriation claim based on the FLIR Parties’ statute of limitations defense. Raytheon has abandoned all of its other claims except its claims relating to four patents which are currently set for trial to commence on September 20, 2010. The Company intends to vigorously defend itself in this matter and is unable to estimate the amount or range of potential loss, if any, which might result if the outcome in this matter is unfavorable.

On July 10, 2008, plaintiffs William J. Parrish and E. Timothy Fitzgibbons filed an action against FLIR Systems, Inc. its affiliate Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.), Earl R. Lewis and James A. Fitzhenry (collectively, “Defendants”) in California Superior Court for the County of Santa Barbara asserting claims for negligent and intentional tortious interference with prospective economic relations. The claims arose from a prior action in the same court in which then-defendants Parrish and Fitzgibbons prevailed. On November 20, 2009, plaintiffs amended their complaint to add a malicious prosecution claim, as well as two additional claims for negligent and intentional tortious interference with prospective economic relations. On July 19, 2010, plaintiffs further amended their complaint to name the Company’s former counsel in the prior action as a defendant. Defendants intend to vigorously defend themselves in this matter and are unable to estimate the amount or range of potential loss, if any, which might result if the outcome in this matter is unfavorable.

Note 18. Income Taxes

As of June 30, 2010, the Company had approximately $6.0 million of net unrecognized tax benefits of which all $6.0 million would affect the Company’s effective tax rate if recognized. The Company anticipates a portion of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of statute of limitations.

The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2010, the Company had approximately $647,000 of accrued interest related to uncertain tax positions.

The Company currently has the following tax years open to examination by major taxing jurisdictions:

 

     Tax Years:

US Federal

   1999 – 2009

State of Oregon

   1999 – 2009

State of Massachusetts

   2005 – 2009

State of California

   2004 – 2009

Sweden

   2003 – 2009

United Kingdom

   2008 – 2009

Germany

   2004 – 2009

France

   2006 – 2009

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 19. Operating Segments and Related Information

Operating Segments

Operating segment information is as follows (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Revenue – External Customers:

        

Government Systems

   $ 167,883      $ 160,359      $ 326,229      $ 322,566   

Thermography

     71,357        66,777        146,919        130,708   

Commercial Vision Systems

     64,669        50,842        118,059        96,700   

Raymarine (Note 20)

     27,224        —          27,224        —     
                                
   $ 331,133      $ 277,978      $ 618,431      $ 549,974   
                                

Revenue – Intersegments:

        

Government Systems

   $ 7,627      $ 4,729      $ 13,193      $ 11,168   

Thermography

     2,146        3,061        4,276        5,357   

Commercial Vision Systems

     6,471        4,299        14,067        9,884   

Raymarine (Note 20)

     —          —          —          —     

Eliminations

     (16,244     (12,089     (31,536     (26,409
                                
   $ —        $ —        $ —        $ —     
                                

Earnings from operations:

        

Government Systems

   $ 65,845      $ 72,412      $ 128,629      $ 145,796   

Thermography

     16,678        15,374        36,847        31,324   

Commercial Vision Systems

     19,226        13,273        33,037        24,571   

Raymarine (Note 20)

     3,443        —          3,443        —     

Other

     (15,377     (16,398     (27,798     (33,664
                                
   $ 89,815      $ 84,661      $ 174,158      $ 168,027   
                                

 

     June 30,
2010
   December 31,
2009

Segment assets (accounts receivable, net and inventories):

     

Government Systems

   $ 285,351    $ 283,683

Thermography

     94,708      105,156

Commercial Vision Systems

     78,260      62,635

Raymarine (Note 20)

     53,397      —  
             
   $ 511,716    $ 451,474
             

Revenue and Long-Lived Assets by Geographic Area

Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

United States

   $ 168,923    $ 163,759    $ 334,432    $ 335,273

Europe

     84,387      47,771      148,968      107,726

Other international

     77,823      66,448      135,031      106,975
                           
   $ 331,133    $ 277,978    $ 618,431    $ 549,974
                           

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 19. Operating Segments and Related Information - (Continued)

 

Long-lived assets by significant geographic locations are as follows (in thousands):

 

     June 30,
2010
   December 31,
2009

United States

   $ 411,376    $ 387,169

Europe

     241,580      116,850

Other international

     8,030      5,175
             
   $ 660,986    $ 509,194
             

Major Customers

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

US Government

   $ 104,769    $ 115,273    $ 213,799    $ 238,714
                           

Note 20. Business Acquisitions

In May 2010, the Company acquired the outstanding stock of Raymarine Holdings Limited (“Raymarine”), a leading provider of a comprehensive range of electronic equipment for recreational boating and light commercial marine markets, for approximately $177.8 million in cash. Allocation of the purchase price to goodwill and identifiable intangible assets is subject to the final determination of the purchase price and the valuation of the assets acquired and liabilities assumed. The excess purchase price of approximately $123.1 million has been reported in Other Assets as of June 30, 2010.

In December 2009, the Company acquired all of the outstanding stock of Directed Perception, Inc. for approximately $20.2 million in cash. During the six months ended June 30, 2010, the Company completed its allocation of the purchase price and has recorded identifiable intangible assets and goodwill of approximately $4.8 million and $14.0 million, respectively, in the Commercial Vision Systems business segment.

The operating results of these acquisitions are included in the Company’s results of operations since their respective dates of acquisition.

Pro forma financial information has not been provided for these acquisitions as they are not material either individually or in the aggregate to the Company’s overall financial position.

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, 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 management’s current expectations, estimates, projections, and assumptions about the Company’s business. 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 the “Risk Factors” in Part II, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we 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, 2010 increased by 19.1 percent, from $278.0 million in the second quarter of 2009 to $331.1 million in the second quarter of 2010. Revenue for the six months ended June 30, 2010 increased 12.4 percent, from $550.0 million in the first six months of 2009 to $618.4 million in the first six months of 2010.

Government Systems revenue increased $7.5 million, or 4.7 percent, from $160.4 million in the second quarter of 2009 to $167.9 million in the second quarter of 2010. Government Systems revenue for the six months ended June 30, 2010 increased $3.7 million, or 1.1 percent, from $322.6 million in the first six months of 2009 to $326.2 million in the first six months of 2010. The increase in Government Systems revenue in the second quarter and the first six months of 2010 compared to the same periods in 2009 was primarily due to increased revenue from ground-based products and revenue from a business acquired in the fourth quarter of 2009 partially offset by a decrease in revenue from large stabilized gimbal products and maritime products.

Thermography revenue increased $4.6 million, or 6.9 percent, from $66.8 million in the second quarter of 2009 to $71.4 million in the second quarter of 2010. Thermography revenue for the six months ended June 30, 2010 increased $16.2 million, or 12.4 percent, from $130.7 million in the first six months of 2009 to $146.9 million in the first six months of 2010. The increase in Thermography revenue in the second quarter and the first six months of 2010 compared to the same periods in 2009 was primarily due to increased revenue in the United States and the Asia-Pacific region across most of the product lines, partially offset by a decline in revenue in Europe.

Commercial Vision Systems revenue increased $13.8 million, or 27.2 percent, from $50.8 million in the second quarter of 2009 to $64.7 million in the second quarter of 2010. Commercial Vision Systems revenue for the six months ended June 30, 2010 increased $21.4 million, or 22.1 percent, from $96.7 million in the first six months of 2009 to $118.1 million in the first six months of 2010. The increase in Commercial Vision Systems revenue in the second quarter and first six months of 2010 compared to the same periods in 2009 was primarily due to increased unit sales in our security, transportation and maritime product lines and the introduction in 2010 of the personal night vision systems products.

Revenue from Raymarine Holdings Limited and its subsidiaries (“Raymarine”) for the period ended June 30, 2010 was $27.2 million. We acquired Raymarine on May 14, 2010. The results of Raymarine are reported for the period from May 14, 2010 to June 30, 2010.

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 2010 of approximately 20 percent, the mix of revenue between our four business segments and within certain product categories in our business segments will vary from quarter to quarter.

 

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As a percentage of revenue, international sales were 49.0 percent and 41.1 percent for the quarters ended June 30, 2010 and 2009, respectively, and 45.9 percent and 39.0 percent for the six months ended June 30, 2010 and 2009, 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.

At June 30, 2010, we had an order backlog of $518 million. Backlog in the Government Systems, Thermography, Commercial Vision Systems and Raymarine divisions was $375 million, $22 million, $104 million and $17 million, respectively. Backlog is defined as orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.

     Gross profit. Gross profit for the quarter ended June 30, 2010 was $183.3 million compared to $161.9 million for the same quarter last year. Gross profit for the six months ended June 30, 2010 was $348.7 million compared to $319.7 million for the same period of 2009. Gross margin, defined as gross profit divided by revenue, decreased from 58.3 percent in the second quarter of 2009 to 55.4 percent in the second quarter of 2010, and from 58.1 percent in the first six months of 2009 to 56.4 percent in the first six months of 2010. The decrease in gross margin for both the three and six month periods in 2010 was primarily due to lower gross margin at Raymarine (which has historically lower gross margins than our other three business segments) and the product mix in our Government Systems division.

     Research and development expenses. Research and development expenses for the second quarter of 2010 totaled $28.3 million, compared to $23.2 million in the second quarter of 2009. Research and development expenses for the first six months of 2010 and 2009 were $53.1 million and $45.6 million, respectively. The increase in research and development expenses was due to increased investment in new product development in all business segments including acquisitions made during 2009 and 2010. As a percentage of revenue, research and development expenses were 8.5 percent and 8.4 percent for the three months ended June 30, 2010 and 2009, respectively, and 8.6 percent and 8.3 percent for the six months ended June 30, 2010 and 2009, respectively.

     Selling, general and administrative expenses. Selling, general and administrative expenses were $65.2 million for the quarter ended June 30, 2010, compared to $54.1 million for the quarter ended June 30, 2009. Selling, general and administrative expenses for the first six months of 2010 and 2009 were $121.4 million and $106.0 million, respectively. The increase in selling, general and administrative expenses was primarily due to increased spending in each of our business segments to drive future growth, including the operating expenses and acquisition related costs of businesses acquired during 2009 and 2010, partially offset by reduced corporate legal expenses. Selling, general and administrative expenses as a percentage of revenue were 19.7 percent and 19.4 percent for the quarters ended June 30, 2010 and 2009, respectively, and 19.6 percent and 19.3 percent for the six months ended June 30, 2010 and 2009, respectively.

     Interest expense. Interest expense for the second quarter and first six months of 2010 was $0.9 million and $2.1 million, respectively, compared to $1.7 million and $4.5 million for the same periods of 2009. Interest expense is primarily attributable to the accrual of interest on the convertible notes that were issued in June 2003 and the amortization of the discounts recorded on the notes and the costs related to the issuance of the notes. The decrease in interest expense in 2010 compared to the same periods of 2009 is primarily due to the conversions of our outstanding convertible notes in 2009 and 2010.

     Other income/expense. For the quarter and six months ended June 30, 2010, we recorded other income of $1.9 million and $2.2 million, respectively, compared to other expense of $1.1 million and $68,000 for the same periods of 2009. Other income in 2010 and other expense in 2009 primarily consist of income earned on investments and foreign currency gains and losses.

     Income taxes. The income tax provision of $31.4 million and $58.9 million for the three and six months ended June 30, 2010, represents an effective tax rate of 34.6 percent and 33.8 percent, respectively. The tax rate for the three months ended June 30, 2010 is higher than the six month rate due to the non-deductibility of acquisition costs incurred primarily during the second quarter. We expect the annual effective tax rate for the full year of 2010 to be approximately 32 percent to 34 percent. The effective tax rate is lower than the US Federal tax rate of 35 percent because of foreign tax rates and the effect of federal, foreign and state tax credits.

 

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Liquidity and Capital Resources

At June 30, 2010, we had cash and cash equivalents on hand of $284.5 million compared to $422.0 million at December 31, 2009. The decrease in cash and cash equivalents was primarily due to the acquisition of Raymarine, capital expenditures and the purchase of shares of our outstanding common stock, partially offset by cash provided by operations.

Cash provided by operating activities totaled $124.9 million for the six months ended June 30, 2010 primarily due to net earnings, adjusted for non-cash charges for depreciation and amortization and stock-based compensation, partially offset by an increase in inventories and decreases in accrued payroll and other liabilities.

Cash used in investing activities of $219.6 million for the six months ended June 30, 2010 primarily related to the acquisition of Raymarine and capital expenditures, including $29.0 million for a facility in Goleta, California for the Commercial Vision Systems division. Cash used in investing activities of $41.0 million for the six months ended June 30, 2009 primarily related to capital expenditures and the acquisition of Salvador Imaging, Inc.

On October 6, 2006, we entered into a Credit Agreement with Bank of America, N.A., Union Bank of California, N.A., U.S. Bank National Association and other Lenders (the “Credit Agreement”), which provides for a $300 million, five-year revolving line of credit. We have the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the line of credit by an additional $150 million until October 6, 2011. The Credit Agreement includes a $100 million sublimit multicurrency option, permitting us and certain of our designated subsidiaries to borrow in Euro, Kronor, Sterling and other agreed upon currencies.

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 over Eurodollar rates based upon the Company’s leverage ratio. The Eurodollar interest rate was 1.284 percent and the prime lending rate was 3.25 percent at June 30, 2010. These rates were 1.001 percent and 3.25 percent, respectively, at December 31, 2009. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on our leverage ratio, which ranges from 0.175 percent to 0.325 percent. At June 30, 2010 and December 31, 2009, the commitment fee rate was 0.175 percent. The Credit Agreement contains six financial covenants that require the maintenance of certain leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth, a maximum level of capital expenditures and a minimum liquidity of cash and availability under the Credit Agreement. The Credit Agreement is collateralized by substantially all assets of the Company. At June 30, 2010 and December 31, 2009, we had no borrowings outstanding under the Credit Agreement and were in compliance with all of its financial covenants. We had $12.4 million and $7.8 million of letters of credit outstanding under the Credit Agreement at June 30, 2010 and December 31, 2009, respectively, which reduces the total available credit thereunder.

Our Sweden subsidiary has a 30 million Swedish Kronor (approximately $3.9 million) line of credit with an interest rate at 1.008 percent at June 30, 2010. At June 30, 2010, the Company had no amounts outstanding on this line of credit. The 30 million Swedish Kronor line of credit is secured primarily by accounts receivable and inventories of the Sweden subsidiary and is subject to automatic renewal on an annual basis.

In June 2003, we issued $210 million of 3.0 percent senior convertible notes due in 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance were approximately $203.9 million. Issuance costs were being amortized over a period of seven years. Interest was payable semiannually on June 1 and December 1 of each year. As of June 30, 2010, all of the notes have been converted into 18.9 million shares of the Company’s common stock.

Cash used in financing activities of $23.9 million and $37.7 million for the six months ended June 30, 2010 and 2009, respectively, primarily related to the repurchase of 1.2 million shares and 2.1 million shares, respectively, of our common stock, partially offset by cash provided from our stock-based compensation plans.

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 current year nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.

 

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Table of Contents

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which provides amendments to the criteria in Subtopic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” for separating consideration in multiple-deliverable arrangements and expands the disclosures related to multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-13 on January 1, 2010. The Company’s adoption of ASU 2009-13 is not expected to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, “Software (Topic 985): Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-14”), which changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted ASU 2009-14 on January 1, 2010. The Company’s adoption of ASU 2009-14 is not expected to have a material impact on its consolidated 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, 2009. As described in Note 1 to the Consolidated Financial Statements included in the Form 10-K, the determination of fair value for stock-based compensation awards requires the use of management’s estimates and judgments.

Contractual Obligations

As of June 30, 2010, there have been no material changes to our contractual obligations outside the ordinary course of our business since December 31, 2009, except for the conversion of all of our outstanding convertible notes during the quarter.

As of June 30, 2010, our contractual obligations were as follows (in thousands):

 

     Payments Due by Period

Contractual Obligations

   Total    Less than
1 Year
   1 – 3
Years
   3 – 5
Years
   More than
5 Years

Operating leases

   $ 28,944    $ 9,088    $ 13,253    $ 5,829    $ 774

Licensing rights

     3,850      550      1,100      1,100      1,100

Post-retirement obligations

     24,064      4,109      12,302      975      6,678
                                  
   $ 56,858    $ 13,747    $ 26,655    $ 7,904    $ 8,552
                                  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of June 30, 2010, the Company has not experienced any changes in market risk exposure that would materially affect the quantitative and qualitative disclosures about market risk presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except that risks relating to the convertible notes are no longer relevant due to their conversion during the quarter.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2010, 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, as such term is defined in Rule 13a-15(e). 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 has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Internal control over financial reporting at Raymarine was excluded from the evaluation for the period ended June 30, 2010.

 

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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 its business. See Note 17, “Contingencies,” of the Notes to the Consolidated Financial Statements for additional information on the Company’s legal proceedings.

 

Item 1A. Risk Factors

There has been no material change in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed with the Securities and Exchange Commission on February 26, 2010.

 

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

During the three months ended June 30, 2010, 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

April 1 to April 30, 2010

   —        —      —     

May 1 to May 31, 2010

   281,957    $ 27.25    281,957   

June 1 to June 30, 2010

   924,761    $ 27.69    924,761   
                   

Total

   1,206,718    $ 27.59    1,206,718    15,561,582
                     

 

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

All share repurchases are subject to applicable securities law, and are at times and in amounts as management deems appropriate. On February 4, 2009, our Board of Directors authorized the repurchase of up to 20.0 million shares of our outstanding common stock. This authorization will expire on February 4, 2011.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 5. Other Information

None

 

18


Table of Contents
Item 6. Exhibits

 

Number

  

Description

10.1        Professional Services Agreement between FLIR Systems, Inc. and Arne Almerfors dated as of June 1, 2010. 1
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.
101.INS     XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) This exhibit constitutes a compensatory plan.

 

19


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities 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 6, 2010    

/ S / A NTHONY L. T RUNZO

    Anthony L. Trunzo
    Sr. Vice President, Finance and Chief Financial Officer
    (Duly Authorized and Principal Financial Officer)

 

20

Exhibit 10.1

LOGO

PROFESSIONAL SERVICES AGREEMENT

Arne Almerfors

This Agreement is made as of this 1st day of June, 2010, by and between

FLIR Systems AB (hereinafter, the “Company” or “FLIR”), a corporation having offices at Rinkebyvägen 19, P.O. Box 3, SE-182 11 Danderyd, Sweden

and

Arne Almerfors, residing at Saltsjöqvarns Kaj 35, SE-131 71 Nacka, Sweden, or such legal entity controlled by Mr. Almerfors as he may designate (hereinafter, the “Consultant”) (individually, a “Party” and together, the “Parties”).

1. SCOPE OF WORK TO BE PERFORMED . FLIR desires that the Consultant perform, and the Consultant agrees to perform the following tasks:

 

   

Analyze all potential opportunities for FLIR and its affiliates to conduct low-cost manufacturing operations globally and report on same to the Chairman of FLIR Systems AB (“Supervisor”) no later than 31 December 2010.

 

   

Be available to consult with the Supervisor regarding historical matters pertaining to the Thermography business.

 

   

Be available to consult with the Supervisor regarding all FLIR Systems, Inc. businesses and operations in the European Union.

Upon request, the Consultant shall submit a detailed report to the Supervisor. The report shall include hours worked, accomplishments and prospective plans, as well as any other data defined by the Supervisor.

2. TERMS OF PAYMENT . The fee for the Consultant’s consulting work and additional work shall consist of the following:

 

   

Base Fee: The equivalent of USD 250,000.00 paid in Swedish kroner in twelve (12) equal monthly payments on or before the 10 th business day of each month. The Base Fee is based on 1,000 hours worked on the Scope of Work activities during the Term.

 

   

Additional Compensation: In the event that the Supervisor requests and the Consultant agrees to perform addition duties outside the Scope of Work set forth in paragraph 1, Consultant will be compensated at the equivalent rate of USD 250.00 per hour paid in Swedish kroner. The Additional Compensation will be payable within thirty (30) calendar days following FLIR’s receipt of an invoice detailing the activities performed and the amount due. Each invoice shall be sent to the Supervisor care of the address set forth in paragraph 17.

3. REIMBURSEMENT OF EXPENSES . FLIR shall not be liable to the Consultant for any expenses paid or incurred by the Consultant unless otherwise agreed to in advance in writing. In the event that the Consultant travels on behalf of the Company, hours worked and reasonable travel expenses will be reimbursed.


4. EQUIPMENT, TOOLS, MATERIALS, OR SUPPLIES . Consultant shall supply, at Consultant’s expense, all equipment, tools, materials, and/or supplies to accomplish the scope of work to be performed.

5. PAYROLL TAXES . Neither federal, nor state, nor local income tax nor payroll tax of any kind shall be withheld or paid by FLIR on behalf of the Consultant or the employees of the Consultant. The Consultant shall not be treated as an employee with respect to the services performed hereunder for the tax purposes of any jurisdiction.

6. NOTICE TO CONSULTANT REGARDING TAX DUTIES AND OTHER LIABILITIES . The Consultant understands that the Consultant is responsible to pay, according to law, the Consultant income tax. If the Consultant is not a corporation, Consultant further understands that the Consultant may be held liable for self-employment tax, to be paid by Consultant according to law. Further, the Consultant shall indemnify and hold FLIR harmless from any and all losses, injuries, or damages caused by the Consultant’s negligence, reckless or intentional acts or omissions. Consultant will show upon request a policy of insurance to cover any negligent acts committed by the Consultant.

7. BENEFITS . The Consultant is not eligible for, and shall not participate in, any employee pension, health, or other benefit plan, of FLIR.

8. COMPLIANCE WITH LAWS . The Consultant shall carry out his duties and obligations in accordance with applicable laws and with any instructions that may from time to time be given to the Consultant by FLIR.

9. TERM OF AGREEMENT . This Agreement shall be effective on the date first set forth above, and shall terminate at 11:59 p.m. on May 31, 2011 (“Term”).

10. TERMINATION WITHOUT CAUSE . Either Party may terminate this Agreement without cause after giving fourteen (14) calendar days prior written notice to the other of intent to terminate without cause. The Parties shall deal with each other in good faith during the 14-day period after any notice of intent to terminate without cause has been given.

11. TERMINATION WITH CAUSE . With reasonable cause, either Party may terminate this Agreement effective immediately upon providing written notice of termination for cause. Reasonable cause shall include, but is not limited to:

 

  a. Material violation of this Agreement; or

 

  b. Any act exposing the other Party to liability to others for personal injury or property damage.

In addition to the provisions of paragraphs 10 and 11, FLIR shall have the absolute right to terminate this Agreement immediately upon the occurrence of any one of the following events:

 

  i. FLIR being obliged under law to terminate this Agreement.

 

Page 2 of 6


  ii. The Consultant:

enters into liquidation, whether voluntary or compulsory, or compounds with creditors, or takes or suffers any similar action in consequence of its indebtedness;

becomes controlled or managed by any other person, body or corporation;

fails to comply with or observe any law, or government regulation, or becomes involved in legal proceedings or activities which may prejudice or harm the business or good name of FLIR of any of its affilates; or

becomes suspended, disbarred or disqualified from conducting transactions by any cognizant authority including, without limitation, the governments of Sweden and the United States of America.

12. NON-WAIVER . The failure of either Party to exercise any of its rights under this Agreement for a breach thereof shall not be deemed to be a waiver of such rights or a waiver of any subsequent rights.

13. NO AUTHORITY TO BIND . The Consultant has no authority to enter into contracts or agreements on behalf of FLIR. This Agreement does not create a partnership or other business relationship between the Parties, other than Consultant’s role as an independent contractor providing services to FLIR.

14. DECLARATION BY THE CONSULTANT . The Consultant declares that the Consultant (i) has complied with all applicable federal, state and local laws regarding business permits, certificates and licenses that may be required to carry out the work to be performed under this Agreement, (ii) will comply with all such laws which are or may pertain to FLIR’s business and the services to be performed by Consultant.

15. PROPRIETARY INFORMATION .

 

  a. FLIR shall retain all title, right and interest it possesses in any drawings, information, data, reports, specifications or documentation, whether of a technical, financial or business nature (hereinafter “Proprietary Data”) furnished to the Consultant by FLIR. For purposes of this Agreement, Proprietary Data shall include such data disclosed in tangible form or in oral or intangible form.

 

  b. The Consultant agrees that the Proprietary Data shall not be used or reproduced for any purposes whatsoever except for the performance of services under this Agreement. The Consultant further agrees not to disclose to any third party, by any means, whatsoever, any FLIR Proprietary Data the Consultant may have obtained in the performance of services under this Agreement, without the prior written permission of an officer of FLIR.

 

Page 3 of 6


  c. Any information which is proprietary to the Consultant and which is disclosed to FLIR hereunder shall be deemed to have been disclosed as a part of the consideration for this Agreement, and FLIR shall have full right to its use as FLIR deems fit.

 

  d. Any information contained in, and the ownership of all reports and documents developed, acquired or performed by the Consultant in connection with this Agreement, shall remain the sole property of FLIR, shall be held in confidence by the Consultant, and shall not be reproduced, used or disclosed to others by the Consultant. The obligation of this paragraph shall survive any termination hereof.

 

  e. Except for subparagraph 15.d, the Consultant’s obligations with respect to this paragraph 15 shall remain in effect for a period of seven (7) years from the date of termination of this Agreement. At FLIR’s request, Consultant shall certify in writing the return and/or destruction of all Proprietary Data.

16. EXCLUSIVITY . During the Term, the Consultant agrees to refrain from engaging in other consulting activities for other companies without FLIR’s written consent.

17. NOTICES . Any notice required or permitted to be given in connection with this Agreement shall be given in writing and shall be delivered either (i) by hand to the Party, or (ii) by certified mail, return receipt requested to the Party at the Party’s address stated herein or (iii) by facsimile with proof of transmission. Any Party may change its address stated herein by giving notice of the change in accordance with this paragraph. For FLIR, notice shall be given as follows:

FLIR Systems, Inc.

Attn: General Counsel

27700 SW Parkway Avenue

Wilsonville, OR 97070

Fax: (503) 498-3911

18. ASSIGNABILITY . The Consultant may not assign, subcontract, or otherwise transfer any right or obligation it has, or may acquire, under this Agreement to any other entity without FLIR’s prior written approval. Any such assignment, subcontracting or transfers approved shall also be conditioned upon acceptance by the assignee, subcontractor and/or transferee of the terms and conditions hereof. Notwithstanding anything to the contrary in this paragraph 17, as stated in the preamble, Mr. Almerfors may substitute may substitute a legal entity to perform the Scope of Work set forth in paragraph 1, subject to the approval of FLIR, which approval shall not be unreasonable withheld.

19. MEDIATION AND ARBITRATION . In the case of any dispute arising under this Agreement which cannot be settled by reasonable discussion (a “Dispute”), the parties agree that, prior to commencing any proceeding to enforce any rights under this Agreement, they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential nonbinding mediation. Each Party shall bear one-half (  1 / 2 ) of the mediator’s fees and expenses and shall pay all of its own attorneys’ fees and expenses related to the mediation.

 

Page 4 of 6


If any Dispute cannot be resolved by mediation, such Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one arbitrator appointed in accordance with the said Rules. The location of the arbitration shall be Stockholm, Sweden, or such other location on which the parties may agree. The arbitrator shall apply Swedish law. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a Party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of FLIR and the Consultant.

20. CHOICE OF LAW . Any dispute under this Agreement or related to this Agreement shall be decided in accordance with the laws of the Kingdom of Sweden, without regard to its choice of laws provisions.

21. ENTIRE AGREEMENT . This is the entire Agreement of the Parties.

22. SEVERABILITY . If any part of this Agreement shall be held unenforceable, the rest of this Agreement will nevertheless remain in full force and effect.

23. AMENDMENTS . This Agreement may be supplemented, amended or revised only in writing as mutually agreed by the Parties.

[SIGNATURES ON FOLLOWING PAGE]

 

Page 5 of 6


IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AGREEMENT AS OF THE DATE FIRST ABOVE STATED.

 

FLIR SYSTEMS AB       CONSULTANT

/s/ Earl R. Lewis

     

/s/ Arne Almerfors

Signature       Signature

Earl R. Lewis

     

Arne Almerfors

Printed Name       Printed Name

Chief Executive Officer

     

 

Title       Title

June 1, 2010

     

May 29, 2010

Date       Date

 

Page 6 of 6

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 6, 2010    

/ S / E ARL R. L EWIS

    Earl R. Lewis
    President and Chief Executive Officer

Exhibit 31.2

I, Anthony L. Trunzo, 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 6, 2010    

/ S / A NTHONY L. T RUNZO

    Anthony L. Trunzo
    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, 2010 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 6, 2010    

/ 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, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony L. Trunzo, 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 6, 2010    

/ S / A NTHONY L. T RUNZO

    Anthony L. Trunzo
    Chief Financial Officer