FLIR Systems, Inc.
FLIR SYSTEMS INC (Form: 10-Q, Received: 08/08/2011 12:17:55)
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, 2011

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 29, 2011, there were 159,730,927 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, 2011 and 2010 (unaudited)

     1   
  

Consolidated Balance Sheets – June 30, 2011 and December 31, 2010 (unaudited)

     2   
  

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010 (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 5.

  

Other Information

     20   

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,
 
     2011     2010     2011     2010  

Revenue

   $ 389,951      $ 331,133      $ 763,416      $ 618,431   

Cost of goods sold

     185,416        147,810        363,236        269,754   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     204,535        183,323        400,180        348,677   

Operating expenses:

        

Research and development

     39,201        28,309        76,461        53,112   

Selling, general and administrative

     123,651        65,199        205,390        121,407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     162,852        93,508        281,851        174,519   

Earnings from operations

     41,683        89,815        118,329        174,158   

Interest expense

     435        900        785        2,124   

Interest income

     (86     (192     (348     (446

Other income, net

     (2,115     (1,734     (1,270     (1,787
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     43,449        90,841        119,162        174,267   

Income tax provision

     13,687        31,387        37,536        58,918   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

     29,762        59,454        81,626        115,349   

Loss from discontinued operations, net of tax

     (453     —          (1,002     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 29,309      $ 59,454      $ 80,624      $ 115,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

        

Continuing operations

   $ 0.19      $ 0.38      $ 0.51      $ 0.75   

Discontinued operations

     0.00        —          (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.18      $ 0.38      $ 0.51      $ 0.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Continuing operations

   $ 0.18      $ 0.37      $ 0.50      $ 0.72   

Discontinued operations

     0.00        —          (0.01     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.18      $ 0.37      $ 0.50      $ 0.72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     159,796        154,495        159,599        153,702   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     162,550        161,643        162,427        161,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

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,
2011
     December 31,
2010
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 235,622       $ 193,137   

Accounts receivable, net

     328,047         339,723   

Inventories

     322,447         303,156   

Prepaid expenses and other current assets

     109,673         95,663   

Deferred income taxes, net

     24,295         23,128   
  

 

 

    

 

 

 

Total current assets

     1,020,084         954,807   

Property and equipment, net

     186,334         189,119   

Deferred income taxes, net

     22,746         22,742   

Goodwill

     493,396         482,019   

Intangible assets, net

     170,794         177,385   

Other assets

     37,261         31,280   
  

 

 

    

 

 

 
   $ 1,930,615       $ 1,857,352   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 88,075       $ 85,881   

Deferred revenue

     20,046         17,867   

Accrued payroll and related liabilities

     46,822         54,894   

Accrued product warranties

     15,941         15,711   

Advance payments from customers

     14,968         22,616   

Accrued expenses

     33,461         36,578   

Accrued income taxes

     1,239         8,218   

Other current liabilities

     4,592         8,186   
  

 

 

    

 

 

 

Total current liabilities

     225,144         249,951   

Deferred tax liability, net

     13,360         13,163   

Accrued income taxes

     21,560         19,793   

Pension and other long-term liabilities

     52,421         51,897   

Commitments and contingencies

     

Shareholders’ equity:

     

Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2011, and December 31, 2010

     —           —     

Common stock, $0.01 par value, 500,000 shares authorized, 159,783 and 159,212 shares issued at June 30, 2011, and December 31, 2010, respectively, and additional paid-in capital

     467,793         465,467   

Retained earnings

     1,116,885         1,055,429   

Accumulated other comprehensive earnings

     33,452         1,652   
  

 

 

    

 

 

 

Total shareholders’ equity

     1,618,130         1,522,548   
  

 

 

    

 

 

 
   $ 1,930,615       $ 1,857,352   
  

 

 

    

 

 

 

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

 

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Table of Contents

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net earnings

   $ 80,624      $ 115,349   

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

    

Depreciation and amortization

     43,631        25,065   

Deferred income taxes

     (1,324     (1,483

Stock-based compensation plans

     13,876        12,922   

Other non-cash items

     (629     4,361   

Changes in operating assets and liabilities, net of acquisitions:

    

Decrease (increase) in accounts receivable

     18,950        (7,190

Increase in inventories

     (24,204     (12,141

(Increase) decrease in prepaid expenses and other current assets

     (11,924     7,218   

Increase in other assets

     (3,246     (6,925

(Decrease) increase in accounts payable

     (418     4,676   

Increase (decrease) in deferred revenue

     1,861        (3,599

Decrease in accrued payroll and other liabilities

     (31,382     (12,229

Decrease in accrued income taxes

     (3,572     (5,429

(Decrease) increase in pension and other long-term liabilities

     (452     4,296   
  

 

 

   

 

 

 

Cash provided by operating activities

     81,791        124,891   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property and equipment

     (18,730     (44,069

Proceeds from sale of property and equipment

     —          210   

Business acquisitions, net of cash acquired

     (2,351     (174,695

Other investments

     —          (1,000
  

 

 

   

 

 

 

Cash used by investing activities

     (21,081     (219,554
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of common stock

     (23,801     (33,290

Proceeds from shares issued pursuant to stock-based compensation plans

     14,281        6,351   

Excess tax benefit from stock-based compensation plans

     2,326        2,960   

Dividends paid

     (19,168     —     

Other financing activities

     (27     38   
  

 

 

   

 

 

 

Cash used by financing activities

     (26,389     (23,941
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     8,164        (18,922
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     42,485        (137,526

Cash and cash equivalents, beginning of period

     193,137        422,047   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 235,622      $ 284,521   
  

 

 

   

 

 

 

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

 

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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. 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, 2010.

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, 2011.

Note 2. 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,
 
     2011     2010     2011     2010  

Cost of goods sold

   $ 881      $ 980      $ 1,522      $ 1,867   

Research and development

     1,358        1,254        2,844        2,521   

Selling, general and administrative

     5,349        4,555        9,510        8,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense before income taxes

     7,588        6,789        13,876        12,922   

Income tax benefit

     (2,201     (2,134     (3,991     (4,092
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense after income taxes

   $ 5,387      $ 4,655      $ 9,885      $ 8,830   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     June 30,  
     2011      2010  

Stock-based compensation costs capitalized in inventory

   $ 943       $ 764   
  

 

 

    

 

 

 

As of June 30, 2011, the Company had $47.0 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.2 years.

 

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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, 2011 and 2010 was estimated with the following weighted-average assumptions:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Stock Option Awards:

        

Risk-free interest rate

     1.0     1.5     1.0     1.5

Expected dividend yield

     0.7     0.0     0.7     0.0

Expected term

     4.3 years        4.3 years        4.3 years        4.3 years   

Expected volatility

     42.3     45.1     42.3     45.1

Employee Stock Purchase Plan:

        

Risk-free interest rate

     0.1     0.3     0.1     0.3

Expected dividend yield

     0.7     0.0     0.7     0.0

Expected term

     6 months        6 months        6 months        6 months   

Expected volatility

     21.3     23.0     21.3     23.0

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,
 
     2011      2010      2011      2010  

Stock Option Awards:

           

Weighted average grant date fair value per share

   $ 11.68       $ 11.52       $ 11.68       $ 11.52   

Total fair value of awards granted

   $ 4,513       $ 7,299       $ 4,513       $ 7,299   

Total fair value of awards vested

   $ 4,958       $ 3,036       $ 7,775       $ 7,200   

Total intrinsic value of options exercised

   $ 5,798       $ 7,858       $ 13,153       $ 11,593   

Restricted Stock Unit Awards:

           

Weighted average grant date fair value per share

   $ 34.50       $ 30.27       $ 34.48       $ 30.14   

Total fair value of awards granted

   $ 21,337       $ 14,447       $ 21,524       $ 14,913   

Total fair value of awards vested

   $ 18,083       $ 15,023       $ 18,933       $ 15,350   

Employee Stock Purchase Plan:

           

Weighted average grant date fair value per share

   $ 7.36       $ 6.73       $ 7.36       $ 6.73   

Total fair value of shares estimated to be issued

   $ 1,051       $ 786       $ 1,051       $ 786   

The total amount of cash received from the exercise of stock options and the related tax benefit realized from the exercise of the stock options were (in thousands):

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Total amount of cash received

   $ 3,218       $ 2,239       $ 10,251       $ 3,388   

Tax benefit realized

   $ 2,438       $ 2,469       $ 4,105       $ 2,899   

 

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

Value
(in thousands)
 

Outstanding at December 31, 2010

     7,403      $ 18.69         5.6      

Granted

     386        35.22         

Exercised

     (708     14.42         

Forfeited

     (54     25.98         
  

 

 

   

 

 

       

Outstanding at June 30, 2011

     7,027      $ 19.97         5.4       $ 97,442   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2011

     5,985      $ 18.25         4.7       $ 92,990   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at June 30, 2011

     6,975      $ 19.90         5.4       $ 97,220   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

     Shares
(in
thousands)
    Weighted
Average
Grant Date
Fair Value
 

Outstanding at December 31, 2010

     1,351      $ 28.54   

Granted

     624        35.19   

Vested

     (542     29.22   

Forfeited

     (22     27.45   
  

 

 

   

 

 

 

Outstanding at June 30, 2011

     1,411      $ 28.52   
  

 

 

   

 

 

 

Information with respect to the 2011 Employee Stock Purchase Plan is as follows:

 

     Shares
(in
thousands)
 

Shares issued during the period

     171   

Shares available for issuance at June 30, 2011

     4,792   

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3. 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,
 
     2011     2010      2011     2010  

Numerator for earnings per share:

         

Earnings from continuing operations

   $ 29,762      $ 59,454       $ 81,626      $ 115,349   

Loss from discontinued operations

     (453     —           (1,002     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings available to common shareholders – basic

     29,309        59,454         80,624        115,349   

Interest associated with convertible notes, net of tax

     —          371         —          935   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings available to common shareholders – diluted

   $ 29,309      $ 59,825       $ 80,624      $ 116,284   
  

 

 

   

 

 

    

 

 

   

 

 

 

Denominator for earnings per share:

         

Weighted average number of common shares outstanding

     159,796        154,495         159,599        153,702   

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

     2,754        3,189         2,828        3,300   

Assumed conversion of convertible notes

     —          3,959         —          4,624   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average diluted shares outstanding

     162,550        161,643         162,427        161,626   
  

 

 

   

 

 

    

 

 

   

 

 

 

Anti-dilutive shares of stock-based compensation awards excluded

     130        406         277        514   
  

 

 

   

 

 

    

 

 

   

 

 

 

Note 4. Fair Value of Financial Instruments

The Company had $14.3 million and $27.2 million of cash equivalents at June 30, 2011 and December 31, 2010, respectively, 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. The fair value of the Company’s forward currency contracts as of June 30, 2011 and December 31, 2010 was not significant. The Company does not have any other financial assets or liabilities that are measured at fair value.

Note 5. Foreign Currency Exchange Rate Risk

The gains and losses related to outstanding derivative instruments recorded in other income are offset by the reciprocal gains and losses from the underlying assets or liabilities which originally gave rise to the exposure. The net amount of these gains and losses was as follows (in thousands):

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Net loss

   $ 5       $ 1,582       $ 4,519       $ 2,290   

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 5. Foreign Currency Exchange Rate Risk – (Continued)

 

Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency gains or losses. The table below presents the notional amounts of the Company’s outstanding foreign currency forward contracts by currency (in thousands):

 

     June 30,
2011
     December 31,
2010
 

Euro

   $ 25,504       $ 41,022   

Swedish Kronor

     29,653         23,212   

British Pound Sterling

     27,384         1,551   

Australian Dollar

     1,181         1,017   

Danish Kroner

     194         —     
  

 

 

    

 

 

 
   $ 83,916       $ 66,802   
  

 

 

    

 

 

 

At June 30, 2011, the Company’s foreign currency forward contracts had maturities of 45 days or less.

Note 6. Accounts Receivable

Accounts receivable are net of an allowance for doubtful accounts of $5.3 million and $5.1 million at June 30, 2011 and December 31, 2010, respectively.

Note 7. Inventories

Inventories consist of the following (in thousands):

 

     June 30,
2011
     December 31,
2010
 

Raw material and subassemblies

   $ 208,921       $ 185,359   

Work-in-progress

     58,695         48,788   

Finished goods

     54,831         69,009   
  

 

 

    

 

 

 
   $ 322,447       $ 303,156   
  

 

 

    

 

 

 

Note 8. Property and Equipment

Property and equipment are net of accumulated depreciation of $165.8 million and $138.2 million at June 30, 2011 and December 31, 2010, respectively.

Note 9. Goodwill

As of June 30, 2011, the Company has determined that there is no impairment of its recorded goodwill. The carrying value of goodwill by reporting segment and the activity for the six months ended June 30, 2011 is as follows (in thousands):

 

     Thermal Vision
and Measurement
    Raymarine      Surveillance      ICx      Total  

Balance, December 31, 2010

   $ 236,181      $ 97,266       $ 37,926       $ 110,646       $ 482,019   

Currency translation adjustments

     5,678        3,806         399         —           9,883   

Other

     (102     —           —           1,596         1,494   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance, June 30, 2011

   $ 241,757      $ 101,072       $ 38,325       $ 112,242       $ 493,396   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

8


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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 9. Goodwill – (Continued)

 

The Company has recorded $112.2 million of goodwill related to the acquisition of ICx Technologies, Inc. (“ICx”). ICx was reported as a separate segment for the year ended December 31, 2010. For the year ending December 31, 2011, the Company has determined that certain business units of ICx will be reported in its Surveillance, Detection and Integrated Systems segments. Certain tax attributes and the allocation of goodwill from the ICx acquisition are pending final valuation and are expected to be finalized by September 30, 2011.

Note 10. Intangible Assets

Intangible assets are net of accumulated amortization of $87.5 million and $74.4 million at June 30, 2011 and December 31, 2010, respectively.

Note 11. 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,
 
     2011     2010     2011     2010  

Accrued product warranties, beginning of period

   $ 18,960      $ 9,196      $ 18,686      $ 9,438   

Amounts paid for warranty services

     (2,193     (1,766     (5,181     (4,761

Warranty provisions for products sold

     2,319        1,896        5,027        4,387   

Accrued product warranties acquired

     —          7,622        —          7,622   

Currency translation adjustments and other

     128        351        682        613   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued product warranties, end of period

   $ 19,214      $ 17,299      $ 19,214      $ 17,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

Current accrued product warranties, end of period

       $ 15,941      $ 14,837   
      

 

 

   

 

 

 

Long-term accrued product warranties, end of period

       $ 3,273      $ 2,462   
      

 

 

   

 

 

 

Note 12. Credit Agreements

At June 30, 2011, the Company had no borrowings outstanding under its Credit Agreement, dated February 8, 2011, with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders, and $14.5 million of letters of credit outstanding, which reduces the total available credit to $185.5 million.

Note 13. Shareholders’ Equity

The following table summarizes the common stock and additional paid-in capital activity during the six months ended June 30, 2011 (in thousands):

 

Common stock and additional paid-in capital, December 31, 2010

   $  465,467   

Income tax benefit of common stock options exercised

     2,438   

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

     9,543   

Stock-based compensation expense

     14,146   

Repurchase of common stock

     (23,801
  

 

 

 

Common stock and additional paid in capital, June 30, 2011

   $ 467,793   
  

 

 

 

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 13. Shareholders’ Equity – (Continued)

 

During the six months ended June 30, 2011, the Company repurchased approximately 713,000 shares of the Company’s common stock under the February 2011 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 expires in February 2013.

On February 9, 2011, the Company’s Board of Directors adopted a dividend policy under which the Company intends to pay quarterly cash dividends on its common stock. Accordingly, a dividend of $0.06 per share of outstanding common stock was paid on March 10, 2011 to shareholders of record as of the close of business on February 22, 2011 and on June 10, 2011 to shareholders of record as of the close of business on May 20, 2011. The total cash payments for the dividends were $19.2 million.

Note 14. 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,
 
     2011      2010     2011      2010  

Net earnings

   $ 29,309       $ 59,454      $ 80,624       $ 115,349   

Translation adjustment

     1,591         (26,556     31,800         (40,204
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive earnings

   $ 30,900       $ 32,898      $ 112,424       $ 75,145   
  

 

 

    

 

 

   

 

 

    

 

 

 

Note 15. 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 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 abandoned all of its other claims except its claims relating to four patents (the “Patent Claims”). On August 11, 2010, the FLIR Parties and Raytheon entered into an agreement in principle to resolve the remaining Patent Claims. On October 27, 2010, the parties finalized the agreement which resulted in a payment of $3 million by the FLIR Parties to Raytheon. The agreement also entitles the FLIR Parties to certain license rights in the patents that were the subject of the Patent Claims. A final judgment was entered on January 7, 2011. The parties have appealed certain rulings of the district court to the United States Court of Appeals for the Federal Circuit. 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.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 15. Contingencies – (Continued)

 

On July 10, 2008, William J. Parrish and E. Timothy Fitzgibbons (collectively, “Plaintiffs”) 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 “2008 Lawsuit”). 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 outside counsel in a prior action as a defendant. The claims against the former outside counsel were subsequently dismissed without prejudice. All tortious interference claims were dismissed as to all Defendants. On May 20, 2011, the Company announced that it had entered into a definitive settlement agreement with the Plaintiffs. Under the terms of the settlement agreement, the Company made a cash settlement payment of $39 million to Plaintiffs for dismissal with prejudice of all claims in the 2008 Lawsuit and a non-exclusive license for use of certain infrared technology.

Note 16. Income Taxes

As of June 30, 2011, the Company had approximately $33.3 million of net unrecognized tax benefits of which $25.3 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 the applicable statute of limitations.

The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2011, the Company had approximately $3.0 million of net 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

   2007 – 2010

State of Oregon

   2006 – 2010

State of Massachusetts

   2007 – 2010

State of California

   2005 – 2010

Sweden

   2003 – 2010

United Kingdom

   2007 – 2010

Germany

   2004 – 2010

France

   2006 – 2010

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Operating Segments and Related Information

Operating Segments

The Company has two business divisions: Commercial Systems and Government Systems.

Commercial Systems Division

The Commercial Systems division is focused on the design, manufacture, and marketing of instrument, sensor, and electronics solutions that facilitate improved situational awareness and environmental analytics for commercial customers. The division is comprised of two operating segments: Thermal Vision and Measurement and Raymarine. The Thermal Vision and Measurement segment provides advanced thermal imaging solutions for emerging commercial and industrial markets that enable people to see at night or through adverse weather conditions and to capture, measure, and analyze temperature data. The Raymarine segment provides electronics for the maritime market and is a leading global provider of fully integrated “stem to stern” networked electronic systems for boats of all sizes.

Government Systems Division

The Government Systems division designs, manufactures, and markets advanced imaging and detection systems for government markets where high performance is required. The division is comprised of three operating segments: Surveillance, Detection, and Integrated Systems. The Surveillance segment provides enhanced imaging and recognition solutions to a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. The Detection segment produces sensor instruments that detect and identify chemical, biological, radiological, nuclear, and explosives (“CBRNE”) threats for military force protection, homeland security, and commercial applications. The Integrated Systems segment develops platform solutions for combating sophisticated security threats and incorporates multiple sensor systems in order to deliver actionable intelligence for wide area surveillance, intrusion detection, and facility security.

As of January 1, 2011, within the Commercial Systems division, the Company merged its former Thermography and Commercial Vision Systems operating segments into the Thermal Vision and Measurement operating segment. In addition, within the Government Systems division, the legacy Government Systems operating segment has been merged with certain business units of ICx to form the Surveillance operating segment. The remaining business units of ICx have been separated into the Detection and Integrated Systems operating segments. Accordingly, the Company has retrospectively reported the June 30, 2010 amounts on a comparable basis.

Raymarine was acquired in May 2010 and ICx was acquired in October 2010 and therefore, the operating results for the Raymarine, Detection and Integrated Systems operating segments are not comparable to the operating results for the prior periods described below.

Operating segment information is as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Revenue – External Customers:

           

Thermal Vision and Measurement

   $ 164,838       $ 136,026       $ 308,939       $ 264,978   

Raymarine

     50,190         27,224         100,726         27,224   

Surveillance

     141,479         167,883         291,336         326,229   

Detection

     17,221         —           35,092         —     

Integrated Systems

     16,223         —           27,323         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 389,951       $ 331,133       $ 763,416       $ 618,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Operating Segments and Related Information – (Continued)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenue – Intersegments:

        

Thermal Vision and Measurement

   $ 5,705      $ 3,859      $ 10,398      $ 8,549   

Raymarine

     4        —          7        —     

Surveillance

     6,764        7,627        17,021        13,193   

Detection

     1,478        —          1,478        —     

Integrated Systems

     689        —          1,084        —     

Eliminations

     (14,640     (11,486     (29,988     (21,742
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Earnings (loss) from operations:

        

Thermal Vision and Measurement

   $ 47,214      $ 35,904      $ 84,422      $ 69,884   

Raymarine

     7,243        3,443        14,653        3,443   

Surveillance

     46,475        65,845        97,799        128,629   

Detection

     (3,014     —          (6,875     —     

Integrated Systems

     (64     —          (98     —     

Other

     (56,171     (15,377     (71,572     (27,798
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 41,683      $ 89,815      $ 118,329      $ 174,158   
  

 

 

   

 

 

   

 

 

   

 

 

 

The loss from operations of Other includes the litigation settlement payment of $39.0 million discussed in Note 15 and certain related legal expenses of $1.8 million.

 

     June 30,
2011
     December 31,
2010
 

Segment assets (accounts receivable, net and inventories):

     

Thermal Vision and Measurement

   $ 202,855       $ 198,419   

Raymarine

     72,989         58,236   

Surveillance

     329,632         327,240   

Detection

     33,106         39,270   

Integrated Systems

     6,753         11,516   

Discontinued Operations

     5,159         8,198   
  

 

 

    

 

 

 
   $ 650,494       $ 642,879   
  

 

 

    

 

 

 

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Operating Segments and Related Information - (Continued)

 

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,
 
     2011      2010      2011      2010  

United States

   $ 195,561       $ 168,923       $ 390,986       $ 334,432   

Europe

     99,222         84,387         191,662         148,968   

Other international

     95,168         77,823         180,768         135,031   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 389,951       $ 331,133       $ 763,416       $ 618,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     June 30,
2011
     December 31,
2010
 

United States

   $ 570,219       $ 583,299   

Europe

     307,622         287,081   

Other international

     9,944         9,423   
  

 

 

    

 

 

 
   $ 887,785       $ 879,803   
  

 

 

    

 

 

 

Major Customers

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

US Government

   $ 89,518       $ 104,769       $ 199,391       $ 213,799   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 18. Subsequent Events

Quarterly Dividend – On July 21, 2011, the Company’s Board of Directors declared a quarterly dividend of $0.06 per share on its common stock, payable on September 9, 2011, to shareholders of record as of close of business on August 22, 2011. The total cash payment of this dividend will be approximately $9.6 million.

Business Acquisition – On July 21, 2011, the Company acquired Aerius Photonics, LLC, a leading provider of short-wavelength infrared detectors and advanced laser components, for approximately $27 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. Goodwill and identifiable intangible assets will be recorded in the Thermal Vision and Measurement business segment.

 

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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” section of the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2010, “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

The following discussion of operating results provides an overview of our operations by addressing key elements in our Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Given the nature of our business, we believe revenue and earnings from operations (including operating margin percentage) are most relevant to an understanding of our performance at a segment level. Additionally, at the segment level we disclose backlog, which represents orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.

Revenue. Revenue for the three months ended June 30, 2011 increased by 17.8 percent, from $331.1 million in the second quarter of 2010 to $390.0 million in the second quarter of 2011. Revenue for the six months ended June 30, 2011 increased 23.4 percent, from $618.4 million in the first six months of 2010 to $763.4 million in the first six months of 2011. The increase was primarily due to revenues reported by Raymarine Holdings, Ltd (“Raymarine”) and ICx Technologies, Inc. (“ICx”) which were acquired on May 14, 2010 and October 4, 2010, respectively. Excluding revenue from Raymarine and ICx, revenue for the three month and six month periods ended June 30, 2011 decreased by 1.0 percent and increased by 0.3 percent, respectively compared to the same periods in 2010. Revenue from our Thermal Vision and Measurement segment increased by 21.2 percent and 16.6 percent for the three month and six month periods ended June 30, 2011, respectively, compared to the same periods in 2010, which was offset by a decrease in revenue from our Surveillance segment of 15.7 percent and 10.7 percent for the three month and six month periods ended June 30, 2011, respectively, compared to the same periods in 2010.

The timing of orders, scheduling of backlog and fluctuations in demand in various regions of the world 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 2011 of approximately 17 percent partially attributable to revenue from businesses acquired in 2010, the mix of revenue between our business segments and within certain product categories in our business segments will vary from quarter to quarter during the year.

As a percentage of revenue, international sales were 49.8 percent and 49.0 percent for the quarters ended June 30, 2011 and 2010, respectively, and 48.8 percent and 45.9 percent for the six months ended June 30, 2011 and 2010, respectively. The percentage of revenue from international sales will fluctuate from quarter to quarter due to normal variation in order activity across various regions. Management anticipates that revenue from international sales will continue to comprise a significant percentage of total revenue.

 

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Table of Contents

Gross profit. Gross profit for the quarter ended June 30, 2011 was $204.5 million compared to $183.3 million for the same quarter last year. Gross profit for the six months ended June 30, 2011 was $400.2 million compared to $348.7 million for the same period of 2010. Gross margin, defined as gross profit divided by revenue, decreased from 55.4 percent in the second quarter of 2010 to 52.5 percent in the second quarter of 2011, and from 56.4 percent in the first six months of 2010 to 52.4 percent in the first six months of 2011. The decrease in gross margin for both the three and six month periods in 2011 was primarily due to lower gross margins at Raymarine and ICx business units and the product mix in our Surveillance division, partially offset by the continued production efficiencies realized from increased volumes in our Thermal Vision and Measurement segment.

Research and development expenses. Research and development expenses for the second quarter of 2011 totaled $39.2 million, compared to $28.3 million in the second quarter of 2010. Research and development expenses for the first six months of 2011 and 2010 were $76.5 million and $53.1 million, respectively. The increase in research and development expenses was due to increased investment in new product development as well as the research and development activity conducted by the companies acquired; $7.5 million and $16.4 million of the increase in research and development expenses for the three months and six months ended June 30, 2011, respectively, is related to the acquisitions. As a percentage of revenue, research and development expenses were 10.1 percent and 8.5 percent for the three months ended June 30, 2011 and 2010, respectively, and 10.0 percent and 8.6 percent for the six months ended June 30, 2011 and 2010, respectively.

Selling, general and administrative expenses. Selling, general and administrative expenses were $123.7 million for the quarter ended June 30, 2011, compared to $65.2 million for the quarter ended June 30, 2010. Selling, general and administrative expenses for the first six months of 2011 and 2010 were $205.4 million and $121.4 million, respectively. The increase in selling, general and administrative expenses was primarily due to the payment of a $39 million litigation settlement and increased spending in each of our business segments to drive future growth, including the operating expenses related to businesses acquired during 2010; $12.9 million and $32.1 million of the increase in selling, general and administrative expenses for the three months and six months ended June 30, 2011, respectively, is related to the acquisitions. Selling, general and administrative expenses as a percentage of revenue were 31.7 percent and 19.7 percent for the quarters ended June 30, 2011 and 2010, respectively, and 26.9 percent and 19.6 percent for the six months ended June 30, 2011 and 2010, respectively. Excluding the litigation settlement and the operating expenses of the businesses acquired during 2010, selling, general and administrative expenses for the three month and six month periods ended June 30, 2011 increase by 10.1 percent and 10.6 percent, respectively, over the same periods of 2010, and represented 21.9 percent and 21.7 percent of revenue for the three months and six months ended June 30, 2011, respectively.

Interest expense. Interest expense for the second quarter and first six months of 2011 was $0.4 million and $0.8 million, respectively, compared to $0.9 million and $2.1 million for the same periods of 2010. The decrease in interest expense in 2011 compared to the same periods in 2010 is primarily due to the conversions of our outstanding convertible notes in 2010.

Income taxes. The income tax provision of $13.7 million for the three months ended June 30, 2011, represents an effective tax rate of 31.5 percent. We expect the annual effective tax rate for the full year of 2011 to be approximately 30 percent to 32 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.

Segment Operating Results

As of January 1, 2011, the Company merged the Thermography and Commercial Vision Systems operating segments into the Thermal Vision and Measurement operating segment. Raymarine was acquired on May 14, 2010, creating the Raymarine operating segment. Finally, ICx was acquired on October 4, 2010 and the ICx operating segment has since been separated into Surveillance, Detection and Integrated Systems operating segments. The Government Systems operating segment has been merged into the Surveillance operating segment.

Thermal Vision and Measurement

Thermal Vision and Measurement operating results are as follows (in millions):

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenue

   $ 164.8      $ 136.0      $ 308.9      $ 265.0   

Earnings from operations

     47.2        35.9        84.4        69.9   

Operating margin

     28.6     26.4     27.3     26.4

Backlog, end of period

         159.5        126.0   

 

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Revenue for the three months and six months ended June 30, 2011 increased by 21.2 percent and 16.6 percent, respectively, compared to the same periods of 2010 primarily due to increased unit deliveries from several of the segment’s product lines including Thermography, cores and components, and maritime product lines. The increase in backlog is primarily due to demand for recently introduced Thermography cameras that exceeded our planned production and for increased orders for most of our vision product lines.

Raymarine

Raymarine operating results are as follows (in millions):

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenue

   $ 50.2      $ 27.2      $ 100.7      $ 27.2   

Earnings from operations

     7.2        3.4        14.7        3.4   

Operating margin

     14.4     12.6     14.5     12.6

Backlog, end of period

         7.2        17.0   

Raymarine was acquired in May 2010 and, therefore, the operating results for the three months and six months ended June 30, 2011 are not comparable to the operating results for the three months and six months ended June 30, 2010.

Surveillance

Surveillance operating results are as follows (in millions):

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenue

   $ 141.5      $ 167.9      $ 291.3      $ 326.2   

Earnings from operations

     46.5        65.8        97.8        128.6   

Operating margin

     32.8     39.2     33.6     39.4

Backlog, end of period

         254.3        375.0   

Revenue for the three months and six months ended June 30, 2011 decreased by 15.7 percent and 10.7 percent, respectively, compared to the same periods of 2010, primarily due to decreases in revenue from US Government agencies, partially offset by revenue of approximately $5.4 million and $7.5 million, respectively, from ICx business units, which were acquired on October 4, 2010. The change in product mix and increased operating expenses of the segment resulted in the decline in earnings from operations and operating margin from 2010 to 2011. The decline in backlog from 2010 to 2011 was primarily due to the continued reduction in procurement activity by our US Government customers in 2011.

Detection

Detection operating results are as follows (in millions):

 

     Three Months
Ended

June 30, 2011
    Six Months
Ended

June  30, 2011
 

Revenue

   $ 17.2      $ 35.1   

Earnings from operations

     (3.0     (6.9

Operating margin

     (17.5 )%      (19.6 )% 

Backlog, end of period

       22.3   

ICx was acquired in October 2010 and therefore there are no comparable operating results for the three months and six months ended June 30, 2010.

 

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Integrated Systems

Integrated Systems operating results are as follows (in millions):

 

     Three Months
Ended

June 30, 2011
    Six Months
Ended

June  30, 2011
 

Revenue

   $ 16.2      $ 27.3   

Earnings from operations

     (0.1     (0.1

Operating margin

     (0.4 )%      (0.4 )% 

Backlog, end of period

       42.7   

ICx was acquired in October 2010 and therefore there are no comparable operating results for the three months and six months ended June 30, 2010.

Liquidity and Capital Resources

At June 30, 2011, we had cash and cash equivalents on hand of $235.6 million compared to $193.1 million at December 31, 2010. The increase in cash and cash equivalents was primarily due to cash provided from operations and cash proceeds from our stock-based compensation programs, partially offset by capital expenditures, repurchases of our common stock, dividends paid during the period and the cash litigation settlement as described in Note 15 to the Consolidated Financial Statements.

Cash provided by operating activities totaled $81.8 million for the six months ended June 30, 2011 primarily due to net earnings, adjusted for non-cash charges for depreciation and amortization and stock-based compensation, and net collections of our accounts receivable, partially offset by net increases in other working capital components and the cash litigation settlement.

Cash used in investing activities of $21.1 million for the six months ended June 30, 2011 primarily related to capital expenditures, including $9.1 million to acquire a building for our Raymarine operations in the United Kingdom.

On February 8, 2011, we signed a new Credit Agreement (“Credit Agreement”) with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders. The Credit Agreement provides for a $200 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 8, 2016. The Credit Agreement allows us and certain designated subsidiaries to borrow in US dollars, euro, Swedish Kronor, pound sterling and other agreed upon currencies. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on the Company’s leverage ratio, which ranges from 0.25 percent to 0.40 percent. The Credit Agreement contains two financial covenants that require the maintenance of certain leverage ratios of which we were in compliance at June 30, 2011. The five-year revolving line of credit available under the Credit Agreement is not secured by any of our assets.

At June 30, 2011, we had no amounts outstanding under the Credit Agreement and the commitment fee on the amount of unused credit was 0.25 percent. We had $14.5 million of letters of credit outstanding at June 30, 2011, which reduced the total available credit under the Credit Agreement.

Our Sweden subsidiary has a 30 million Swedish Kronor (approximately $4.8 million) line of credit. At June 30, 2011, 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.

Cash used in financing activities of $26.4 million for the six months ended June 30, 2011 primarily related to the payment of dividends and repurchase of approximately 713,000 shares of our common stock, partially offset by cash provided from our stock-based compensation plans.

On February 9, 2011, our Board of Directors authorized the repurchase of up to 20.0 million shares of our outstanding common stock. As of June 30, 2011, there were approximately 19.3 million shares still authorized for repurchase under this authorization, which expires on February 9, 2013.

 

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We believe that our existing cash combined with the cash we expect 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.

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, 2010. 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, 2011, there have been no material changes to our contractual obligations outside the ordinary course of our business since December 31, 2010.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of June 30, 2011, 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, 2010.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2011, 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, 2011 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Internal control over financial reporting at ICx was excluded from the evaluation for the period ended June 30, 2011.

 

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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 15, “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, 2010, which was filed with the Securities and Exchange Commission on March 1, 2011.

 

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

During the three months ended June 30, 2011, 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, 2011

     —           —           —        

May 1 to May 31, 2011

     177,161       $ 35.07         177,161      

June 1 to June 30, 2011

     322,839       $ 33.49         322,839      
  

 

 

    

 

 

    

 

 

    

Total

     500,000       $ 34.05         500,000         19,287,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 9, 2011, 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 9, 2013.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 5. Other Information

None.

 

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Table of Contents
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.
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

 

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Table of Contents

SIGNATURE

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 8, 2011                          

  / S /    A NTHONY L. T RUNZO

        Anthony L. Trunzo
        Sr. Vice President, Finance and Chief Financial Officer
        (Duly Authorized and Principal Financial 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 8, 2011                        

/ 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 8, 2011                        

/ 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, 2011 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 8, 2011                        

/ 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, 2011 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 8, 2011                        

/ S /    A NTHONY L. T RUNZO

        Anthony L. Trunzo
        Chief Financial Officer