FLIR Systems, Inc.
FLIR SYSTEMS INC (Form: 10-Q, Received: 11/08/2011 14:02:24)

 

 

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 September 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 October 31, 2011, there were 155,991,450 shares of the Registrant’s common stock, $0.01 par value, outstanding.

 

 

 


INDEX

PART I. FINANCIAL INFORMATION

 

Item 1.   

Financial Statements

  
  

Consolidated Statements of Income – Three Months and Nine Months Ended September  30, 2011 and 2010 (unaudited)

     1   
  

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

     2   
  

Consolidated Statements of Cash Flows – Nine Months Ended September  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

     20   
Item 4.   

Controls and Procedures

     20   
PART II. OTHER INFORMATION   
Item 1.   

Legal Proceedings

     21   
Item 1A.   

Risk Factors

     21   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     21   
Item 3.   

Defaults Upon Senior Securities

     21   
Item 5.   

Other Information

     21   
Item 6.   

Exhibits

     22   
  

Signature

     23   


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
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 371,327      $ 332,497      $ 1,138,850      $ 950,928   

Cost of goods sold

     169,430        150,389        535,030        420,143   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     201,897        182,108        603,820        530,785   

Operating expenses:

        

Research and development

     35,188        28,520        112,257        81,632   

Selling, general and administrative

     81,300        67,801        288,036        189,209   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     116,488        96,321        400,293        270,841   

Earnings from operations

     85,409        85,787        203,527        259,944   

Interest expense

     1,526        349        2,311        2,472   

Interest income

     (155     (454     (505     (900

Other expense (income), net

     66        (631     (1,206     (2,418
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     83,972        86,523        202,927        260,790   

Income tax provision

     19,582        23,568        57,109        82,486   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations

     64,390        62,955        145,818        178,304   

Earnings (loss) from discontinued operations, net of tax

     329        —          (475     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 64,719      $ 62,955      $ 145,343      $ 178,304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

        

Continuing operations

   $ 0.41      $ 0.40      $ 0.92      $ 1.15   

Discontinued operations

     0.00        —          (0.00     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.41      $ 0.40      $ 0.91      $ 1.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

        

Continuing operations

   $ 0.40      $ 0.39      $ 0.90      $ 1.11   

Discontinued operations

     0.00        —          (0.00     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.40      $ 0.39      $ 0.90      $ 1.11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     158,665        158,215        159,225        155,223   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     160,798        160,925        161,811        161,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

1


FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

     September 30,
2011
     December 31,
2010
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 374,499       $ 193,137   

Accounts receivable, net

     320,411         339,723   

Inventories

     327,132         303,156   

Prepaid expenses and other current assets

     133,767         95,663   

Deferred income taxes, net

     25,097         23,128   
  

 

 

    

 

 

 

Total current assets

     1,180,906         954,807   

Property and equipment, net

     184,071         189,119   

Deferred income taxes, net

     28,391         22,742   

Goodwill

     484,632         482,019   

Intangible assets, net

     162,193         177,385   

Other assets

     62,105         31,280   
  

 

 

    

 

 

 
   $ 2,102,298       $ 1,857,352   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 82,234       $ 85,881   

Deferred revenue

     22,135         17,867   

Accrued payroll and related liabilities

     44,007         54,894   

Accrued product warranties

     14,090         15,711   

Advance payments from customers

     13,031         22,616   

Accrued expenses

     37,492         36,578   

Accrued income taxes

     —           8,218   

Other current liabilities

     5,376         8,186   
  

 

 

    

 

 

 

Total current liabilities

     218,365         249,951   

Long-term debt

     247,747         —     

Deferred tax liability, net

     13,221         13,163   

Accrued income taxes

     23,413         19,793   

Pension and other long-term liabilities

     51,825         51,897   

Commitments and contingencies

     

Shareholders’ equity:

     

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

     —           —     

Common stock, $0.01 par value, 500,000 shares authorized, 155,889 and 159,212 shares issued at September 30, 2011, and December 31, 2010, respectively, and additional paid-in capital

     375,538         465,467   

Retained earnings

     1,172,086         1,055,429   

Accumulated other comprehensive earnings

     103         1,652   
  

 

 

    

 

 

 

Total shareholders’ equity

     1,547,727         1,522,548   
  

 

 

    

 

 

 
   $ 2,102,298       $ 1,857,352   
  

 

 

    

 

 

 

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

 

2


FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net earnings

   $ 145,343      $ 178,304   

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

    

Depreciation and amortization

     61,208        39,466   

Deferred income taxes

     (1,904     (8,397

Stock-based compensation plans

     19,313        19,010   

Other non-cash items

     3,007        802   

Changes in operating assets and liabilities, net of acquisitions:

    

Decrease (increase) in accounts receivable

     26,711        (3,654

Increase in inventories

     (34,921     (24,463

(Increase) decrease in prepaid expenses and other current assets

     (40,050     20,395   

Increase in other assets

     (2,502     (5,244

(Decrease) increase in accounts payable

     (8,355     9,604   

Increase (decrease) in deferred revenue

     3,466        (5,659

Decrease in accrued payroll and other liabilities

     (34,047     (7,291

Decrease in accrued income taxes

     (9,267     (11,377

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

     (307     8,449   
  

 

 

   

 

 

 

Cash provided by operating activities

     127,695        209,945   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property and equipment

     (31,100     (51,225

Proceeds from sale of property and equipment

     4        225   

Business acquisitions, net of cash acquired

     (27,182     (174,696

Other investments

     —          3,081   
  

 

 

   

 

 

 

Cash used by investing activities

     (58,278     (222,615
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from long-term debt, net

     247,708        —     

Repurchase of common stock

     (124,384     (35,725

Proceeds from shares issued pursuant to stock-based compensation plans

     15,085        11,983   

Excess tax benefit from stock-based compensation plans

     4,468        5,592   

Dividends paid

     (28,686     —     

Other financing activities

     (317     17   
  

 

 

   

 

 

 

Cash provided (used) by financing activities

     113,874        (18,133
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (1,929     (11,341
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     181,362        (42,144

Cash and cash equivalents, beginning of period

     193,137        422,047   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 374,499      $ 379,903   
  

 

 

   

 

 

 

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

 

3


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
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Cost of goods sold

   $ 941      $ 969      $ 2,462      $ 2,836   

Research and development

     1,152        1,213        3,997        3,734   

Selling, general and administrative

     3,344        3,906        12,854        12,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense before income taxes

     5,437        6,088        19,313        19,010   

Income tax benefit

     (1,574     (1,900     (5,565     (5,993
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense after income taxes

   $ 3,863      $ 4,188      $ 13,748      $ 13,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     September 30,  
     2011      2010  

Stock-based compensation costs capitalized in inventory

   $ 795       $ 682   
  

 

 

    

 

 

 

As of September 30, 2011, the Company had $38.2 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.0 years.

 

4


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 nine months ended September 30, 2011 and 2010 was estimated with the following weighted-average assumptions:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011     2010  

Stock Option Awards:

          

Risk-free interest rate

     —           —           1.0     1.55

Expected dividend yield

     —           —           0.7     0.0

Expected term

     —           —           4.3 years        4.3 years   

Expected volatility

     —           —           42.3     45.1

Employee Stock Purchase Plan:

          

Risk-free interest rate

     —           —           0.1     0.3

Expected dividend yield

     —           —           0.7     0.0

Expected term

     —           —           6 months        6 months   

Expected volatility

     —           —           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
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Stock Option Awards:

           

Weighted average grant date fair value per share

   $ —         $ —         $ 11.68       $ 11.52   

Total fair value of awards granted

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

Total fair value of awards vested

   $ 75       $ 80       $ 8,037       $ 7,281   

Total intrinsic value of options exercised

   $ 2,016       $ 11,842       $ 15,169       $ 15,577   

Restricted Stock Unit Awards:

           

Weighted average grant date fair value per share

   $ 27.43       $ 30.31       $ 34.41       $ 30.14   

Total fair value of awards granted

   $ 169       $ 73       $ 21,692       $ 14,986   

Total fair value of awards vested

   $ 165       $ 413       $ 19,098       $ 15,763   

Employee Stock Purchase Plan:

           

Weighted average grant date fair value per share

   $ —         $ —         $ 7.36       $ 6.73   

Total fair value of shares estimated to be issued

   $ —         $ —         $ 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
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Total amount of cash received

   $ 804       $ 5,632       $ 11,055       $ 9,020   

Tax benefit realized

   $ 624       $ 2,815       $ 4,729       $ 5,714   

 

5


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

     (809     13.65         

Forfeited

     (65     26.19         
  

 

 

   

 

 

       

Outstanding at September 30, 2011

     6,915      $ 20.14         5.1       $ 46,890   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2011

     5,888      $ 18.42         4.5       $ 46,571   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest at September 30, 2011

     6,864      $ 20.06         4.5       $ 46,874   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

     630        34.41   

Vested

     (548     29.16   

Forfeited

     (79     29.64   
  

 

 

   

 

 

 

Outstanding at September 30, 2011

     1,354      $ 28.31   
  

 

 

   

 

 

 

Information with respect to the 2010 Employee Stock Purchase Plan is as follows:

 

     Shares
(in  thousands)
 

Shares issued during the nine months ended September 30, 2011

     171   

Shares available for issuance at September 30, 2011

     4,449   

 

6


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
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011     2010  

Numerator for earnings per share:

          

Earnings from continuing operations

   $ 64,390       $ 62,955       $ 145,818      $ 178,304   

Income (loss) from discontinued operations

     329         —           (475     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net earnings available to common shareholders – basic

     64,719         62,955         145,343        178,304   

Interest associated with convertible notes, net of tax

     —           —           —          935   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net earnings available to common shareholders – diluted

   $ 64,719       $ 62,955       $ 145,343      $ 179,239   
  

 

 

    

 

 

    

 

 

   

 

 

 

Denominator for earnings per share:

          

Weighted average number of common shares outstanding

     158,665         158,215         159,225        155,223   

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

     2,133         2,710         2,586        3,151   

Assumed conversion of convertible notes

     —           —           —          3,066   
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted average diluted shares outstanding

     160,798         160,925         161,811        161,440   
  

 

 

    

 

 

    

 

 

   

 

 

 

Anti-dilutive shares of stock-based compensation awards excluded

     731         517         307        421   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Note 4. Fair Value of Financial Instruments

The Company had $173.0 million and $27.2 million of cash equivalents at September 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 September 30, 2011 and December 31, 2010 was not significant. The fair value of the Company’s long-term debt approximates its carrying value at September 30, 2011. 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
September 30,
     Nine Months  Ended
September 30,
 
     2011      2010      2011      2010  

Net loss

   $ 3,181       $ 2,080       $ 7,858       $ 4,370   

 

7


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):

 

     September 30,
2011
     December 31,
2010
 

Euro

   $ 28,512       $ 41,022   

Swedish Kronor

     26,400         23,212   

British Pound Sterling

     16,412         1,551   

Australian Dollar

     718         1,017   

Danish Kroner

     182         —     
  

 

 

    

 

 

 
   $ 72,224       $ 66,802   
  

 

 

    

 

 

 

At September 30, 2011, all of 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 $5.2 million and $5.1 million at September 30, 2011 and December 31, 2010, respectively.

 

Note 7. Inventories

Inventories consist of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

Raw material and subassemblies

   $ 207,747       $ 185,359   

Work-in-progress

     58,918         48,788   

Finished goods

     60,467         69,009   
  

 

 

    

 

 

 
   $ 327,132       $ 303,156   
  

 

 

    

 

 

 

 

Note 8. Property and Equipment

Property and equipment are net of accumulated depreciation of $170.2 million and $138.2 million at September 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 and as of September 30, 2011, there have been no triggering events that would require an updated impairment review. The carrying value of goodwill by reporting segment and the activity for the nine months ended September 30, 2011 is as follows (in thousands):

 

     Balance,
December 31,
2010
     Business
Acquisitions
     Currency
Translation
Adjustments
    Other (1)     Balance,
September 30.
2011
 

Thermal Vision and Measurement

   $ 236,181       $ —         $ 541      $ (102   $ 236,620   

Raymarine

     97,266         —           419        268        97,953   

Surveillance

     88,052         —           (42     2,552        90,562   

Detection

     41,026         —           —          (1,697     39,329   

Integrated Systems

     19,494         —           —          674        20,168   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 482,019       $ —         $ 918      $ 1,695      $ 484,632   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Primarily relates to adjustments for tax assets and liabilities recorded in relation to recent acquisitions.

 

8


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. Accordingly, the December 31, 2010 balance in the table above has been revised to reflect the change in reporting segments of ICx.

 

Note 10. Intangible Assets

Intangible assets are net of accumulated amortization of $91.8 million and $74.4 million at September 30, 2011 and December 31, 2010, respectively.

 

Note 11. Credit Agreements

At September 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 $14.0 million of letters of credit outstanding, which reduces the total available credit to $186.0 million.

 

Note 12. Accrued Product Warranties

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Accrued product warranties, beginning of period

   $ 19,214      $ 17,299      $ 18,686      $ 9,438   

Amounts paid for warranty services

     (948     (1,022     (6,128     (5,783

Warranty provisions for products sold

     (388     1,367        4,639        5,754   

Accrued product warranties acquired

     —          —          —          8,247   

Currency translation adjustments and other

     (448     503        233        491   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued product warranties, end of period

   $ 17,430      $ 18,147      $ 17,430      $ 18,147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Current accrued product warranties, end of period

       $ 14,090      $ 15,330   
      

 

 

   

 

 

 

Long-term accrued product warranties, end of period

       $ 3,340      $ 2,817   
      

 

 

   

 

 

 

 

Note 13. Long-Term Debt

In August 2011, the Company issued $250 million aggregate principal amount of its 3.750% senior unsecured notes due September 1, 2016 (the “Notes”). The net proceeds from the issuance of the Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest is payable on the Notes semiannually in arrears on March 1 and September 1, commencing March 1, 2012. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock.

 

9


FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 14. Shareholders’ Equity

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

 

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

   $ 465,467   

Income tax benefit of common stock options exercised

     4,729   

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

     10,291   

Stock-based compensation expense

     19,435   

Repurchase of common stock

     (124,384
  

 

 

 

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

   $ 375,538   
  

 

 

 

During the nine months ended September 30, 2011, the Company repurchased approximately 4,713,000 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, on June 10, 2011 to shareholders of record as of the close of business on May 20, 2011 and on September 9, 2011 to shareholders of record as of the close of business on August 22, 2011. The total cash payments for dividends in the nine months ended September 30, 2011 were $28.7 million.

 

Note 15. Comprehensive Earnings

The following table sets forth the calculation of comprehensive earnings for the periods indicated (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  

Net earnings

   $ 64,719      $ 62,955       $ 145,343      $ 178,304   

Translation adjustment

     (33,349     42,683         (1,549     2,480   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive earnings

   $ 31,370      $ 105,638       $ 143,794      $ 180,784   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

Note 16. 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.

 

10


FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Income Taxes

As of September 30, 2011, the Company had approximately $30.8 million of net unrecognized tax benefits of which $23.4 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. During the three months ended September 30, 2011, the Company recognized $8.0 million of previously unrecognized tax benefits which reduced the Company’s income tax provision by $5.7 million.

The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2011, the Company had approximately $2.1 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    2010
State of Oregon    2008 – 2010
State of Massachusetts    2008 – 2010
State of California    2006 – 2010
Sweden    2003 – 2010
United Kingdom    2007 – 2010
Germany    2004 – 2010
France    2006 – 2010

 

Note 18. 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.

 

11


FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 18. Operating Segments and Related Information – (Continued)

Operating Segments- (Continued)

 

As of January 1, 2011, within the Commercial Systems division, the Company combined its former Thermography and Commercial Vision Systems operating segments into the Thermal Vision and Measurement operating segment. Also on January 1, 2011 within the Government Systems division, certain ICx business units were combined with the legacy Government Systems operating segment 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 September 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 nine month period ended September 30, 2011 for the Raymarine operating segment, and for the three month and nine month periods ended September 30, 2011 for the 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
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue – External Customers:

        

Thermal Vision and Measurement

   $ 160,998      $ 132,399      $ 470,799      $ 397,377   

Raymarine

     35,442        36,909        136,169        64,133   

Surveillance

     139,827        163,189        431,164        489,418   

Detection

     21,193        —          56,284        —     

Integrated Systems

     13,867        —          44,434        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 371,327      $ 332,497      $ 1,138,850      $ 950,928   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue – Intersegments:

        

Thermal Vision and Measurement

   $ 3,799      $ 3,039      $ 14,197      $ 11,588   

Raymarine

     —          —          7        —     

Surveillance

     5,982        4,790        23,003        17,982   

Detection

     1,913        —          3,391        —     

Integrated Systems

     —          —          1,811        —     

Eliminations

     (11,694     (7,829     (42,409     (29,570
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12


FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 18. Operating Segments and Related Information – (Continued)

Operating Segments- (Continued)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Earnings (loss) from operations:

        

Thermal Vision and Measurement

   $ 47,162      $ 39,868      $ 131,447      $ 109,753   

Raymarine

     (2,824     977        11,829        4,420   

Surveillance

     51,872        62,177        149,672        190,807   

Detection

     1,997        —          (4,878     —     

Integrated Systems

     298        —          126        —     

Other

     (13,096     (17,235     (84,669     (45,036
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 85,409      $ 85,787      $ 203,527      $ 259,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

The loss from operations of Other for the nine months ended September 30, 2011 includes a litigation settlement payment of $39.0 million made during the second quarter of 2011.

 

     September 30,
2011
     December 31,
2010
 

Segment assets (accounts receivable, net and inventories):

     

Thermal Vision and Measurement

   $ 211,486       $ 198,419   

Raymarine

     59,497         58,236   

Surveillance

     330,228         327,240   

Detection

     29,310         39,270   

Integrated Systems

     12,217         11,516   

Discontinued Operations

     4,805         8,198   
  

 

 

    

 

 

 
   $ 647,543       $ 642,879   
  

 

 

    

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

United States

   $ 205,579       $ 182,732       $ 598,236       $ 503,193   

Europe

     87,647         71,737         279,341         220,740   

Other international

     78,101         78,028         261,273         226,995   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 371,327       $ 332,497       $ 1,138,850       $ 950,928   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30,
2011
     December 31,
2010
 

United States

   $ 590,509       $ 583,299   

Europe

     293,163         287,081   

Other international

     9,329         9,423   
  

 

 

    

 

 

 
   $ 893,001       $ 879,803   
  

 

 

    

 

 

 

 

13


FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 18. Operating Segments and Related Information - (Continued)

 

Major Customers

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

US Government

   $ 118,659       $ 120,741       $ 348,944       $ 339,897   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Note 19. 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 valuation of the assets acquired and liabilities assumed. Goodwill and identifiable intangible assets will be recorded in the Thermal Vision and Measurement business segment. The excess purchase price of approximately $25.2 million has preliminarily been reported in other assets as of September 30, 2011.

 

Note 20. Subsequent Events

On October 19, 2011, the Company’s Board of Directors declared a quarterly dividend of $0.06 per share on its common stock, payable on December 9, 2011, to shareholders of record as of close of business on November 21, 2011. The total cash payment of this dividend will be approximately $9.4 million.

 

14


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 September 30, 2011 increased by 11.7 percent, from $332.5 million in the third quarter of 2010 to $371.3 million in the third quarter of 2011. The increase was primarily due to increased revenue in our Thermal Vision and Measurement segment and revenues reported by ICx Technologies, Inc. (“ICx”) which was acquired on October 4, 2010, partially offset by lower revenue from our Surveillance segment. Excluding revenue from ICx, revenue for the three month period ended September 30, 2011 was flat compared to the same period in 2010. Revenue from our Thermal Vision and Measurement segment increased by 21.6 percent for the three month period ended September 30, 2011 compared to the same period in 2010, while revenue from our Surveillance segment decreased by 14.3 percent for the three month period ended September 30, 2011 compared to the same period in 2010.

Revenue for the nine months ended September 30, 2011 increased by 19.8 percent, from $950.9 million in the first nine months of 2010 to $1,138.9 million in the first nine months of 2011. The increase was primarily due to increased revenue from our Thermal Vision and Measurement segment, revenues reported by Raymarine Holdings, Ltd. (“Raymarine”) which was acquired on May 14, 2010, and ICx. Excluding revenue from Raymarine and ICx, revenue for the nine month period ended September 30, 2011 was flat compared to the same period in 2010. Revenue from our Thermal Vision and Measurement segment increased by 18.5 percent for the nine month period ended September 30, 2011 compared to the same period in 2010, while revenue from our Surveillance segment declined by 11.9 percent for the nine month period ended September 30, 2011 compared to the same period 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 14 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.

 

15


International sales accounted for 44.6 percent and 45.0 percent of total revenue for the quarters ended September 30, 2011 and 2010, respectively, and 47.5 percent and 47.1 percent for the nine months ended September 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.

Gross profit. Gross profit for the quarter ended September 30, 2011 was $201.9 million compared to $182.1 million for the same quarter last year. Gross profit for the nine months ended September 30, 2011 was $603.8 million compared to $530.8 million for the same period of 2010. Gross margin, defined as gross profit divided by revenue, decreased slightly from 54.8 percent in the third quarter of 2010 to 54.4 percent in the third quarter of 2011, and from 55.8 percent in the first nine months of 2010 to 53.0 percent in the first nine months of 2011. The decrease in gross margin for both the three and nine 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 third quarter of 2011 totaled $35.2 million, compared to $28.5 million in the third quarter of 2010. Research and development expenses for the first nine months of 2011 and 2010 were $112.3 million and $81.6 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; $10.0 million and $29.3 million of the increase in research and development expenses for the three months and nine months ended September 30, 2011, respectively, was related to the acquisitions. As a percentage of revenue, research and development expenses were 9.5 percent and 8.6 percent for the three months ended September 30, 2011 and 2010, respectively, and 9.9 percent and 8.6 percent for the nine months ended September 30, 2011 and 2010, respectively.

Selling, general and administrative expenses. Selling, general and administrative expenses were $81.3 million for the quarter ended September 30, 2011, compared to $67.8 million for the quarter ended September 30, 2010. Selling, general and administrative expenses for the first nine months of 2011 and 2010 were $288.0 million and $189.2 million, respectively.

The increase in selling, general and administrative expenses for the third quarter of 2011 was primarily due to increased spending in each of our business segments to drive future growth, severance costs of $3.5 million, and the operating expenses related to businesses acquired during the fourth quarter of 2010; $13.3 million of the increase in selling, general and administrative expenses for the third quarter of 2011 is related to the acquisitions, including $2.2 million of severance costs.

The increase in selling, general and administrative expenses for the first nine months of 2011 was primarily due to the payment of a $39 million litigation settlement in the second quarter of 2011 and increased spending in each of our business segments to drive future growth, severance costs of $3.5 million, and the operating expenses related to businesses acquired during 2010; $49.5 million of the increase in selling, general and administrative expenses for the nine months ended September 30, 2011 is related to the acquisitions, including $2.2 million of severance costs.

Selling, general and administrative expenses as a percentage of revenue were 21.8 percent and 20.4 percent for the quarters ended September 30, 2011 and 2010, respectively, and 25.3 percent and 19.9 percent for the nine months ended September 30, 2011 and 2010, respectively. Excluding the litigation settlement, severance costs and the operating expenses of the businesses acquired during 2010 and 2011, selling, general and administrative expenses for the three month period and nine month period ended September 30, 2011 were flat and increased by 5.5 percent, respectively, over the same periods of 2010 and represented 20.7 percent and 21.0 percent of revenue for the three months and nine months ended September 30, 2011, respectively.

Interest expense. Interest expense for the third quarter and first nine months of 2011 was $1.5 million and $2.3 million, respectively, compared to $0.3 million and $2.5 million for the same periods of 2010. The increase in interest expense for the third quarter of 2011 was due to interest expense associated with the $250 million aggregate principal amount of 3.750% senior unsecured notes due September 1, 2016 issued during the quarter.

Income taxes. The income tax provision of $19.6 million for the three months ended September 30, 2011, represents a quarterly effective tax rate of 23.3 percent. We expect the annual effective tax rate for the full year of 2011 to be approximately 28 percent to 30 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. The quarterly effective tax rate is significantly lower than the expected annual effective tax rate due to the recognition of previously unrecognized tax benefits which resulted in a $5.7 million reduction of our income tax provision during the quarter ended September 30, 2011.

 

16


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 that was reported through December 31, 2010 has since been separated into the Surveillance, Detection and Integrated Systems operating segments. As of January 1, 2011, the former Government Systems operating segment is also included in the Surveillance operating segment.

Thermal Vision and Measurement

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 161.0      $ 132.4      $ 470.8      $ 397.4   

Earnings from operations

     47.2        39.9        131.4        109.8   

Operating margin

     29.3     30.1     27.9     27.6

Backlog, end of period

         165.7        139.4   

Revenue for the three months and nine months ended September 30, 2011 increased by 21.6 percent and 18.5 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 and the acquisition of Aerius Photonics, LLC on July 21, 2011.

Raymarine

Raymarine operating results are as follows (in millions):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 35.4      $ 36.9      $ 136.2      $ 64.1   

Earnings from operations

     (2.8     1.0        11.8        4.4   

Operating margin

     (8.0 )%      2.6     8.7     6.9

Backlog, end of period

         6.5        8.5   

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

Surveillance

Surveillance operating results are as follows (in millions):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

   $ 139.8      $ 163.2      $ 431.2      $ 489.4   

Earnings from operations

     51.9        62.2        149.7        190.8   

Operating margin

     37.1     38.1     34.7     39.0

Backlog, end of period

         293.6        385.5   

Revenue for the three months and nine months ended September 30, 2011 decreased by 14.3 percent and 11.9 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 $5.1 million and $12.6 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.

 

17


Detection

Detection operating results are as follows (in millions):

 

     Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2011
 

Revenue

   $ 21.2      $ 56.3   

Earnings from operations

     2.0        (4.9

Operating margin

     9.4     (8.7 )% 

Backlog, end of period

       35.3   

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

Integrated Systems

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

 

     Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2011
 

Revenue

   $ 13.9      $ 44.4   

Earnings from operations

     0.3        0.1   

Operating margin

     2.1     0.3

Backlog, end of period

       44.8   

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

Liquidity and Capital Resources

At September 30, 2011, we had cash and cash equivalents on hand of $374.5 million compared to $193.1 million at December 31, 2010. The increase in cash and cash equivalents was primarily due to the net proceeds of $247.7 million from the issuance of $250 million aggregate principal amount of our 3.750% senior unsecured notes due September 1, 2016 (the “Notes”), 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 business acquisitions.

Cash provided by operating activities totaled $127.7 million for the nine months ended September 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.

Cash used in investing activities of $58.3 million for the nine months ended September 30, 2011 primarily related to the acquisition of Aerius Photonics, LLC, and 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 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 with which we were in compliance at September 30, 2011. The five-year revolving line of credit available under the Credit Agreement is not secured by any of our assets.

 

18


At September 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 $14.0 million of letters of credit outstanding at September 30, 2011, which reduced the total available credit under the Credit Agreement.

On August 19, 2011, the Company issued $250 million aggregate principal amount of the Notes. The net proceeds from the issuance of the Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest is payable on the Notes semiannually in arrears on March 1 and September 1, commencing March 1, 2012. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of our common stock.

A Swedish subsidiary has a 30 million Swedish Kronor (approximately $4.4 million) line of credit. At September 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 provided by financing activities of $113.9 million for the nine months ended September 30, 2011 primarily related to the net proceeds of $247.7 million from the issuance of $250 million five year unsecured notes, the payment of dividends and repurchase of approximately 4,713,000 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 September 30, 2011, there were approximately 15.3 million shares still authorized for repurchase under this authorization, which expires on February 9, 2013.

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 September 30, 2011, our contractual obligations were as follows:

 

     Payments Due by Period  

Contractual Obligations

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

Long-term debt

   $ 296,875       $ 9,375       $ 18,750       $ 268,750       $ —     

Operating leases

     49,714         15,057         17,572         5,986         11,099   

Licensing rights

     3,163         550         1,100         1,100         413   

Post-retirement obligations

     22,246         545         13,091         1,028         7,582   

Other obligations

     1,023         862         161         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 373,021       $ 26,389       $ 50,674       $ 276,864       $ 19,094   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table above reflects the issuance of $250 million aggregate principal amount of our Notes, which was the only material change in the specified contractual obligations during the quarter ended September 30, 2011.

 

19


Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of September 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 September 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 September 30, 2011 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

 

20


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 September 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
 

July 1 to July 31, 2011

     100,000       $ 28.38         100,000      

August 1 to August 31, 2011

     2,201,826       $ 24.20         2,201,826      

September 1 to September 30, 2011

     1,698,174       $ 26.18         1,698,174      
  

 

 

    

 

 

    

 

 

    

Total

     4,000,000       $ 25.15         4,000,000         15,287,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

21


Item 6. Exhibits

 

Number

  

Description

  4.1    Indenture, dated August 19, 2011, between FLIR Systems, Inc. and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 19, 2011).
  4.2    First Supplemental Indenture, dated August 19, 2011, between FLIR Systems, Inc. and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 19, 2011).
  4.3    Form of 3.750% Note due September 1, 2016 (Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on August 19, 2011).
10.1    First Amendment to Credit Agreement by and among FLIR Systems, Inc. and certain subsidiaries of FLIR Systems, Inc., as borrowers, Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A and other Lenders dated August 9, 2011 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 12, 2011).
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

 

22


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     November 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)

 

23

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     November 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     November 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 September 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     November 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 September 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     November 8, 2011  

    /s/ A NTHONY L. T RUNZO

      Anthony L. Trunzo
      Chief Financial Officer