FLIR Systems, Inc.
FLIR SYSTEMS INC (Form: 10-K, Received: 02/29/2012 13:21:09)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________ 
FORM 10-K
(Mark one)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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)
Registrant’s telephone number, including area code: (503) 498-3547
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange
on Which Registered
Common Stock, $0.01 par value
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:    None
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x
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 (§229.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K.     x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions 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 Act).     Yes   ¨     No   x
As of June 30, 2011 , the aggregate market value of the shares of voting and non-voting stock of the registrant held by non-affiliates was $5,346,910,436 .
As of February 22, 2012, there were 154,044,443 shares of the registrant’s common stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant has incorporated by reference into Part III of this Form 10-K, portions of its Proxy Statement for its 2012 Annual Meeting of Shareholders.



FLIR Systems, Inc.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
 
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15



Forward-Looking Statements
This Annual Report on Form 10-K (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 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 “Risk Factors” in Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, 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, economic 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.

PART I

ITEM 1.
BUSINESS
Overview
FLIR Systems, Inc. (“FLIR,” the “Company,” “we,” “us,” or “our”) is a world leader in sensor systems that enhance perception and awareness. We were founded in 1978 and have since become a premier designer, manufacturer, and marketer of thermal imaging systems. Our advanced sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications in commercial, industrial, and government markets worldwide.
Our goal is to both enable our customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for our shareholders. We create value for our customers by providing advanced surveillance and tactical defense capabilities, improving personal and public safety and security, facilitating air, ground, and maritime navigation, enhancing enjoyment of the outdoors, providing infrastructure inefficiency information, conveying pre-emptive structural deficiency data, displaying process irregularities, and enabling commercial business opportunities through our continual support and development of new thermal imaging data and analytics applications. Our business model meets the needs of a multitude of customers - we sell off-the-shelf products to a wide variety of markets in an efficient, timely, and affordable manner as well as offer a variety of system configurations to suit specific customer requirements. Centered on the design of products for low cost manufacturing and high volume distribution, our commercial operating model has been developed over time and provides us with a unique ability to adapt to market changes and meet our customers’ needs.
Our business is organized into two divisions: Commercial Systems and Government Systems. Within these divisions, we had five reporting segments in 2011: Thermal Vision & Measurement and Raymarine, which comprise the Commercial Systems division; and Surveillance, Detection, and Integrated Systems, which make up our Government Systems division.
Thermal Vision & Measurement (“TVM”) products are generally sold for applications where the customer need is to see at night or in adverse conditions or to image a scene while gathering valuable temperature information. Due to continued reductions in the cost of infrared technology, demand in large untapped commercial markets such as commercial security, automotive, marine, airborne, personal night vision, and first responder markets has grown rapidly. Our TVM products range from highly sensitive cameras with extensive analytic capabilities and sophisticated image processing to less expensive cameras offering a mix of performance and value for less demanding applications. Our infrared sensors business, which sells focal plane arrays and camera cores internally as well as to third parties on an original equipment manufacturer (“OEM”) basis, is also part of TVM. Revenue from TVM has grown at a compound annual rate of 16 percent since 2006 and was $660.3 million, or 43 percent of consolidated revenue in 2011.
Raymarine designs, develops, and markets electronics for the maritime market and is a leading global provider of fully integrated “stem to stern” networked electronic systems for boats of many sizes. Products include multifunction displays used to control multiple onboard electronic components, radar systems, thermal imaging cameras, autopilot systems, sonar modules, connectivity software, and various other instruments used to monitor factors such as boat speed, direction, and location. The business distributes its products through a large network of independent distributors and retailers as well as through its relationships with boat builders, providing both first fitment and aftermarket solutions. During 2011, Raymarine generated revenue of $171.5 million and represented 11 percent of consolidated 2011 revenue.

1


Surveillance is focused on selling advanced imaging and sensor systems to government customers and markets where high performance is required. Typical applications include intelligence, surveillance, and reconnaissance (“ISR”), force protection, drug interdiction, search and rescue, special operations, and target designation. Surveillance products are sold off-the-shelf or can be customized for specific applications and frequently incorporate additional sensors, including visible light cameras, radars, low light cameras, laser rangefinders, laser illuminators, and laser designators. Surveillance products range in price from under $10,000 for certain hand-held and weapon-mounted systems to over $1 million for our most advanced stabilized targeting systems. Since 2006, Surveillance revenue has grown at a compound annual rate of 17 percent. Surveillance revenue during 2011 was $577.6 million in 2011, or 37 percent of consolidated revenue.
Detection primarily produces sensor systems that detect and identify chemical, biological, radiological, nuclear, and explosives (“CBRNE”) threats. Detection has unique strengths in understanding the nature of sophisticated security threats, the technological potential of advanced detection instruments and systems, and the complex procurement processes of United States government customers. With a history of entering into government-funded design and development contracts, Detection has built relationships with key government customers and has experience in converting highly specialized technologies into commercial solutions that are marketable to a global customer base. During 2011, Detection generated $79.9 million of revenue, representing 5 percent of consolidated 2011 revenue.
Integrated Systems 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. Integrated Systems incorporates advanced sensors from both the FLIR product suite and external vendors in order to design and manufacture adaptive and effective force protection, homeland security, and commercial solutions that are designed to save lives and protect critical assets. Integrated Systems revenue in 2011 was $54.8 million, representing 4 percent of consolidated 2011 revenue.
For additional information concerning the Company’s segments, including revenues from external customers, earnings from operations and total assets by segment presented in accordance with our segment structure, see Note 17 to the Consolidated Financial Statements in Item 8.
Infrared Technology Overview
Infrared is a portion of the electro-magnetic spectrum that is adjacent to the visible spectrum, but is invisible to the human eye due to its longer wavelengths. Unlike visible light, infrared radiation (or heat) is emitted directly by all objects above absolute zero in temperature. Thermal imaging systems detect this infrared radiation and convert it into an electronic signal, which is then processed into a video signal and displayed on a video screen. Thermal imaging systems are different than other types of “low light” vision systems, such as visible light intensification used in green or gray sighted night vision goggles. Infrared imaging systems are not adversely affected by the presence of visible light, so they can be used day or night, and they are not susceptible to rapid changes in visible light levels. Since infrared systems are detecting emitted infrared radiation, they are passive and thus more covert than certain “active” or “illuminated” systems. Additionally, thermal imaging systems can measure very small temperature differences, a critical feature for a variety of commercial, industrial, and scientific applications.
An infrared detector, which collects or absorbs infrared radiation and converts it into an electronic signal, is the primary component of thermal imaging systems. The two types of infrared detectors we manufacture and use in our systems are often referred to as “cooled” and “uncooled.” Cooled detectors utilize a mechanical micro-cooler to reduce the operating temperature of the infrared sensor to -200° C, and offer high sensitivity and resolution for long-range applications or those applications requiring high measurement precision. These detectors, while more sensitive and thus able to see farther, result in a product that is more expensive, heavier, more complex, and uses more power than those using uncooled detectors. Uncooled detectors operate at room temperature and thus do not require a micro-cooler, resulting in products that are lighter, use less power and are less expensive to produce than cooled detectors. While the performance of uncooled detectors is improving, uncooled detectors are still less sensitive than cooled detectors. The cost of both types of detectors is declining and we expect to continue reducing costs as volumes rise and the technology advances in the future. We currently expect demand for both types of detectors, or sensors, to increase.
Recent Acquisitions
Since 2006, we have made a total of thirteen acquisitions. The most recent significant acquisitions were Raymarine Holdings, Ltd. (“Raymarine”) in May 2010 and ICx Technologies, Inc. (“ICx”) in October 2010. The Raymarine acquisition significantly enhanced the distribution capabilities of our thermal marine products business by adding a substantial number of dealer outlets and marine OEM relationships. Additionally, Raymarine provided us the opportunity to build an integrated product line that offers thermal imaging cameras coupled with Raymarine’s multifunction displays, radars, depth sounders, global positioning systems, and autopilots products to create the broadest, most effective, and easiest to use suite of products in the marine electronics industry. The acquisition of ICx expanded our capabilities into advanced sensor technologies that detect CBRNE threats, including products that are currently sold to the defense and homeland security markets. ICx also enhanced our existing intelligence, surveillance, and reconnaissance product suite by adding advanced radars, imaging, and integrated platforms solutions. During 2011, Raymarine is reported as an individual business segment while the majority of ICx has been incorporated into our Detection and Integrated Systems segments, with a small portion of the business being included in Surveillance.

2


We are selective and opportunistic in our acquisitions, seeking to purchase companies that are strategically significant and additive or complementary to our existing technologies, distribution network, or product portfolio. We are continuously evaluating opportunities for additional acquisitions, but cannot predict the timing, size, or nature of any future activity.
FLIR Systems, Inc. is an Oregon corporation and was incorporated in 1978. Our headquarters are located at 27700 SW Parkway Avenue, Wilsonville, Oregon 97070-8238, and the telephone number at this location is (503) 498-3547. Information about the Company is available on our website at www.flir.com.
Competitive Strengths
With our decades of experience in developing and marketing infrared sensor products, we have built several unique competitive advantages that are core to our success. We look to leverage these strengths to continue to increase the ownership and application of advanced sensing technologies and to grow our revenue and profitability:
Commercial Operating Model
A key differentiator of our business model is our pervasive commercial mindset. This is characterized by our focus on superior customer service, unparalleled new product speed-to-market, consistency in exceeding customer expectations, innovation of new technologies and unique products, ability to design for large-volume and low cost production, and control of multiple production inputs through our vertically integrated operations. Our manufacturing capabilities, which reach across the world in both developed and emerging regions, increase the effectiveness and efficiency of meeting customer needs and delivering value.
Vertically Integrated Manufacturing
We have built a vertically integrated manufacturing operation that provides control over certain key component technologies. Through acquisitions and internal development, we have created this internal supply network that allows for optimized manufacturing throughput, increased product design flexibility, enhanced product reliability, and independence in designing key components. Further, this integrated approach enables us to lower costs and to improve the functionality of critical components so that they work together efficiently within our products. In comparison to competitors that do not possess a similar level of integration, we can deliver products in a more timely and cost-effective manner as we rely less on third-party suppliers for critical components.
Industry-Leading Market Position
We are a leading developer of highly advanced, proprietary sensor systems that are highly reliable, accurate, and effective. We believe that none of our competitors have comparable penetration into as many markets as we do, including the government, industrial, commercial, and consumer sectors. Having a leading position in the markets we serve allows us to secure new and continuing business while also achieving manufacturing economies of scale. Increased unit volumes work to reduce costs throughout our business, which allows us to lower our prices. This creates a virtuous cycle whereby we are able to make advanced sensor technologies more affordable to a wide array of end-users while reducing costs. This established presence across multiple markets enhances our competitive position.
Broad Product Line
We offer a wide array of sensor products, including infrared imaging cameras and systems, detector cores, CBRNE threat detectors, test and measurement instruments, radars, maritime electronics, and related products and solutions. Our customers can buy these products off-the-shelf or request a customized sensor solution. This ability to serve a variety of customers with disparate needs and specifications allows us to be successful in facilitating the use of advanced sensors in a broad range of applications. We have the ability to rapidly conceive, design, prototype, and manufacture new products to meet the evolving landscapes of the markets we serve. Our development process incorporates significant customer satisfaction and field-use data, and results in the rapid creation of new features that are able to address the changing needs of the end-user. This continual evolution of our products has proven successful through our high level of customer retention and revenue and income growth.
Internally-Funded Innovation
We have expertise in developing sensing instruments that are both highly advanced from a technical standpoint and commercially viable and salable across multiple pools of customers. Since 2006, we have invested approximately $600 million in research and development (“R&D”) of new technologies and products, with approximately 85 percent of this expense paid for with our internal funds. Utilizing our own funds for R&D provides us with full ownership of the development process and the end product, and also focuses our R&D teams on projects that will result in products that are commercially viable and can be marketed to multiple markets for multiple applications.

3


Diverse Customer Base
We sell our products to thousands of commercial and government customers for use in a variety of applications and markets worldwide. The buyers and users of our products include government agencies and militaries, aerospace and defense contractors, electricians and tradesmen, commercial ports, first responders, critical infrastructure operators, electrical generation and gas processing plants, heating and air conditioning technicians, building inspectors, food processors, automobile parts manufacturers, commercial and residential security providers, research and lab technicians, manufacturing companies, doctors and veterinarians, recreational boaters, and the general consumer market. We believe that the diversity of our customers, end-user markets, and applications helps to mitigate fluctuations in demand from any particular customer or market. The diversity of our customers and of the end-users of sensor technologies provides us with multiple long-term growth opportunities.
Global Distribution Capabilities
Our core infrared imaging products have evolved from a niche technology sold primarily to military customers and high-end research firms to become a valuable information gathering and assessment tool to a multitude of industrial, government, and commercial entities. With the widening adoption of these technologies, distribution has become a key advantage to our business globally. We believe our sales and distribution organization is among the largest in the industry and effectively covers the world with a combination of direct sales, third-party representatives and distributors, independent dealers, application engineers, and service and training centers. Internationally, we have invested heavily to build a strong presence to sell and service our products, a key advantage in penetrating particular markets, such as foreign governments. Our sales representatives, including third-party distributors, undergo a comprehensive training program on each product’s technical specifications, functions, and applications. We also continuously update our training programs to incorporate technological and competitive shifts and changes. We sell in many distinct markets and have established specific sales channels for each market.
We continue to expand this distribution platform through internal growth and outside acquisitions. Our 2010 acquisition of Raymarine further enhanced our distribution network of thermal marine products by adding approximately 2,500 dealers, retailers, distributors and wholesalers and 250 OEM relationships to our maritime business. Additionally, our 2010 acquisition of ICx provided us with access to new markets and delivered long-standing relationships with many government customers.
Consistent Generation and Distribution of Cash Flows
Our earnings, combined with our modest capital expenditure requirements, result in the generation of significant free cash flow. In the years ended December 31, 2011 and 2010, our net cash provided by operating activities was $243.9 million and $255.3 million, respectively. Over the past 5 years, our operating cash flows have exceeded our net earnings every year except in 2007. This ability to consistently convert revenues into net operating cash provides us significant flexibility in making growth and capital deployment decisions, such as executing strategic acquisitions, undertaking new product or technology development initiatives, building out our distribution and marketing presence, making capital investments, or repurchasing shares of our common stock in the open market. Since 2006, we have utilized approximately $625 million of cash for acquisitions, $310 million for share repurchases, and $220 million for capital expenditures. In 2011, we initiated a quarterly common stock dividend, further augmenting our capital structure and shareholder return strategy.
Growth Strategies
Our clear and consistent strategy has enabled strong and steady performance in our business while allowing expansion into areas of growth. We look to build on our leading position in advanced sensor systems by leveraging our key competitive strengths through a focused corporate strategy that will yield growth in both revenue and profitability. Key elements of the FLIR growth strategy include:
Grow Existing and Enter New Markets
A key element of our success is our ability to deliver high-value sensor technologies with various specifications and price points to reach a rapidly expanding range of customers. While our commercial operating model and innovative development teams work to continually increase the availability, value, and effectiveness of our products, our sizable and growing end-user population often discover new uses for our technologies. We will continue to enable our existing markets, facilitate customer application innovation, and expand into new areas of opportunity by making investments in the development of advanced multi-use products, best-in-class field-located sales and service capabilities, proactive technical and application communication forums, integrated and expert sales and marketing organizations, comprehensive customer training, and capabilities to rapidly deploy new products and solutions.

4


Design and Develop Innovative Sensor Systems
We intend to continue to broaden our product line by developing next-generation sensor technologies by leveraging our internally-funded innovation centers and, in limited situations that are strategically beneficial to our commercial model, by using customer funds. Creating a regular flow of new products that incorporate novel features and technologies while also reducing their size, weight, and power consumption is critical to our continued success in our existing and future markets. We allocate significant resources to business and product development, concentrating on tracking and analyzing industry and technology trends. By being aware of our changing customers' needs and the trends within our markets, we expect to bring to market the most cutting-edge and innovative products that provide critical information to secure, protect and improve lives and resources.
Continually Reduce Costs
Our ability to continue penetrating and expanding on our leading market position and into the markets for advanced sensor systems is predicated on our success at reducing our internal costs to manufacture systems. Through our commercial operating model, we have had great success designing and manufacturing products that benefit from economies of scale and thus reduce our cost to deliver a product to our customers. We expect to further leverage this model and accelerate the virtuous cycle our business has created where increased unit volume output reduces our costs, allowing us to lower selling prices, which increases demand and sales volume for our products. We intend to continue to reduce costs, through continuing to vertically integrate our operations, expanding our use of shared services, rationalizing our strategic sourcing alternatives, and diversifying our manufacturing operations, which we believe will result in increased market demand for our products.
Expand Global Reach
Expanding and strengthening our already substantial distribution network is vital to our ability to keep pace with demand and the growing adoption of advanced infrared and threat detection systems. Investing in our direct sales force and building relationships with independent distributors and partners is a key priority. Building a presence in new international markets has been successful, most recently in regions of the Middle East, and we intend to continue the development of our global reach. Developing countries such as India and China are areas of focus, as they are emerging economies for our technologies. Additionally, as our sensor technologies become more affordable and prevalent in consumer markets, we have worked to strengthen our marketing and sales channels to better communicate with and serve the millions of potential customers that transact over the internet, through catalogs, and at retail locations.
Build Application Awareness and Our Brand
Both thermal imaging and CBRNE detection technologies are still in the early stages of adoption in many of our markets. We believe that as people understand and recognize the extensive commercial, consumer, and industrial uses for the information our sensors provide, our business will continue to grow. As such, we strive to communicate the benefits of thermal and detection sensors to new market participants in order to drive demand for our products. We leverage our distribution channels to focus on marketing activities that incorporate internet promotion, advertising, direct mail, press and demonstration tours, technical articles for publications, and sponsorship of and participation in most major trade shows. Additionally, we strive to support the advancement of new sensor uses, provide world-class service and support, and listen to customer feedback and incorporate the findings into our solutions to further build the awareness of our solutions and our brand. These activities give us the opportunity to educate potential customers about the key features and attributes of our products and how they may be used to address specific customer needs. As an example, we have partnered with various television and internet outlets to exhibit the FLIR product line and demonstrate the unique value of our products.
Complement Core Competencies with Strategic Acquisitions
Infrared imaging has been and remains our core business. Our unique position as a leading infrared imaging products company has enabled us to build an integrated sensors company, having recently added CBRNE detection, radar, maritime, and test and measurement products. We intend to continue investing in complementary technologies, products, and distribution channels to grow our business and become an integrated, single-source provider of advanced sensor systems and solutions.
Focus on Financial Performance
We are focused on translating success in selling our products into high margins and increasing profits. We have been consistently successful in doing so through cost discipline, considering the impact of key business decisions on financial performance, and benchmarking our business against some of the best performing companies in the world. Coupling consistent sales growth with a focus on controlling costs has yielded significant financial flexibility. The cash flows that our business generates has allowed us to invest in growth initiatives as well as return value to our shareholders. Since 2006, our revenue, earnings per share, and operating cash flows have grown at annual rates of 22 percent, 16 percent and 16 percent, respectively. We evaluate opportunities to deploy our cash flows in the context of long-term profitability and shareholder return impact.

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Business Segments
Thermal Vision & Measurement

Our Thermal Vision & Measurement segment addresses thermal imaging applications where a customer has a need to see at night or in adverse conditions, or to image a scene while also gathering valuable temperature information. These markets have grown in size and breadth as prices have declined, volumes have increased, and new applications have emerged. While these markets are broad and growing rapidly, many of these markets exhibit low penetration rates for infrared technology. Our strategies in this business are to continue to develop products for high-end applications while introducing new products at lower price points, and to capitalize on highly price-elastic demand in numerous emerging markets. These strategies focus our efforts on building distribution channel relationships, accelerating design cycles, reducing manufacturing costs, and providing excellent customer service. While we expect markets to continue to develop in the future, significant markets for our TVM products today include:

Thermal Vision Markets
Security and Surveillance
Thermal imaging systems have been used for surveillance and perimeter security of government, military and industrial facilities for many years. Over the past few years, we have introduced a series of lower priced, purpose built systems targeted at the commercial security market and are actively expanding distribution in this market. Our security products are now being used to protect critical infrastructure, ports, borders, commercial sites, and residential homes. Demand for security systems utilizing thermal imaging technology is growing rapidly, especially in lower cost, higher volume market segments.
 
 
Automotive Night Vision
We offer a night vision system for passenger automobiles that provides drivers with the ability to see at night and through obscurants, such as fog, at distances much further and wider than can be seen with traditional headlights. We currently provide camera cores for certain Audi, BMW, and Rolls Royce models through our partnership with Autoliv Electronics, a major supplier of automotive safety equipment. We expect to continue to expand this technology into new makes and models over the next several years.
 
 
Marine
In 2006, we introduced the first cost-effective infrared device specifically designed for recreational boating, cruise lines, commercial fishing and merchant marine vessels, ferries, and other maritime markets. Since then we have aggressively expanded distribution through a combination of direct sales and a network of dealers. Our acquisition of Raymarine has greatly expanded our distribution capabilities as well as our product breadth. We now offer an integrated suite of maritime electronics that utilizes multifunction displays, infrared cameras, depth sounders, GPS, auto pilots, and advanced command and control software.
 
 
Personal Vision
We are pioneering the use of advanced thermal imaging technology for consumer applications. Our easy to use, affordable, and lightweight personal vision thermal cameras give people the ability to see at night and stay safe in various settings. We enhance people’s enjoyment of the outdoors by enabling them to keep track of their camping party, see and track animals, and navigate during deteriorated weather conditions. In the home, our cameras can be used for numerous household and security applications, such as locating heat leaks, evaluating insulation coverage, detecting water damage, identifying intruders, and locating pests.
 
 
Law Enforcement
We are a leader in the supply of low cost, hand-held systems to the law enforcement market. These cameras provide a lightweight, cost-effective, high performance tool for police officers and other law enforcement professionals to conduct search and rescue, surveillance, or pursuit missions.
 
 
OEM Markets
We supply cooled and uncooled camera cores, sensors, and readout integrated circuits on an OEM basis for a broad range of applications where customers require a product at a lower level of integration than a fully developed thermal imaging system. Examples of major customers in this segment are Mine Safety Appliances (firefighting); Bullard (firefighting); AeroVironment (unmanned aerial vehicles); Northrop Grumman (cooled cores for military applications); Hologic (readout integrated circuits for digital X-ray); and various makers of security systems worldwide.



6


Thermal Measurement Markets
Predictive Maintenance
Thermal imaging systems are used for monitoring the condition of mechanical and electrical equipment. Such monitoring assists our customers in identifying equipment faults (manifested as hot spots) so they can be repaired before they fail. This increases equipment productivity and avoids catastrophic failures or major damage, which reduces operating expenses by lowering repair costs and reducing downtime. Improved functionality of image analysis software, smaller size and weight, and simplicity of system operation are critical factors for this well established market segment.
 
 
Research & Development
Infrared’s unique ability to detect very small differences in temperature while detailing complex thermal dynamics and patterns makes thermal imaging systems a useful tool in a wide variety of research and development applications. Our systems provide the ability to view thermal distribution in real time for products ranging in size from small hybrid integrated circuits to jet engines. Common applications include product development of microelectronics, cell phones, laptop computers, telecommunications equipment, consumer appliances, automotive components, and aircraft engines. Systems used in research and development applications typically require very high imaging performance and measurement precision, coupled with extensive analysis and reporting software. We have a complete line of both cooled and uncooled infrared imagers specifically designed for high-end research and development applications.
 
 
Manufacturing Process Control
Thermal imaging applications for manufacturing process control include applications where temperature consistency is critical, including monitoring the quality of metal, plastic and glass cast parts, which are highly dependent upon the temperature distribution in the mold; monitoring the quality of paper, which is dependent upon proper and even moisture distribution during the drying process; and monitoring the quality of products such as rubber gloves, which can be thermally examined to locate abnormally warm or cool spots, indicating non-uniform thickness that may result in a quality defect.
 
 
Building Inspection
Infrared imagers can detect missing insulation, electrical faults, water intrusion and pest infiltration, gauge energy efficiency, and help detect the presence of moisture. Market segments include building diagnostics, energy auditing and home inspection, property and facility management, HVAC and plumbing, and moisture detection and restoration. This market has grown rapidly as costs have declined and new uses for thermal imaging systems have emerged.
 
 
Gas Detection
Specially designed infrared systems can detect and image hydrocarbon gas emissions or leaks. Using this technology, we have established a market focused on leak detection at gas production, transmission and storage locations, as well as compliance monitoring by environmental and other regulatory agencies. New applications are emerging for this technology. For example, we now have a system that detects sulfur hexafluoride, a dangerous pollutant and potential fire hazard used as an insulator in electrical transformers. During 2010, the U.S. Environmental Protection Agency (“EPA”) issued a requirement that large-scale extractors and distributors of greenhouse gases begin to annually self-report the amount of greenhouse gas that is emitted from their facilities. The issuance noted that the EPA will allow, and in certain situations require, the use of optical gas imaging systems such as ours to be used to perform the emission analysis.
 
 
Test and Measurement
We supply trade professionals a wide range of test equipment to deliver high accuracy readings for the measurement of electricity, light, sound, temperature, humidity, airflow, revolutions per minute and water quality. Our fifteen product categories provide innovative tools that are used worldwide and are available through catalogs, distributors and retail stores.
 
 
Emerging Markets
We have successfully introduced progressively lower priced thermal imaging systems that have enabled us to expand traditional thermography markets and open new markets for our products. These products, the latest of which is the i-family, have met with strong market acceptance in the higher volume building and electrical inspection markets, and we expect additional market segments for thermal imaging to develop as prices continue to decline. These market segments may include healthcare and screening, food service and distribution, veterinary science, automotive care, aircraft inspection, and maritime vessel inspections.
 
 
Training
We offer fee-based training on the principles of thermography and the use of our products through ITC ® , our Infrared Training Center, which provides comprehensive instruction, training, certification and applications engineering from several FLIR locations or at the customer’s site. We also license Infrared Training Centers to qualified third parties in certain countries.


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Sales and Distribution
We sell our TVM products worldwide through a direct sales staff and a network of distributors and representatives. Our TVM business continues to expand distribution by hiring additional direct sales personnel and expanding third-party distribution networks in specific markets, particularly in Asia, Latin America and other emerging markets. In certain markets, TVM has chosen to supply camera cores on an OEM basis to companies with well established distribution networks. For example, we are partnered with Autoliv Electronics to most efficiently distribute our core technology into the automotive market. With our further expansion into the low cost segment of the commercial markets, we have developed greater competencies in market research, electronic marketing, marketing communications, and business development. Our ability to identify new markets, adapt our product solutions to meet unique market needs, quickly develop marketing communications that highlight our unique features, and leverage existing and new distribution channels to develop incremental business are important aspects of our marketing and communications efforts.
TVM carries backlog in certain markets, but the business is less backlog dependent than our Government Systems division’s segments. TVM order backlog, defined as orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months, was $136 million as of December 31, 2011, compared with $135 million at the end of 2010.
Customers
Typical TVM customers include OEMs, major integrators of security systems, security dealers, utility companies, electrical contractors, maritime dealers, law enforcement agencies, outdoor enthusiasts, building inspectors, damage restoration contractors, universities, numerous commercial enterprises, and increasingly, consumers. The emerging personal vision systems market is becoming increasingly accessible as we leverage our business model to reduce the price of advanced thermal imaging products. This consumer market is a key strategic area of focus given the vast size of the customer base and the opportunities it provides us to expand our volumes and brand name. Given the high-value nature of many of our thermography-related instruments, our thermography products’ revenues tend to be correlated with seasonal trends, in particular capital spending trends. In general, customers in markets like predictive maintenance and R&D are sensitive to the broad economy because our cameras are viewed as capital expense items. The sales of our high volume cameras and emerging thermal vision products are somewhat less sensitive to economic cycles due to their lower price points and the growing market awareness of thermal technology.
Our established distribution network, broad product portfolio, and product and technical development capabilities set a foundation for future success as we continue to leverage our operating model to increase our product volumes and reduce our costs in creating advanced imaging products. As we continue to make our products accessible to a larger population of end-users and build awareness of the advantages of thermal imaging applications, we anticipate our TVM segment will provide significant revenue and profitability for our business.
Competition
Many of the markets that TVM addresses are emerging from the early-adopter environments to broader-based demand, which has attracted competitors. While our market share in thermography products is significant, estimated to be approximately 60 percent based on independent industry research, we view the TVM market as highly competitive, with both large and niche providers of thermal camera equipment. We believe the key drivers of success in these markets are: technological proficiency in imaging sensors, product design and functionality, product cost, ability to deliver in a timely manner, trustworthy customer service, distribution reach, brand name, and scalability of operations. We are uniquely positioned to operate in this competitive environment given our demonstrated ability to innovate high-quality sensors at low cost due to our operating model, our advanced research and development capabilities, our established and reliable distribution and service network, our diversified manufacturing operations, and our broad product offering. Our competitors vary market by market, but include divisions of Danaher (Fluke), General Dynamics (Axsys), L-3 Communications, Sofradir (ULIS), Axis Communications, NEC, Testo, and numerous smaller companies.
Raymarine
Raymarine is a leading provider of marine electronics, and continues as the pioneer in the use of digital control systems. The comprehensive suite of products that Raymarine develops and markets is intended to fulfill all of the marine electronic needs of recreational boaters and offer best-in-class integrated control solutions for all of their onboard instrumentation. The current product portfolio includes multifunction displays, autopilots, thermal imaging cameras, radars, sonar modules, and other instruments which interconnect through Raymarine’s proprietary networking solutions. This broad product range is differentiated by the reliability, usability, and interconnectivity of the instruments we provide. Raymarine’s core capability, providing a comprehensive and centralized control, navigation, and communication system that can be managed with a single integrated data output, is valuable to our customers, who increasingly look for quality, technologically advanced products from a single-source.

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Our key strategies for Raymarine, as we continue to integrate the business into our operations, include rationalizing and leveraging the significant R&D engineering expertise of the business, incorporating thermal imaging cameras into the integrated product suite while building the awareness of the significant value of thermal imaging to the recreational marine industry, and enhancing the integration capabilities of the business through investments in software and networking solutions. We have invested resources in evolving Raymarine’s product line, improving our distribution network, and rationalizing our operations and outsourced manufacturing relationships. While the boating market that Raymarine serves is sizable, the industry has been in a cyclical trough. We believe that recent operational improvements have positioned the business to benefit significantly as global demand returns to historical levels.
Markets
Recreational Boating OEMs
A main focus of Raymarine has been to establish relationships with boat manufacturers in order to sell a fully integrated electronic “backbone” on new boats, with the intention of driving brand continuity with a large installed base of end-users. Medium sized (26 to 45 feet in length) and large boats (in excess of 45 feet in length) have a unique need for sophisticated electronics and multifunction control solutions. Additionally, in recent years, demand has grown for scaled-down instruments in the much larger segment for small boats (comprising inflatable and rigid motor craft under 25 feet in length). Raymarine’s comprehensive product offering has evolved to serve these evolving boat manufacturers’ needs well.
 
 
Aftermarket
Due to the comparatively long life of a recreational boat, the growing importance and usefulness of marine electronic equipment and the pace of technological development, the aftermarket is large for electronics systems refits and upgrades. Raymarine has ensured that both our instruments and our networking software are capable of integrating with third party platforms and instruments, which has become a key driver of demand in the aftermarket.
Sales and Distribution
Raymarine’s products are sold through a combination of direct sales, third-party distributors, service partners, and retail outlets. Raymarine has strong relationships with a large number of key boat builder OEMs, most of which are supplied directly with the latest Raymarine systems. Many of these relationships are long-term in nature and have evolved over a number of years with important exchanges of product development ideas. Raymarine’s OEM customers have typically built up important embedded technical product fitting and integration knowledge over a period of time. We have also established confidence in the critical electronic systems fitted to the products we supply to our customers.
Raymarine also supplies a global network of approximately 2,500 dealers, retailers, distributors and wholesalers. Many of these partnerships are on an exclusive basis, whereby Raymarine is the only electronic boating equipment stocked. Raymarine also has a global network of approximately 2,000 dealers and service centers which are able to sell, repair, and install Raymarine’s products. This global support and repair service network is very important to boaters as many of our products are critical to the operation of a boat and easy access to parts and service help ensure quick repairs. Additionally, the business has established a presence at retail locations and boat shows, which serves to build the Raymarine brand in both the new-build and aftermarket spaces. Having a strong consumer brand name and a large installed base of users created through our first fitments drives business in the aftermarket as boaters look to upgrade or replace instrumentation, often with the brand with which they are familiar.
Raymarine’s backlog as of December 31, 2011, was $5 million. Raymarine is not considered a backlog intensive business, as shipment of product typically occurs within a few weeks of receipt of orders.
Customers
Raymarine sells its products via diverse distribution channels to a wide variety of customers. Raymarine has established long-term relationships with approximately 250 OEM boat builders, each of which have experience and knowledge of the product capabilities, quality, and reliability. These OEMs value the breadth of the Raymarine product line and our global dealership service network. We supply a number of OEMs directly, who outfit their new boats with integrated Raymarine electronic systems. As a result of Raymarine’s long standing relationships with OEMs and its ability to provide fully integrated electronic systems, including an electronic “backbone” to a boat, there is a high level of business from consumers purchasing replacement or upgrade equipment for their outfitted boats. We also sell discrete instruments to consumers who are looking to install new or upgrade existing marine electronics on their small, medium, or large boats.
Competition
The maritime electronics markets are competitive with many established brands and companies. We compete with these companies through innovation, product capabilities and perceived value, relationships with OEMs and distributors, and product availability and service. We believe we compete successfully with our strength in distribution, established brand name, engineering capabilities, and renewed financial flexibility. Our principal competitors in the recreational boating market include Furuno, Garmin, Navico, and a number of small companies.

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Surveillance
Surveillance focuses on providing enhanced vision and detection capabilities to a wide variety of military, paramilitary, law enforcement, public safety, and other government customers. Our systems typically provide the capability to see over long distances, day or night, through adverse weather conditions, and from a wide variety of vehicle, man portable, and fixed installation platforms. Our radar technologies are very complementary to our core thermal imaging systems in that they allow us to integrate them with our thermal imaging cameras to provide a robust slew-to-cue solution that can survey and detect movement within a large perimeter and automatically direct a thermal camera towards the movement to provide a specific field of view. Currently, the majority of our Surveillance infrared imaging systems use cooled technology to identify objects from long distances; however, uncooled thermal imaging systems are growing rapidly in certain markets such as weapon sights, hand-held monoculars/binoculars, military vehicles, and unmanned aerial vehicles. Many of our customers require systems that operate in demanding environments such as extreme climatic conditions, battlefield and military environments, or maritime conditions. Systems are often installed onto larger platforms and must be able to integrate with such other systems as aircraft avionics, radars, laser systems, and large, broad-based security networks.
Surveillance offers a very wide array of products across multiple applications. For airborne applications, we have developed highly stabilized platforms, known as gimbals, which typically contain multiple payloads in addition to the infrared imaging system, as well as sophisticated software and analytic capabilities. For land applications, we manufacture three types of products: hand-held products, platform mounted products, and targeting products. Platform mounted surveillance systems include imaging and radar solutions which are typically housed in a weather-tight enclosure and feature remote control capabilities and multi-sensor integration capability (e.g., closed circuit TV, laser rangefinder, compass or global positioning system). Hand-held ground products are ruggedized and have optional lenses and target location capabilities. Ground-based targeting products are designed to attach to existing daylight sights to provide bore-sighted, nighttime capabilities. For maritime applications, we manufacture shipborne products which are similar to our airborne gimbals, but are inverted and customized for the marine environment.
We address our core markets through either a commercial, off-the-shelf (“COTS”) model or a commercially developed, military qualified (“CDMQ TM ”) model. The products we develop under the COTS model are applicable to a range of commercial and government customers and markets, including military applications. CDMQ products are specifically designed to meet military specifications. In both the COTS and CDMQ product development models, we use internally generated funds for research and development, and we generally own all rights to the products and their design.

Markets
Search and Rescue
Thermal imaging systems are used in airborne and shipborne search and rescue missions to rescue individuals in danger or distress on boats or vehicles, or wounded or lost in adverse conditions. Such systems are in use today by organizations such as the United States Army, United States Coast Guard, the United States Marine Corps, the United States Air National Guard and the United Kingdom Ministry of Defense.
 
 
Force Protection
In instances where military or other personnel are deployed in hostile areas, thermal imaging systems mounted on towers or other platforms are deployed to identify and defeat potential threats at an early stage. Our systems are deployed for this purpose by the United States Army, United States Marine Corps and others worldwide.
 
 
Border and Maritime Patrol
Thermal imaging systems are used in airborne, shipborne, hand-held and fixed installation applications for border and maritime surveillance, particularly at night, to enforce borders and coastal waters, to monitor national fishing boundaries and to prevent smuggling. Our cameras are currently deployed along numerous borders worldwide, including in the United States, Europe and the Middle East.
 
 
Surveillance and Reconnaissance
Thermal imaging systems are used in surveillance and reconnaissance applications for the precise positioning of objects or people from substantial distances and for enhanced situational awareness, particularly at night or in conditions of reduced or obscured visibility. We also offer high-resolution frequency-modulated continuous wave radars that enable wide-area surveillance capable of detecting potential threats before they cross a perimeter. These systems are installed on fixed platforms, manned mobile platforms, and unmanned aerial vehicles.

 
 
Airborne Law Enforcement
We are a leader in the supply of stabilized airborne thermal imaging systems for federal, state, and local law enforcement agencies. Agencies with this type of equipment have the ability to track suspects, locate lost persons, and provide situational awareness to officers on the ground.

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Targeting
We offer several products that provide precise target location and designation capabilities in applications ranging from clip-on rifle scope devices to high-precision, stabilized, airborne laser designator systems.
 
 
Federal Drug Interdiction
Thermal imaging systems enable government agencies to expand their drug interdiction and support activities by allowing greater surveillance and detection capabilities. Our systems are in use by the United States Customs Service, the United States Drug Enforcement Agency and the United States Federal Bureau of Investigation, as well as by foreign government agencies.
Sales and Distribution
Our Surveillance business has a direct sales staff and a network of independent representatives and distributors covering major government markets worldwide. Included in this total are technical and customer support staff in the United States, Europe, the Middle East and Asia Pacific who provide application development, technical training and operational assistance to direct and indirect sales personnel as well as to customers.
We enter into contracts and subcontracts which are subject to certain risks related to doing business with the United States government and may be subject to termination, reduction and/or amendment at the election of the United States government. For a discussion of these risks, see sections “We depend on the United States government for a material portion of our business and changes in government spending could adversely affect our business” and “As a United States government contractor, we are subject to a number of procurement rules and regulations” in Item 1A “Risk Factors.”
Surveillance typically has the highest backlog of our segments relative to revenue and in absolute terms. At December 31, 2011, Surveillance backlog totaled $247 million, compared with $333 million at December 31, 2010. The decline in Surveillance backlog is primarily due to reductions in United States government procurement in 2011.
Customers
Surveillance customers generally consist of United States and foreign government agencies, including civilian, military, paramilitary, and police forces, as well as defense contractors and aircraft manufacturers. A substantial portion of our consolidated revenue is derived from sales to United States and foreign government agencies and our business will continue to be substantially dependent upon such sales. Aggregate sales to United States government agencies accounted for 29 percent of our consolidated revenue in 2011, 34 percent in 2010, and 43 percent in 2009. We expect revenue outside the United States to continue to account for a significant portion of our Surveillance revenue, but demand for our equipment is increasing rapidly outside the United States. The Surveillance segment is susceptible to some seasonality in its orders primarily based on the United States government budget year end. The result is that the third quarter tends to exhibit the largest amount of orders for our Surveillance segment. However, fiscal policy trends, budget delays, and general economic trends can overshadow this seasonality in any given year.
Competition
The Surveillance segment operates in highly competitive markets that evolve rapidly with the advent of new technologies and requirements. Many of our competitors in the government sector are well established contractors for various governments and have more financial and other resources than we possess. The principal competitive factors in the government markets include technical innovation, agency relationships, product quality and reliability, price and ability to deliver. We believe we compete successfully in these markets with our best-in-class technologies, our products’ abilities to outperform customer requirements and competitors’ products, our lower priced solutions that result from our commercial operating model, and our service and support functions that exist in the field and near the customer. Our current principal competitors in the Surveillance markets include divisions of BAE Systems, DRS (a Finmeccanica company), Elbit Systems, General Dynamics, L-3 Communications, Lockheed Martin, Raytheon, Sagem, Sofradir, and Thales.
Detection
With our acquisition of ICx in October 2010, we added leading capabilities in the development of advanced sensor technologies used to detect and identify CBRNE threats. We created our Detection segment to focus on the markets for CBRNE detection equipment, utilizing these ICx technologies and products to penetrate a global market for advanced threat detection capabilities. Detection leverages an established technical research and development organization which, we believe, enables the business to offer the highest quality, most sensitive, and easiest to use products that meet the evolving needs of government and commercial security providers worldwide.
Detection manufactures and markets the leading portable explosive detector, the smallest spectroscopic radiation detector, and the smallest handheld Raman sensor. The methods Detection’s CBRNE solutions utilize to test and monitor areas for threats include continuous air sampling mass spectrometry (indoor and outdoor), point detection, spray-based analysis, gamma ray

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detection, vapor testing, liquids screening, and Raman spectroscopy. With significant experience in managing government-funded research and development projects, Detection has developed relationships with various government decision makers and has substantial knowledge of the governmental procurement process.
Markets
Government and private sectors are continuing to find new ways to address increasingly sophisticated types of terrorist attacks, including CBRNE threats, as well as other major security risks and natural disasters. Detection designs, develops and manufactures compact, rugged, and portable instruments that detect CBRNE threats for various end users. Product success has allowed Detection to build a leadership position in the homeland security market, and the business intends to expand on this position through continued development of innovative technologies.
Chemical and biological threat detection instruments are used by various facilities, ports, military bases, and checkpoints to quickly and accurately detect trace amounts of chemicals such as illicit drugs, volatile organic compounds, toxic industrial emissions, and warfare agents. We offer both indoor and outdoor biological air monitors that are used by various governmental agencies, including the U.S. Department of Defense, airport authorities, and the National Park Service, for layered security at facilities and events. Our explosives detection products are used to identify military-grade explosives and homemade explosive devices in a wide array of military and public safety applications, such as screening high-risk individuals at checkpoints, identifying improvised explosive device (IED) makers, and screening air passengers and baggage. Our radiation products protect the public by warning of radionuclide exposure and have been or are being used by the U.S. Department of Energy’s Nuclear Emergency Search Team, the New York Police Department, the International Atomic Energy Agency, the U.S. Coast Guard, and the United Kingdom’s Home Office Border and Immigration Agency.
Sales and Distribution
Detection sells its products worldwide primarily through a direct sales force, but also utilizes third-party sales representatives, value-added resellers, and systems integrators. With a centralized sales organization and specialized sales teams that serve specific markets, Detection has been successful at building and leveraging strong relationships with key decision makers at various government agencies and commercial entities. As some Detection products are designed as components or sub-systems, the business utilizes value-added resellers or systems integrators, including our Integrated Systems segment, for incorporation into their products or systems. For example, Detection provides bio-samplers for first responders, explosives detectors for airport security personnel, and multi-channel analyzers for radiation portals.
Detection derives a portion of its revenue, approximately 43 percent in 2011, from funding received from agencies of the United States government pursuant to research projects. The revenue that we recognize under these contracts represents reimbursement by the customer for time periods ranging from several months to several years. Our participation in these and other development programs has culminated in the development of a number of commercial products. In general, our contracts with the United States government permit us to retain all rights to patents emerging from the funded research and development.
At December 31, 2011, Detection had a total backlog of $25 million. Backlog represents orders that have been received for products, contract research and development, or other services for which a contractual agreement is in place and delivery or performance is expected to occur within twelve months.
Customers
Detection sells its products, systems, and services to a broad base of federal, state and local government customers, to all branches of the United States military, foreign militaries, and to private sector businesses and commercial ports both in the United States and internationally. Utilizing a regionally-deployed sales force, the business sells to agencies of the United States government, such as the U.S. Department of Homeland Security, the U.S. Department of Defense, the U.S. Department of Energy, the U.S. Transportation Security Administration, Federal Bureau of Investigation, NASA, U.S. Secret Service, U.S. Coast Guard, as well as agencies of multiple state and local governments in the United States, such as the New York Police Department. Similar to Surveillance, the Detection segment experiences some seasonality in its orders due to the United Stated government budget year end.
Competition
The markets in which Detection competes are dynamic and highly competitive. Success in these markets depends on our ability to develop new technologies to meet rapidly evolving customer needs, reduce production and development costs, integrate with third-party devices and systems, establish and foster relationships with key government and commercial customers, and recruit highly technical personnel. While Detection does not compete with any one competitor across the full range of our products, we do compete with several single-point providers, diversified enterprises, and divisions of large technology companies, such as: Agilent Technologies, Canberra Industries, Idaho Technologies, NUCSAFE, SAIC, Smiths Detection, Thermo Fisher Scientific, and United Technologies.

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Integrated Systems
The addition of ICx also provided us with platform integration and software solutions to enable adaptive systems to protect and secure borders, perimeters, and critical infrastructure. Integrated Systems utilizes an array of sensor technologies, such as radars, thermal imaging and visible light cameras, chemical detectors, radiation detectors, and command and control systems, provided by our other segments as well as from external parties, to create high value solutions for customers across the world. Integrated Solutions has expertise in creating systems that incorporate numerous sensors and making them work together to meet the often demanding requirements of government and commercial security providers. Integrated Systems performs as a prime contractor on many projects, which strengthens our relationship with the users of our various sensor solutions, allows us to reduce total cost of ownership, and reduces system turnaround time by removing additional steps in the procurement process.
Integrated Systems manufactures and markets several highly accurate mobile and fixed solutions for perimeter surveillance. The Cerberus TM mobile unmanned towers and manned SkyWatch towers are utilized for protecting borders, securing facilities, protecting forces, and safeguarding the public. These tower systems can be deployed in almost any environment and are fully networkable platform solutions that integrate various sensor suites, including infrared thermal or visible light cameras, ground surveillance radar, video motion detection, and unattended ground sensors. The towers are used all along the United States-Mexico border, at theme parks, at national monuments, by the military at home and abroad, by numerous police forces across the United States and to secure high-profile events such as Mardi Gras, the Super Bowl, the Independence Day celebrations on the National Mall and inauguration ceremonies.
Additionally, Integrated Systems offers open-source software that enables customers to command, control, and monitor their sensor networks. Cohesion TM is a flexible integration software enabling CBRNE sensors to be incorporated into standard command and control software systems and is specifically designed to support or integrate with our or third-party advanced sensors and devices. Cameleon TM video integration software allows for advanced monitoring and control of video surveillance camera networks.
Markets
Combining sensor and surveillance technologies to create turn-key security solutions, Integrated Systems develops and manufactures platforms for various surveillance, assessment, and response applications. Global military agencies utilize Integrated Systems’ solutions for force protection, converting domestic and foreign military bases from traditional “boots and guns” security methods to fully networked electronic sensor-based surveillance and warning systems. Border security is a priority for many countries across the world, and our solutions, including manned and unmanned mobile surveillance towers, biometrics and access control systems, and electronic fencing and radar solutions, help keep our customers’ populaces and resources secure. Critical infrastructure, such as airports, power and gas utilities, and harbors, are another key market for Integrated Systems.
Sales and Distribution
Integrated Systems markets its solutions to customers through a direct sales force and sales representatives. This sales organization has been successful at selling established solutions to various customers across the world and has secured funded research and development projects with the United States government. These projects are strategically sought out and bid on with the intention that the technologies and solutions that are developed will later be sold to other customers on a commercial basis. In 2011, approximately 24 percent of Integrated Systems revenue was derived from these contracted research projects.
Customers
Integrated Systems sells solutions to United States and foreign government customers, and to private sector customers that manage energy and power production, oil and gas production, commercial ports, and critical infrastructure. Integrated Systems has provided solutions to the U.S. Department of Homeland Security, the U.S. Department of Defense, U.S. Customs and Border Protection, the U.S. National Guard, Federal Bureau of Investigation, NASA, U.S. Secret Service, U.S. National Park Service, domestic and foreign airports, as well as various state and local governments.
Competition
The diverse portfolio of solutions Integrated Systems is able to provide places the business in competition with a wide variety of companies in the homeland security, defense, and industrial sectors. We compete by creating innovative new solutions, identifying new markets for advanced surveillance solutions, reducing the total cost of ownership, and building on a successful track record with current customers. Integrated Systems competes with diversified defense integrators, commercial security system integrators, and divisions of large technology companies, such as: Boeing, Cobham, Honeywell, L-3 Communications, Lockheed Martin, Northrup Grumman, Raytheon, SAIC, Telephonics, and Thales.

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Technology and Capabilities
We use our expertise in product design, infrared imaging sensors, mass spectronomy, sensing material, optics, lasers, image processing, systems integration and other technologies, to develop and produce sophisticated thermal, multi-sensor imaging, and threat detection systems. We integrate the following capabilities and disciplines into our manufacturing processes:

System Design and Integration
We have developed extensive competencies in the design and integration of numerous capabilities and payloads into integrated systems or sub-systems. Competencies such as stabilization, packaging and systems integration allow us to effectively combine a wide variety of technologies and payloads to design and manufacture complex systems to suit our customers’ needs.
 
 
Radiometry
Our ability to produce thermal imaging systems that can accurately measure temperature is critical in many of our thermography markets. We have demonstrated know-how in designing and producing systems that can measure temperature to within very precise tolerances while maintaining accuracy and stability over time and over a wide range of ambient temperatures. We believe our skills in this area, known as radiometry, offer an important competitive advantage over many of our competitors.
 
 
Mechanical Engineering
Our design and production of thermal imaging systems involves highly sophisticated mechanical engineering techniques, particularly in the design and assembly of the supporting structures for system components such as detector arrays, coolers, scanners and optics. We also have expertise in designing stabilized assemblies used in our gimbal mounted products utilizing electro-mechanical control, gyroscopes and electronic stabilization, and specialized control mechanisms.
 
 
Infrared Detector Design Manufacturing
We design and manufacture both cooled and uncooled infrared detector arrays, in high volumes and at low costs. We believe our uncooled vanadium oxide microbolometers and cooled detectors using indium antimonide and indium gallium arsenide are among the highest performing infrared detectors of their type available in the world. Internal design and manufacturing of detectors provides significant cost and engineering advantages compared with the use of third-party detectors.
 
 
Integrated Circuits and Electronic Design
We have significant electronic design capabilities across several specialized areas, including readout integrated circuit design, signal processing, image processing, and electronics integration. Our design expertise lies in the areas of reliability, low power consumption and extreme environmental survivability.
 
 
Sensing Materials
Our sensors use new materials with novel characteristics, such as innovative semiconductors, crystals, polymers, reagents, and other recently developed materials. Some materials are extraordinarily sensitive, responding to trace exposures of chemical compounds such as explosives, nerve agents, or biological proteins. Other materials respond to low-intensity radioactive emissions of electromagnetic energy, such as specific bands of infrared light. Many of these materials did not exist a few years ago or could not be sufficiently purified or economically assembled into functional structures.
 
 
Software Development
Software is an increasingly important aspect of our overall engineering and design activity. We offer networking capability, video analytics and other software and middleware inside many of our camera systems, and such applications are growing in importance. Our systems are also able to interface with many standard external software protocols.
 
 
Optical Design, Fabrication and Coating
We design and manufacture sophisticated infrared optics using materials such as silicon and germanium that are required to produce a thermal imaging system. This capability allows us to rapidly develop optics optimized for use with our cameras and avoid costs and delays associated with reliance on third-party optics suppliers. We also have the ability to apply custom vapor deposited coatings to improve the transmission of the unique lens materials that are used in infrared systems.
 
 
Micro-Coolers
We manufacture the industry’s smallest, lightest and lowest power micro-coolers for use in cooling infrared detectors. Our coolers are especially effective in hand-held applications, where light weight and long battery life are essential.
 
 
Lasers and Laser Components
Many of our more sophisticated systems are increasingly being offered with various types of laser payloads, including pointers, illuminators, rangefinders and designators. We design and manufacture purpose-built laser rangefinders and designators for inclusion in some of our gimbaled systems. We also manufacture certain laser-related components for customers. Our 2011 acquisition of Aerius Photonics, LLC enhanced our ability to provide advanced laser components.

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Tactical Platforms
With our acquisition of ICx in 2010, we added the capability to develop and manufacture comprehensive and integrated solutions for surveillance, assessment, and response. These platform solutions draw from our Surveillance and Detection products, as well as products sourced outside of the Company. These unmanned and manned networkable mobile and vehicle mounted tower systems, branded under Cerberus  and SkyWatch  names, can be deployed in nearly any environment and have provided security at borders, at theme parks, for police and military forces, at national monuments, and at high profile events.
Research & Development
Our success has been and will be in the future substantially affected by our ability to innovate new products and technologies that both augment our existing solutions and create new avenues for growth. We strive to differentiate ourselves from our competition with our R&D operations. Our internally funded research and development expenses were $147.2 million, $116.6 million, and $91.3 million in 2011, 2010, and 2009, respectively. We intend to continue to have significant internal research and development expenses in the future to provide a continuing flow of innovative and high quality products to maintain and enhance our competitive position in each of our business segments. In addition to these internally-funded amounts, in 2011, 2010, and 2009, we spent $47.9 million, $12.3 million, and $5.4 million, respectively, on research and development projects that were reimbursed by government agencies or prime contractors pursuant to development contracts we undertook.
Focusing on projects that have the highest probability for commercial marketability, our R&D teams are located within our business segments. These teams work to develop products that will fulfill our specific customers’ constantly evolving needs while also sharing findings, successes, technologies, tools, and best practices with one another. One method that our Government Systems division R&D teams use to ensure our new products evolve with our customers is a development process that utilizes rapid field testing and refinement of new technologies in order to get end-users the critical protection and information tools they need as quickly as possible. A key tenet of our development philosophy is seeking and receiving end-user feedback on new or upgraded products. Engineers in the field work with the end-users in real-time in order to revise and tune products quickly and efficiently. The solicitation and effectiveness of the end-user feedback has proven integral to our success in creating the most technologically advanced yet user-friendly solutions.
Proprietary Rights
Given our focus on being the innovation leader in our key markets, we have numerous pending and issued patents and trademarks, commercial and technical trade secrets and other intellectual property that are important for our success. We rely on a combination of patent, trademark, copyright, and trade secret laws, a strong internet domain presence, confidentiality agreements, joint development agreements, and robust contractual provisions to protect our proprietary rights. Given our diligent efforts to respect the intellectual property rights of others combined with the important competitive advantages that our intellectual property provides, we have intensified our efforts to police and protect our intellectual property from improper use and misappropriation. We will continue to actively protect our intellectual property and intend to emphasize initiatives that will further promote innovation and leadership in marketable technology. We cannot, however, be certain or give any assurance that we can secure patent or trademark protection on all our innovations, maintain our competitive advantage or that competitors will not develop similar or superior capabilities.
Manufacturing
We manufacture many of the critical components for our products, including but not limited to infrared detectors, gimbals, pan-tilts, optics and coatings, laser sub-systems and micro-coolers, and develop much of the necessary software and middleware for our systems. This vertical integration minimizes lead times, facilitates prompt delivery of our products, controls costs and ensures that these components satisfy our quality standards. We purchase other parts pre-assembled, including certain detectors, certain coolers and optics, circuit boards, cables and wire harnesses. These purchased and manufactured components are then assembled into finished systems and tested at one of our primary production facilities located in the U.S., Sweden, Estonia, France, Germany and Canada. Certain components and finished goods, especially many of our Raymarine products, are produced by contract manufacturers.
Our manufacturing operations are, from time to time, audited by certain OEM customers, which include several major aircraft manufacturers, and have been certified as meeting their quality standards. Substantially all of our manufacturing locations are either ISO 9001:2000 or :2008 certified with certain locations having higher certifications.

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Customer Service
We maintain service facilities at many locations worldwide. Each of our service facilities has the capability to perform the complex calibrations required to service thermal imaging systems. We also maintain field service capabilities under the direction of our independent representatives or distributors in locations outside the United States.
Employees
As of December 31, 2011, we had 3,084 employees of which 1,893 were located in the United States and 1,191 were located outside of the United States. We have generally been successful in attracting highly skilled technical, marketing and management personnel. None of our employees in the United States are represented by a union or other bargaining group. Certain employees in Europe are represented by unions and workers councils whose contracts are subject to periodic renegotiations. We believe our relationships with our employees, unions and workers councils are good.
Environmental Matters  
Our operations are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal and remediation of certain materials, substances and wastes used in our operations. We continually assess our obligations and compliance with respect to these requirements. We have also assessed the risk for environmental contamination for our various manufacturing facilities, including our acquired businesses and facilities and, where appropriate, have obtained indemnification from the sellers of those businesses and facilities.
We believe that our current operations are in substantial compliance will all existing applicable environmental laws and permits. Operating and maintenance costs associated with environmental compliance are a normal, recurring part of our operations. Historically, these costs have not been material.
Available Information
Our internet website address is www.flir.com. This Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and other required filings are available through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Report.


ITEM 1A.
RISK FACTORS
The following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. If we are unable to adequately respond to these risks and uncertainties, our business, financial condition and results of operations could be materially adversely affected. Additionally, we cannot be certain or give any assurance that any actions taken to reduce known risks and uncertainties will be effective.
General economic conditions may adversely affect our business, operating results and financial condition
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of capital investment and consumer spending. Economic factors that could adversely influence demand for the Company’s products include uncertainty about global economic conditions leading to reduced levels of investment, changes in government spending levels and/or priorities, the size and availability of government budgets, customers’ and suppliers’ access to credit, consumer confidence and other macroeconomic factors affecting government, industrial or consumer spending behavior.
Our primary markets are volatile and unpredictable
Our business depends on the demand for our products and solutions in a variety of commercial, industrial and government markets. In the past, the demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control, including:
the timing, number and size of orders from, and shipments to, our customers, as well as the relative mix of those orders;
variations in the volume of orders for a particular product or product line in a particular quarter;
the size and timing of new contract awards;
the timing of the release of government funds for procurement of our products; and
the timing of orders and shipments within a given fiscal quarter.

16


Seasonal fluctuations in our operating results result from:
the seasonal pattern of contracting by the United States government and certain foreign governments;
the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations; and
the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration.
We depend on the United States government for a material portion of our business and changes in government spending could adversely affect our business
We derive significant revenue from contracts or subcontracts funded by United States government agencies. A significant reduction in the purchase of our products by these agencies or contractors for these agencies would have an adverse effect on our business. For the fiscal years ended December 31, 2011 , 2010 and 2009 , approximately 29 percent , 34 percent and 43 percent , respectively, of our revenues were derived directly or indirectly from sales to the United States government and its agencies. The funding of contracts awarded to us depends on the overall United States government budget and appropriations process, which is beyond our control. In addition, at its discretion, the United States government may change its spending priorities and/or terminate, reduce or modify contracts.
As a United States government supplier, we are subject to a number of procurement rules and regulations
Government contractors must comply with specific procurement regulations and other requirements and are subject to routine audits and investigations by United States government agencies. If we fail to comply with these rules and regulations, the results could include: reductions in the value of contracts; contract modifications or termination; the assessment of penalties and fines; and/or suspension or debarment from United States government contracting or subcontracting for a period of time or permanently.
Our future success will depend on our ability to respond to the rapid technological change in the markets in which we compete, our ability to introduce new or enhanced products and enter into new markets
The markets in which we compete, including the thermal imaging industry, are characterized by rapid technological developments and frequent new product introductions, enhancements and modifications. Our ability to develop new products and technologies that anticipate changing customer requirements, reduce costs and otherwise retain or enhance our competitive position in existing and new markets will be an important factor in our future results from operations. We will continue to make substantial capital expenditures and incur significant research and development costs to improve our manufacturing capability, reduce costs, and develop and introduce new products and enhancements. If we fail to develop and introduce new products and technologies in a timely manner, our business, financial condition and results of operations would be adversely affected. In addition, we cannot be certain that our new products and technologies will be successful or that customers will accept any of our new products.
We must successfully manage an increasingly complex global organization
As we have grown, the size and scope of our worldwide operations have also increased substantially. We now design, manufacture and market numerous product lines across our segments in numerous locations worldwide. Significant management time and effort is required to effectively manage the increased complexity of the business and our failure to successfully do so could have a material adverse effect on our business, financial condition and results of operations. In addition, we manufacture our products at various facilities. Our inability to continue to manufacture our products at one or more of our facilities as a result of, for example, a prolonged power outage, earthquake, fire or other natural disaster, or labor or political unrest, could prevent us from supplying products to our customers and could have a material adverse effect on our business, financial condition and results of operations.
We face risks from international sales and business activities
We market and sell our products worldwide and international sales have accounted for, and are expected to continue to account for, a significant portion of our revenue. For the years ended December 31, 2011 , 2010 and 2009 , international sales accounted for 48 percent , 47 percent and 41 percent , respectively, of our total revenue. We also manufacture certain products and subassemblies in Europe and we have several contract manufacturing agreements with third parties in Europe and in Asia. Our international business activities are subject to a number of risks, including:
the imposition of and changes to governmental controls;
restrictions on the export of critical technology;
trade restrictions;
difficulty in collecting receivables;
inadequate protection of intellectual property;

17


labor union activities;
changes in tariffs and taxes;
restriction on the importation and exportation of goods and services;
compliance with anti-bribery and anti-corruption laws;
difficulties in staffing and managing international operations; and
political and economic instability.
No assurance can be given that these factors will not have a material adverse effect on our future international sales and operations and, consequently, on our business, financial condition and results of operations.
Operating margins may be negatively impacted by a downturn in sales
Our expense levels are based, in part, on our expectations regarding future sales and these expenses are largely fixed in the short term. Some expenses, such as those related to research and development activities, would likely be maintained in the event of a sales downturn in order to maintain and enhance the long-term competitiveness of the Company. In addition, to enable us to promptly fill orders, we maintain inventories of finished goods, components and raw materials. As a result, we commit to considerable costs in advance of anticipated sales. Accordingly, we may not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted and actual sales. Any significant shortfall of sales may result in us carrying higher levels of inventories of finished goods, components and raw materials thereby increasing our risk of inventory obsolescence and corresponding inventory write-downs and write-offs.
Competition in our markets is intense and our failure to compete effectively could adversely affect our business
Competition in the markets for our products is intense. The speed with which companies can identify new applications for thermal imaging, develop products to meet those needs and supply commercial quantities at low prices to the market are important competitive factors. We believe the principal competitive factors in our markets are product performance, price, customer service and training, product reputation, and effective marketing and sales efforts. Many of our competitors have greater financial, technical, research and development, and marketing resources than we do. All of these factors, as well as the potential for increased competition from new competitors, require us to continue to invest in, and focus on, research and development and new product innovation. No assurance can be given that we will be able to compete effectively in the future and a failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Our future success depends in part on attracting and retaining key senior management and qualified technical, sales and other personnel
Our future success depends in part on the efforts and continued services of our key executives and our ability to attract and retain qualified technical, sales and other personnel. Significant competition exists for such personnel and we cannot assure the retention of our key executives, technical and sales personnel or our ability to attract, integrate and retain other such personnel that may be required in the future. We cannot assure that employees will not leave and subsequently compete against us. If we are unable to attract and retain key personnel, our business, financial condition and results of operations could be adversely affected.
We may be unable to successfully integrate recent or future acquisitions into our operations, thereby disrupting our business and harming our financial condition and results of operations
We have made thirteen acquisitions of various sizes in the past five years. Our most recent acquisitions include Aerius Photonics, LLC in 2011, Raymarine Holdings Limited (“Raymarine”) and ICx Technologies, Inc. (“ICx”) in 2010 and Salvador Imaging, Inc., OmniTech Partners, Inc. and Directed Perception, Inc. in 2009. Raymarine and ICx are among the largest acquisitions we have completed and the integration of businesses, personnel, product lines and technologies can be difficult, time consuming and subject to significant risks. For example, we could lose key personnel from companies that we acquire, incur unanticipated costs, lose major sources of revenue, fail to integrate critical technologies, suffer business disruptions, fail to capture anticipated synergies, fail to establish satisfactory internal controls, or incur unanticipated liabilities. Any of these difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and decrease our revenue.
We frequently evaluate strategic opportunities available to us and it is likely that we will make additional acquisitions in the future. Such acquisitions may vary in size and complexity. Any future acquisitions are subject to the risks described above. Furthermore, we might assume or incur additional debt or issue additional equity securities to pay for future acquisitions. Additional debt may negatively impact our results and increase our financial risk, and the issuance of any additional equity securities could dilute our then existing shareholders’ ownership. No assurance can be given that we will realize anticipated benefits of any future acquisitions, or that any such acquisition or investment will not have a material adverse effect on our business, financial condition and results of operations.

18


We may experience impairment in the value of our tangible and intangible assets
Our industry is subject to rapid changes in technology, which may result in unexpected obsolescence or impairment of our assets. As of December 31, 2011 , our intangible assets, including goodwill, totaled $662.8 million and represented 31 percent of our total assets. Most of these intangibles are the result of acquisitions in which the purchase price exceeded the value of the tangible assets acquired. We amortize certain of these intangibles over their anticipated useful life and review goodwill for impairment annually or more frequently if warranted by events. To date we have not experienced any impairment of our intangible assets, but there can be no assurance that we will not experience such impairment in the future. In addition, certain of our tangible assets such as inventory and machinery and equipment may experience impairment in their value as a result of such events as the introduction of new products, changes in technology or changes in customer demand patterns. We depreciate our machinery and equipment at levels we believe are adequate; however, there can be no assurance that there will not be a future impairment that may have a material impact on our business, financial condition and results of operations.
We face risks from currency fluctuations
Historically, currency fluctuations have affected our operating results. Changes in the value of foreign currencies in which our sales or costs incurred are denominated have in the past caused, and could in the future cause, fluctuations in our operating results. We seek to reduce our exposure to currency fluctuations by denominating, where possible, our international sales in United States dollars, by balancing expenses and revenues in various currencies and by undertaking limited hedging of forecasted currency exposures. With respect to international sales denominated in United States dollars, a decrease in the value of foreign currencies relative to the United States dollar could make our products less price competitive.
Our inability to protect our intellectual property and proprietary rights and avoid infringing the rights of others could harm our competitive position and our business
Our ability to compete successfully and achieve future revenue growth depends, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others. To accomplish this, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements and contractual provisions to protect our proprietary rights. Many of our proprietary rights are held in confidence as trade secrets and are not covered by patents, making them more difficult to protect. Although we currently hold United States patents covering certain aspects of our technologies and products, and we are actively pursuing additional patents, we cannot be certain that we will obtain additional patents or trademarks on our technology, products and trade names. Furthermore, we cannot be certain that our patents or trademarks will not be challenged or circumvented by our competitors or that measures taken by us to protect our proprietary rights will adequately deter their misappropriation or disclosure. Any failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Moreover, because intellectual property does not necessarily prevent our competitors from entering the thermal imaging industry, there can be no assurance that we will be able to maintain our competitive advantage or that our competitors will not develop capabilities equal or superior to ours.
Litigation over patents and other intellectual property is common in our industry. We have been the subject of patent and other intellectual property litigation in the past and cannot be sure that we will not be subject to such litigation in the future. Similarly, there exists the possibility we will assert claims in litigation to protect our intellectual property. Lawsuits defending or prosecuting intellectual property claims and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort of our personnel. An adverse determination in a patent suit or in any other proceeding in which we are a party could subject us to significant liabilities, result in the loss of intellectual property rights we claim or impact our competitive position. Additionally, an adverse determination could require us to seek licenses from third parties. If such licenses are not available on commercially reasonable terms or at all, our business, financial condition and results of operations could be adversely affected.
We may not be successful in obtaining the necessary export licenses to conduct operations abroad and the United States government may prevent proposed sales to foreign governments
Export licenses are required from United States government agencies under the Export Administration Act, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976 for export of many of our products. We can give no assurance that we will be successful in obtaining these licenses. In the aftermath of 9/11, heightened government scrutiny of export licenses for products in our markets has resulted in lengthened review periods for our license applications. Failure to obtain or delays in obtaining these licenses would prevent or delay us from selling our products outside the United States and could have a material adverse effect on our business, financial condition and results of operations.

19


We rely on information systems, electronic communication systems, internal and external data and application software in our operations. Systems failures, security breaches and other disruptions, whether internal or external, could have an adverse affect on our business and results of operations
The efficient operation of our business is dependent on computer hardware, software and communication systems. Even the most well protected information systems are vulnerable to systems failures. Such failures could be caused by internal or external events such as incursions by intruders or hackers, computer viruses, power outages or cyber terrorists. We are particularly mindful of these risks because we believe the technologies we have developed or acquired are attractive to third parties.  The unavailability of the information systems, the failure of these systems to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous effects, including reduced effectiveness and efficiency of our operations and increased overhead costs and the loss or compromise of important information or data, causing our reputation, business and results of operations to be adversely affected.
Our products may suffer from defects or errors leading to substantial damage or warranty claims
We include complex system designs and components in our products that may contain errors or defects, particularly when we incorporate new technology into our products or release new versions. If any of our products are defective, we might be required to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses including expenses arising from product liability and warranty claims, disrupt sales and affect our reputation and that of our products, which could have a material adverse effect on our business, financial condition and results of operations. We maintain product liability insurance but cannot be certain that it is adequate or will remain available on acceptable terms.
We have indebtedness as a result of the issuance of our 3.75 percent senior unsecured notes (the “Notes”) and are subject to certain restrictive covenants under our unsecured credit facility and the indenture governing the Notes which may limit our operational and financial flexibility
Our ability to meet our debt service obligations and comply with the financial covenants under our credit facility will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Our inability to meet our debt service obligations or comply with the required covenants could result in a default under the credit facility or indenture. In the event of any such default, under the credit facility, the lenders thereunder could elect to declare all outstanding debt, accrued interest and fees under the facility to be due and immediately payable. In the event of any such default under our indenture, either the trustee or the holders of at least 25 percent of the outstanding principal amount of the Notes could declare the principal amount of all of the Notes to be due and payable immediately.
Changes in our effective income tax rate may have an adverse effect on our results of operations
Our future effective tax rate may be adversely affected by a number of factors including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the valuation of our deferred tax assets and liabilities;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in share-based compensation expense;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles; and/or
the repatriation of earnings from outside the United States for which we have not previously provided for United States taxes.
Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the United States Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our financial condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor.
State of Oregon law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if the transaction would benefit our shareholders
Other companies may seek to acquire or merge with us. An acquisition or merger of our Company could result in benefits to our shareholders, including an increase in the value of our common stock. Some provisions of our Articles of Incorporation and Bylaws, including our ability to issue preferred stock without further action by our shareholders, as well as provisions of the State of Oregon law, may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable.

20


ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

ITEM 2.    PROPERTIES
At December 31, 2011 , we conducted manufacturing, research and development, and sales and administration in 84 facilities world-wide. Of these, we owned 6 facilities with approximately 683 thousand square feet and leased 31 facilities with approximately 689 thousand square feet in the United States, and we owned 6 facilities with approximately 258 thousand  square feet and leased 41 facilities with approximately 345 thousand square feet outside the United States, primarily in Europe. Our headquarters is located in Wilsonville, Oregon.
Our major facilities include the following locations:
Location
Owned
 
Leased
 
(Square feet in Thousands)
Wilsonville (Portland), Oregon
154

 

Danderyd (Stockholm), Sweden

 
125

Arninge (Stockholm), Sweden
178

 

North Billerica (Boston), Massachusetts
133

 

Goleta (Santa Barbara), California
169

 
137

Nashua, New Hampshire
140

 

Alpharetta (Atlanta), Georgia

 
81

Fareham (Portsmouth), United Kingdom
63

 

Other
104

 
691

Total
941

 
1,034

Our reportable segments operate out of facilities as follows:
Thermal Vision and Measurement: Danderyd, Sweden; North Billerica, Massachusetts; Goleta, California; Nashua, New Hampshire and 6 facilities in the United States and 24 facilities located outside the United States.
Raymarine: Fareham, UK and 3 facilities in the United States and 14 facilities located outside the United States.
Surveillance: Wilsonville, Oregon; North Billerica, Massachusetts; Arninge, Sweden and 6 facilities in the United States and 5 facilities located outside the United States.
Detection: 7 facilities in the United States and 1 facility located outside the United States.
Integrated Systems: Alpharetta, Georgia and 2 facilities in the United States and 3 facilities located outside the United States.
We believe all of our properties are suitable for their intended use, adequate to meet our current and near-term business needs, and in good condition. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.


21


ITEM 3.
LEGAL PROCEEDINGS
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 appealed certain rulings of the district court to the United States Court of Appeals for the Federal Circuit. The issues on appeal were briefed and oral argument occurred on February 8, 2012.  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.
We are also subject to other legal proceedings, claims and litigation arising in the ordinary course of business. We make a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. We believe we have recorded adequate provisions for any probable and estimable losses. While the outcome of such matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.


22



PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company has been traded on the NASDAQ Global Market since June 22, 1993, under the symbol “FLIR.” The following table sets forth, for the quarters indicated, the high and low closing sales price for our common stock as reported on the NASDAQ Global Select Market, a segment of the NASDAQ Global Market.
 
2011
 
2010
 
High
 
Low
 
High
 
Low
First Quarter
$
34.61

 
$
28.87

 
$
32.93

 
$
26.49

Second Quarter
37.04

 
32.03

 
31.42

 
26.73

Third Quarter
34.68

 
22.15

 
30.66

 
24.38

Fourth Quarter
27.68

 
24.16

 
29.97

 
24.61

At December 31, 2011 , there were approximately 124 holders of record of our common stock and 154,968,900 shares outstanding. On February 9, 2011, we announced the adoption of a dividend policy under which we began to pay quarterly cash dividends for the first time in our history. During the year ended December 31, 2011, we paid dividends quarterly at the rate of $0.06 per share for a total of $38.0 million . On February 10, 2012, we announced an increase of our quarterly dividend to $0.07 per share. We currently intend to continue to pay cash dividends to holders of our common stock for the foreseeable future, but such payment remains at the discretion of the Board of Directors and will depend upon many factors, including our financial condition, earnings, and other factors the Board of Directors deems relevant.
The graph below shows a comparison of the five-year cumulative total shareholder return for the Company’s common stock with the cumulative total returns on the Standard & Poor’s (“S&P”) 500 Index and the S&P 500 Electronic Equipment & Instruments Index for the same five-year period. The data used for this graph assumes that $100 was invested in the Company and in each index on December 31, 2006 , and that all dividends were reinvested.


The stock performance graph was plotted using the following data:
 
Dec 06
 
Dec 07
 
Dec 08
 
Dec 09
 
Dec 10
 
Dec 11
FLIR Systems, Inc.
$
100.00

 
$
196.67

 
$
192.77

 
$
205.66

 
$
186.93

 
$
158.80

S&P 500 Index
100.00

 
105.49

 
66.46

 
84.05

 
96.71

 
98.76

S&P 500 Electronic Equipment & Instruments Index
100.00

 
111.37

 
47.38

 
74.63

 
85.19

 
72.40


23


The following table summarizes our 2011 common stock repurchases:
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 at December 31, 2011 Under the Plans or Programs
March 1 to March 31, 2011
212,879

 
$
31.83

 
212,879

 
 
May 1 to May 31, 2011
177,161

 
$
35.07

 
177,161

 
 
June 1 to June 30, 2011
322,839

 
$
33.49

 
322,839

 
 
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

 
 
October 1 to October 31, 2011
284,751

 
$
26.57

 
284,751

 
 
November 1 to November 30, 2011
684,421

 
$
25.41

 
684,421

 
 
December 1 to December 31, 2011
453,194

 
$
25.00

 
453,194

 
 
Total
6,135,245

 
$
26.19

 
6,135,245

 
13,864,755

_______________ 
(1)
All shares were purchased in open market transactions.
All share repurchases are subject to applicable securities laws, and are at times and in amounts as management deems appropriate. All shares of our common stock repurchased in 2011 were repurchased under authorization by our Board of Directors, granted on February 9, 2011, pursuant to which we are authorized to repurchase up to 20.0 million shares of our outstanding common stock in the open market. This authorization will expire on February 9, 2013 .


24


ITEM 6.    SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.”
 
 
Year Ended December 31,
 
2011
 
2010 (1)
 
2009
 
2008
 
2007
 
(in thousands, except per share amounts)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
Revenue
$
1,544,062

 
$
1,388,437

 
$
1,147,087

 
$
1,076,974

 
$
779,397

Cost of goods sold
715,458

 
624,796

 
488,558

 
470,832

 
346,167

Gross profit
828,604

 
763,641

 
658,529

 
606,142

 
433,230

Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development
147,177

 
116,635

 
91,301

 
89,964

 
72,458

Selling, general and administrative
368,232

(2)
286,695

 
219,941

 
231,687

 
168,940

Total operating expenses
515,409

 
403,330

 
311,242

 
321,651

 
241,398

Earnings from operations
313,195

 
360,311

 
347,287

 
284,491

 
191,832

Interest expense
5,487

 
2,884

 
6,882

 
14,336

 
15,309

Interest income
(1,273
)
 
(1,258
)
 
(1,749
)
 
(7,397
)
 
(5,619
)
Other (income) expense, net
(2,098
)
 
(4,015
)
 
1,761

 
(12,766
)
 
(3,932
)
Earnings from continuing operations before income taxes
311,079

 
362,700

 
340,393

 
290,318

 
186,074

Income tax provision
88,427

 
114,326

 
110,180

 
89,418

 
52,502

Earnings from continuing operations
222,652

 
248,374

 
230,213

 
200,900

 
133,572

Loss from discontinued operations, net of tax
(1,178
)
 
(248
)
 

 

 

Net earnings
$
221,474

 
$
248,126

 
$
230,213

 
$
200,900

 
$
133,572

Basic earnings per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
1.41

 
$
1.59

 
$
1.54

 
$
1.45

 
$
0.99

Discontinued operations
(0.01
)
 
(0.00
)
 

 

 

Basic earnings per share
$
1.40

 
$
1.59

 
$
1.54

 
$
1.45

 
$
0.99

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
1.38

 
$
1.54

 
$
1.45

 
$
1.28

 
$
0.89

Discontinued operations
(0.01
)
 
(0.00
)
 

 

 

Diluted earnings per share
$
1.38

 
$
1.54

 
$
1.45

 
$
1.28

 
$
0.89

_______________
 
 
 
 
 
 
 
 
 
(1)    Amounts have been adjusted for the reclassification of certain discontinued operations to continuing operations.
(2)    Selling, general and administrative expenses for 2011 include the payment of a $39 million litigation settlement. See Note 13 to the Consolidated Financial Statements in Item 8 for additional information.
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
1,002,465

 
$
704,856

 
$
793,142

 
$
640,227

 
$
494,606

Total assets
2,147,029

 
1,857,352

 
1,494,544

 
1,241,077

 
1,019,161

Short-term debt
136

 
131

 
19

 
21

 
19,007

Long-term debt, excluding current portion
247,861

 

 
57,992

 
182,825

 
194,270

Total shareholders’ equity
1,579,029

 
1,522,548

 
1,203,749

 
844,725

 
631,736

 
 
 
 
 
 
 
 
 
 
Other Financial Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.24

 
$

 
$

 
$

 
$




25


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
FLIR Systems, Inc. (“FLIR,” the “Company,” “we,” “us,” or “our”) is a world leader in sensor systems that enhance perception and awareness. We were founded in 1978 and have since become a premier designer, manufacturer, and marketer of thermal imaging systems. Our advanced sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications in commercial, industrial, and government markets worldwide.
Our goal is to both enable our customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for our shareholders. We create value for our customers by providing advanced surveillance and tactical defense capabilities, improving personal and public safety and security, facilitating air, ground, and maritime navigation, enhancing enjoyment of the outdoors, providing infrastructure inefficiency information, conveying pre-emptive structural deficiency data, displaying process irregularities, and enabling commercial business opportunities through our continual support and development of new thermal imaging data and analytics applications. Our business model meets the needs of a multitude of customers – we sell off-the-shelf products to a wide variety of markets in an efficient, timely, and affordable manner as well as offer a variety of system configurations to suit specific customer requirements. Centered on the design of products for low cost manufacturing and high volume distribution, our commercial operating model has been developed over time and provides us with a unique ability to adapt to market changes and meet our customers’ needs.
Our business is organized into two divisions: Commercial Systems and Government Systems. Within these divisions, we have five reporting segments: Thermal Vision & Measurement and Raymarine, which comprise the Commercial Systems division; and Surveillance, Detection and Integrated Systems, which make up our Government Systems division. For a more detailed description of our segments, see “Business Segments” within Item 1.
International revenue accounted for approximately 48 percent , 47 percent and 41 percent of our revenue in 2011, 2010 and 2009 , respectively. We anticipate that international sales will continue to account for a significant percentage of revenue in the future. We have exposure to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations in the value of the United States dollar relative to other currencies. Factors contributing to this variability include significant manufacturing activity in Europe, significant sales denominated in currencies other than the United States dollar, and cross currency fluctuations between such currencies as the United States dollar, euro, Swedish kroner and British pound sterling. The impact of those fluctuations is reflected throughout our consolidated financial statements, but in the aggregate, did not have a material impact on our results of operations.
We experience fluctuations in orders and sales due to seasonal variations and customer sales cycles, such as the seasonal pattern of contracting by the United States and certain foreign governments, the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations, and the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration. Such events have resulted and could continue to result in fluctuations in quarterly results in the future. As a result of such quarterly fluctuations in operating results, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance.

Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to revenue recognition, bad debts, inventories, goodwill, warranty obligations, contingencies and income taxes on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.
Revenue recognition.     The majority of our revenue is recognized upon shipment of the product to the customer at a fixed or determinable price and with a reasonable assurance of collection, passage of title to the customer as indicated by the shipping terms and fulfillment of all significant obligations.

26


We design, market and sell our products primarily as commercial, off-the-shelf products. Certain customers request different system configurations, generally based on standard options or accessories that we offer. In general, our revenue arrangements do not involve acceptance provisions based upon customer specified acceptance criteria. In those limited circumstances when customer specified acceptance criteria exist, revenue is deferred until customer acceptance if we cannot demonstrate that the system meets those specifications prior to shipment. For any contracts with multiple elements (i.e., training, installation, additional parts, etc.) we allocate revenue among the deliverables primarily based upon objective and reliable evidence of fair value of each element in the arrangement.  If objective and reliable evidence of fair value of any element is not available, we use an estimated selling price for purposes of allocating the total arrangement consideration among the elements. In addition, judgments are required in evaluating the credit worthiness of our customers. Credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured.
Allowance for doubtful accounts.     Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying their credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting their business, we record a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available. Actual write-offs during the past three years have not been material to our results of operations.
We also record an allowance for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. As of December 31, 2011 , our accounts receivable balance of $325.4 million is reported net of allowances for doubtful accounts of $5.6 million . We believe our reported allowances at December 31, 2011 , are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional allowances that would result in additional selling, general and administrative expenses being recorded for the period in which such determination is made.
Inventory.     Our policy is to record inventory write-downs when conditions exist that indicate that our inventories are likely to be in excess of anticipated demand or are obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate the ability to realize the value of our inventories based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, our write-downs are intended to reduce the carrying value of our inventories to their net realizable value and establish a new cost basis. As of December 31, 2011 , our inventories of $336.1 million are stated net of inventory write-downs. If actual demand for our products deteriorates or market conditions are less favorable than those that we project, additional inventory write-downs may be required in the future.
Goodwill.     We have recorded goodwill in connection with our business acquisitions. We review goodwill in June of each year, or on an interim basis if required, for impairment to determine if events or changes in business conditions indicate that the carrying value of the goodwill may not be recoverable. Such reviews assess the fair value of the assets based upon our estimates of the future cash flows we expect the assets to generate within the boundaries of the applicable business segments of the Company. Our current review indicates that no adjustments are necessary for the goodwill assets, which have a carrying value of $498.3 million as of December 31, 2011 .
Product warranties.     Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our products over a specified period of time, generally twelve to twenty-four months, at no cost to our customers. Our policy is to establish warranty reserves at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements at the time that revenue is recognized. We believe that our recorded liability of $16.0 million at December 31, 2011 is adequate to cover our future cost of materials, labor and overhead for the servicing of our products sold through that date. If actual product failures or material or service delivery costs differ from our estimates, our warranty liability would need to be revised accordingly.
Contingencies.     We are subject to the possibility of loss contingencies arising in the normal course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.

27


Income taxes.     We record our deferred tax assets when the benefits are more likely than not to be recognized. Valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets are not more likely than not to be realized in the future. In making that determination, on a jurisdiction by jurisdiction basis, we estimate our future taxable income based upon historical operating results and external market data. Future levels of taxable income are dependent upon, but not limited to, general economic conditions, competitive pressures and other factors beyond our control. As of December 31, 2011 , we have determined that a valuation allowance against our net deferred tax assets of $6.7 million is required. If we should determine that we may be unable to realize our deferred tax assets to the extent reported, an adjustment to the deferred tax assets would be recorded in the period such determination is made.

Consolidated Operating Results
The following table sets forth for the indicated periods certain items as a percentage of revenue:
 
Year Ended December  31, (1)
 
2011
 
2010 (2)
 
2009
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
46.3

 
45.0

 
42.6

Gross profit
53.7

 
55.0

 
57.4

Operating expenses:
 
 
 
 
 
Research and development
9.5

 
8.4

 
8.0

Selling, general and administrative
23.8

 
20.6

 
19.2

Total operating expenses
33.4

 
29.0

 
27.1

Earnings from operations
20.3

 
26.0

 
30.3

Interest expense
0.4

 
0.2

 
0.6

Interest income
(0.1
)
 
(0.1
)
 
(0.2
)
Other income, net
(0.1
)
 
(0.3
)
 
0.2

Earnings from continuing operations before income taxes
20.1

 
26.1

 
29.7

Income tax provision
5.7

 
8.2

 
9.6

Earnings from continuing operations
14.4

 
17.9

 
20.1

Loss from discontinued operations, net of tax
(0.1
)
 
(0.0
)
 

Net earnings
14.3
 %
 
17.9
 %
 
20.1
 %
_______________  
(1)
Totals may not recompute due to rounding
(2)
Amounts have been adjusted for the reclassification of certain discontinued operations to continuing 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 for 2011, 2010 and 2009 . 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 2011 totaled $1,544.1 million , an increase of 11.2 percent over 2010 revenue of $1,388.4 million . 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 Technologies, Inc. (“ICx”) which was acquired on October 4, 2010. Excluding revenue from Raymarine and ICx, revenue for the year ended December 31, 2011 was flat compared to the same period in 2010. Revenue from our Thermal Vision and Measurement segment increased by 14.9 percent in 2011 compared to the same period in 2010, while revenue from our Surveillance segment declined by 14.0 percent in 2011 compared to the same period in 2010.
Revenue for 2010 totaled $1,388.4 million , an increase of 21.0 percent over 2009 revenue of $1,147.1 million . The increase was primarily due to a 16.9 percent increase in Thermal Vision and Measurement revenue, and the revenue reported by Raymarine and ICx. Revenues from the dates of acquisition for those businesses totaled $150.2 million. Excluding Raymarine and ICx, revenue for 2010 increased by 7.9 percent from 2009.
International revenue in 2011 totaled $740.6 million , representing 48.0 percent of revenue. This compares with international revenue in 2010 which totaled $653.7 million , representing 47.1 percent of revenue and $474.8 million in 2009 , representing 41.4 percent of revenue. While the sales mix between United States and international sales may fluctuate from year to year, we expect revenue from customers outside the United States to continue to comprise a significant portion of our total revenue on a long-term basis.

28


Gross profit .    Gross profit for the year ended December 31, 2011 was $828.6 million compared to $763.6 million in 2010 . Gross margin, defined as gross profit divided by revenue, decreased slightly from 55.0 percent in 2010 to 53.7 percent in 2011 . The decrease in gross margin in 2011 was primarily due to lower gross margins at Raymarine and ICx business units (which have historically lower gross margins than our other business segments) 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. Excluding Raymarine and the ICx business units, gross margins were 57.4 percent and 56.8 percent in 2011 and 2010, respectively.
Gross profit for the year ended December 31, 2010 was $763.6 million compared to $658.5 million in 2009 . Gross margin decreased from 57.4 percent in 2009 to 55.0 percent in 2010 . The decrease in gross margin was primarily due to gross margins at Raymarine and ICx and the product mix in our Surveillance division, partially offset by production efficiencies related to increased volumes and lower production costs in our Thermal Vision and Measurement manufacturing facilities. Excluding Raymarine and ICx, gross margin was 56.8 percent of revenue in 2010.
Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs.
Research and development.     Research and development expenses were $147.2 million , or 9.5 percent of revenue in 2011 , compared to $116.6 million , or 8.4 percent of revenue, in 2010 , and $91.3 million , or 8.0 percent of revenue, in 2009 . The increase in research and development expenses as a percentage of revenue in 2011 over 2010 and 2009 was due to increased investment in new product development as well as the research and development activity conducted by the acquired companies.
We believe that spending levels are sufficient to support the development of new products and the continued growth of the business. We expect research and development expenses to be approximately 8 to 10 percent of revenue on a long-term basis.
Selling, general and administrative expenses.     Selling, general and administrative expenses were $368.2 million , or 23.8 percent of revenue in 2011 compared to $286.7 million , or 20.6 percent of revenue, in 2010 and $219.9 million , or 19.2 percent of revenue, in 2009 . The increase in selling, general and administrative expenses from 2010 to 2011 was primarily due to the operating expenses related to businesses acquired during 2010 which represented $46.1 million of the increase, 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. The increase in selling, general and administrative expenses from 2009 to 2010 was primarily due to increased spending in each of our business segments to support future growth, as well as the operating expenses of businesses acquired during 2009 and 2010, acquisition related costs incurred in 2010 of $9.2 million and a $3.0 million litigation settlement recorded in the third quarter of 2010. We anticipate selling, general and administrative expenses in the future to increase at a slower rate than revenue.
Interest expense.     Interest expense totaled $5.5 million , $2.9 million and $6.9 million for the years ended December 31, 2011, 2010 and 2009 , respectively. Interest expense in 2011 is primarily attributable to the interest expense associated with the $250 million aggregate principal amount of 3.75 percent senior unsecured notes due September 1, 2016 that were issued in August 2011 and the amortization of the costs related to the issuance of the notes. Interest expense in 2010 is primarily attributable to interest on the convertible notes that were issued in June 2003, the amortization of the discounts recorded on the notes and the costs related to the issuance of the notes. The convertible notes were fully converted by June 2010.
Interest income.     Interest income was $1.3 million , $1.3 million and $1.7 million for the years ended December 31, 2011, 2010 and 2009 , respectively. The decrease in interest income in 2011 and 2010 compared to 2009 was primarily due to lower interest rates and less invested cash.
Other income, net.     We reported other income of $2.1 million in 2011 , $4.0 million in 2010 and other expense of $1.8 million in 2009 . The other income in 2011 and 2010 is primarily currency transaction gain and rental income. The other expense in 2009 is primarily currency transaction losses offset by investment gains.
Income taxes.     Our income tax provision was $88.4 million , $114.3 million and $110.2 million in 2011, 2010 and 2009 , respectively. The effective tax rates for 2011, 2010 and 2009 were 28.4 percent , 31.5 percent and 32.4 percent , respectively. The mix in taxable income between our United States and international operations impacted the income tax provisions in each of these years. Our effective tax rate is lower than the United States federal tax rate of 35 percent because of lower foreign tax rates, the effect of foreign tax credits and other federal and state tax credits.
At December 31, 2011 , the Company had United States tax net operating loss carry-forwards totaling approximately $77.7 million which expire between 2025 and 2030 . In addition, the Company has various state net operating loss carry-forwards totaling approximately $67.5 million which expire between 2012 and 2030 . The federal and state net operating losses were generated by

29


ICx Technologies, Inc. prior to being acquired by us in 2010.
Tax benefits as described above are recorded as assets when the benefits are more likely than not to be recognized. To the extent that we assess the realization of such assets to not be more likely than not, a valuation allowance is required to be recorded. We believe that the net deferred tax assets of $41.8 million reflected on the December 31, 2011 Consolidated Balance Sheet are materially realizable based on future forecasts of taxable income over a relatively short time horizon, but we have determined that a valuation allowance against our net deferred tax assets of $6.7 million is required, primarily related to certain acquired net operating losses. A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. A review of all available positive and negative evidence is considered, including past and future performance, the market environment in which the Company operates, utilization of tax attributes in the past, length of carryback and carryforward periods, and evaluation of potential tax planning strategies when evaluating the realizability of deferred tax assets.
Discontinued operations.     Certain operations that were included in the acquisition of ICx have been identified as available for sale and their results are reported as discontinued operations. In December 2011, we sold two of the ICx business units reported as discontinued operations. In addition, we have written down the net assets to estimated market value of the two remaining business units classified as discontinued operations. The net loss of $0.7 million on the sale, the write down of $3.0 million, and the operating losses of $1.3 million for the year have been included in the loss from discontinued operations, net of cumulative tax benefits of $3.8 million, on the Consolidated Statement of Income for the year ended December 31, 2011.

Segment Operating Results
As of January 1, 2011, we 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):
 
Year Ended December 31,
 
2011
 
2010
 
2009
Revenue
$
660.3

 
$
574.9

 
$
491.8

Earnings from operations
194.7

 
163.7

 
122.2

Operating margin
29.5
%
 
28.5
%
 
24.9
%
Backlog
136

 
135

 
111

Revenue increased by 14.9 percent in 2011 compared to 2010 primarily due to increased unit deliveries from several of the segment’s product lines including thermography, cores and components, and maritime product lines. Earnings from operations increased by 18.9 percent due to the increase in revenue and manufacturing efficiencies resulting from higher production volumes and lower material costs on new products.
Revenue increased by 16.9 percent in 2010 compared to 2009 primarily due to increased unit sales in our security, transportation and maritime product lines and the introduction in 2010 of the personal night vision systems products. Earnings from operations increased by 33.9 percent due to the increase in revenue and manufacturing efficiencies resulting from higher production volumes and lower material costs on new products.
Raymarine
Raymarine operating results are as follows (in millions):
 
Year Ended December 31,
 
2011
 
2010
Revenue
$
171.5

 
$
104.1

Earnings from operations
11.9

 
8.3

Operating margin
6.9
%
 
8.0
%
Backlog
5

 
11

Raymarine was acquired on May 14, 2010 and the operating results are for the period since the acquisition. The earnings from operations include the impact of the amortization of intangible assets of $3.8 million in 2011 and $2.1 million in 2010.

30


Surveillance
Surveillance operating results are as follows (in millions):
 
Year Ended December 31,
 
2011
 
2010
 
2009
Revenue
$
577.6

 
$
671.3

 
$
655.3

Earnings from operations
208.5

 
256.2

 
286.4

Operating margin
36.1
%
 
38.2
%
 
43.7
%
Backlog
247

 
333

 
433

Revenue decreased by 14.0 percent in 2011 compared to 2010 , primarily due to decreases in revenue from U.S. government agencies, partially offset by revenue of $8.8 million from ICx business units, which were acquired on October 4, 2010. Lower revenue and increased segment operating expenses caused the decline in earnings from operations and operating margin from 2010 to 2011. The earnings from operations include the impact of the amortization of intangible assets of $2.4 million and $0.6 million, and the fair value adjustments on inventory of $2.6 million and $1.3 million in 2011 and 2010, respectively. The fair value adjustment on inventory related to purchase price accounting and the adjustment was fully amortized in 2011. The decline in backlog from 2010 to 2011 was primarily due to the continued reduction in procurement activity by our U.S. government customers in 2011.
Revenue increased by 2.4 percent in 2010 compared to 2009 . Higher deliveries of ground-based products and the revenue from a business acquired in October 2009 was offset by decreases in revenue from airborne and maritime products as spending by U.S. government agencies declined in 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 2009 to 2010. The decline in backlog from 2009 to 2010 was primarily due to deliveries on U.S. government programs that were booked in prior years and the reduced procurement activity by our U.S. government customers in 2010.
Detection
Detection operating results are as follows (in millions):
 
Year Ended December 31,
 
2011
 
2010
Revenue
$
79.9

 
$
23.6

Earnings from operations
(5.6
)
 
(2.5
)
Operating margin
(7.0
)%
 
(10.8
)%
Backlog
25

 
20

ICx was acquired on October 4, 2010 and the operating results are for the period since the acquisition. The earnings from operations include the impact of the amortization of intangible assets of $2.6 million and $0.6 million, and the fair value adjustments on inventory of $4.2 million and $2.1 million in 2011 and 2010, respectively. The fair value adjustment on inventory related to purchase price accounting and the adjustment was fully amortized in 2011.
Integrated Systems
Integrated Systems operating results are as follows (in millions):
 
Year Ended December 31,
 
2011
 
2010
Revenue
$
54.8

 
$
14.7

Earnings from operations
1.7

 

Operating margin
3.0
%
 
0.2
%
Backlog
42

 
36

ICx was acquired on October 4, 2010 and the operating results are for the period since the acquisition. The earnings from operations include the impact of the amortization of intangible assets of $1.6 million and $0.4 million, and the fair value adjustments on inventory of $0.5 million and $0.2 million in 2011 and 2010, respectively. The fair value adjustment on inventory related to purchase price accounting and the adjustment was fully amortized in 2011.



31


Liquidity and Capital Resources
At December 31, 2011 , we had a total of $440.9 million in cash and cash equivalents, $263.6 million of which was in the United States and $177.3 million at our foreign subsidiaries compared to $77.9 million in the United States and $115.3 million at our foreign subsidiaries at December 31, 2010 . The increase in cash and cash equivalents in 2011was primarily due to the net proceeds of $247.7 million from the issuance of $250 million aggregate principal amount of our 3.75 percent 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 in 2011 totaled $243.9 million compared to $255.3 million in 2010 and $271.8 million in 2009 . The decrease in cash provided from operating activities in 2011 was primarily due to the decrease in net earnings partially offset by the non-cash income charges for depreciation and amortization. The decrease in cash provided from operating activities in 2010 was primarily due to an increase in accounts receivable, inventories, and deferred tax assets, offset by an increase in net earnings compared to 2009.
Cash used for investing activities for the year ended December 31, 2011 totaled $67.1 million , primarily consisting of the acquisition of Aerius Photonics, LLC for $27.0 million and capital expenditures of $42.0 million. Capital expenditures in 2011 included the purchase of the building in Fareham, United Kingdom and building improvements for our facilities in Nashua, New Hampshire and Arninge, Sweden. Cash used for investing activities for the year ended December 31, 2010 totaled $465.4 million , primarily consisting of the acquisitions of Raymarine for $174.7 million and ICx for $228.0 million and capital expenditures of $66.0 million. Capital expenditures in 2010 included the purchase of two buildings for $36.2 million. Cash used for investing activities for the year ended December 31, 2009 totaled $107.7 million , primarily consisting of the acquisitions of Salvador, OmniTech, and Directed Perception and capital expenditures of $41.9 million which include the purchase of a building for $9.7 million.
Cash provided by financing activities for the year ended December 31, 2011 totaled $75.4 million , primarily consisting of the net proceeds of $247.7 million from the issuance of the Notes and cash provided from our stock-based compensation plans partially offset by the payment of dividends and repurchase of approximately 6.1 million shares of our common stock. Cash used from financing activities for the year ended December 31, 2010 totaled $6.5 million , primarily consisting of the repurchase of approximately 1.3 million shares of our common stock, offset by proceeds from shares issued for, and tax benefits recognized from, our stock-based compensation plans. Cash provided from financing activities for the year ended December 31, 2009 totaled $43.5 million , primarily consisting of the repurchase of approximately 3.2 million shares of our common stock, offset by proceeds from shares issued for, and tax benefits recognized from, our stock-based compensation plans.
On October 6, 2006, we signed a Credit Agreement (“2006 Credit Agreement”) with Bank of America, N.A., Union Bank of California, N.A., U.S. Bank National Association and other Lenders. The 2006 Credit Agreement provided for a $300 million, five-year revolving line of credit. At December 31, 2010, we had no amounts outstanding under the 2006 Credit Agreement and had $6.5 million of letters of credit outstanding which reduced the total available credit. This credit facility was terminated on February 8, 2011.
On July 7, 2010, we entered into an uncommitted letter of credit agreement with Bank of America to support letters of credit whose expiration would extend beyond the 2006 Credit Agreement. At December 31, 2011 and 2010 the total value of the letters of credit outstanding under this facility was $0.6 million and $8.6 million, respectively.
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 February 8, 2016. The Credit Agreement allows us and certain designated subsidiaries to borrow in United States dollars, euro, kroner, 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 December 31, 2011 . The five-year revolving line of credit available under the Credit Agreement is unsecured.
At December 31, 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 $15.8 million of letters of credit outstanding at December 31, 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 semi-annually 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.

32


Our Sweden subsidiary has a 30 million Swedish kroner (approximately $4.3 million ) line of credit with an interest rate at 2.81 percent at December 31, 2011 . At December 31, 2011 , we had no amounts outstanding on this line of credit. The 30 million Swedish kroner 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.
We believe that our existing cash combined with the cash we anticipate generating from operating activities, and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the next twelve months. We do not have any significant commitments nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity or capital resources.

Off-Balance Sheet Arrangements
As of December 31, 2011 , we leased our non-owned facilities under operating lease agreements. We also leased certain operating machinery and equipment and office equipment under operating lease agreements. Except for these operating lease agreements, we do not have any off-balance sheet arrangements that have or are likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations
As of December 31, 2011 , our contractual obligations were as follows (in thousands):  
 
Payments Due by Period
Contractual Obligations
Total
 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 Years
Long-term debt
$
296,875

 
$
9,375

 
$
18,750

 
$
268,750

 
$

Operating leases
36,230

 
16,700

 
14,683

 
4,047

 
800

Licensing rights
3,025

 
550

 
1,100

 
1,100

 
275

Post-retirement obligations
23,497

 
525

 
14,203

 
998

 
7,771

Other obligations
2,753

 
2,728

 
25

 

 

 
$
362,380

 
$
29,878

 
$
48,761

 
$
274,895

 
$
8,846

Principal and interest on long-term debt, operating leases and licensing rights obligations are based upon contractual terms. Actual payments may differ in terms of both timing and amounts.
The Company cannot make a reasonably reliable estimate of the period of potential cash settlement of its unrecognized tax benefits of $29.2 million and, therefore has not included the unrecognized tax benefits in the table of significant contractual obligations as of December 31, 2011 . For further detail on unrecognized tax benefits, see Note 14 to the consolidated financial statements included in this Report. We did not include approximately $15.8 million of standby letters of credit and performance bonds due to the unlikely event of payment, if any, of amounts under those arrangements.

Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements in Item 8 for a discussion of recent accounting pronouncements.


33


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to our credit agreements. The credit agreements are at variable rates. A change in interest rates under the credit agreements impacts the interest that we incur and our cash flows. At December 31, 2011 , no amounts were outstanding under our credit agreements; consequently, no sensitivity analysis is presented.
We have assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates. Similarly, certain revenues from products sold in countries outside the United States and costs associated with non-U.S. operations are denominated in foreign currencies. For more information on our foreign currency translation, see Note 1 to the Consolidated Financial Statements in Item 8. Assets and liabilities located outside the United States are primarily located in Europe. Our investments in subsidiaries outside the United States with functional currencies other than the United States dollar are considered long-term. We currently engage in limited forward currency exchange contracts and other similar hedging activities to reduce our economic exposure to changes in exchange rates. At December 31, 2011 , exchange contracts with a notional amount of approximately $45.1 million were outstanding. Because we market, sell and license our products throughout the world, we could be adversely affected by weak economic conditions in international markets that could reduce demand for our products.
Our net investment in subsidiaries outside the United States, translated into United States dollars using the period-end exchange rates, was approximately $622.4 million and $486.9 million at December 31, 2011 and 2010 , respectively. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in foreign exchange rates would be approximately $62.2 million and $48.7 million at December 31, 2011 and 2010 , respectively. The increase in the potential loss in fair value is primarily due to the increase in the net investment of subsidiaries outside the United States. We have no plans to liquidate any of our subsidiaries outside the United States, and therefore, foreign exchange rate gains or losses on our international investments are reflected as a cumulative translation adjustment and do not increase or reduce our reported net earnings.

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item includes the following financial information:

Statement
Page

34



Report of Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders of FLIR Systems, Inc.:
We have audited the accompanying consolidated balance sheets of FLIR Systems, Inc. (an Oregon Corporation) and subsidiaries as of December 31, 2011 and 2010 , and the related consolidated statements of income, shareholders’ equity and comprehensive earnings, and cash flows for each of the years in the three-year period ended December 31, 2011 . These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FLIR Systems, Inc. and subsidiaries as of December 31, 2011 and 2010 , and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 , in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FLIR Systems Inc.’s internal control over financial reporting as of December 31, 2011 , based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Portland, Oregon
February 29, 2012

35


FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 
Year Ended December 31,
 
2011
 
2010 (1)
 
2009
Revenue
$
1,544,062

 
$
1,388,437

 
$
1,147,087

Cost of goods sold
715,458

 
624,796

 
488,558

Gross profit
828,604

 
763,641

 
658,529

Operating expenses:
 
 
 
 
 
Research and development
147,177

 
116,635

 
91,301

Selling, general and administrative
368,232

 
286,695

 
219,941

Total operating expenses
515,409

 
403,330

 
311,242

Earnings from operations
313,195

 
360,311

 
347,287

Interest expense
5,487

 
2,884

 
6,882

Interest income
(1,273
)
 
(1,258
)
 
(1,749
)
Other (income) expense, net
(2,098
)
 
(4,015
)
 
1,761

Earnings from continuing operations before income taxes
311,079

 
362,700

 
340,393

Income tax provision
88,427

 
114,326

 
110,180

Earnings from continuing operations
222,652

 
248,374

 
230,213

Loss from discontinued operations, net of tax
(1,178
)
 
(248
)
 

Net earnings
$
221,474

 
$
248,126

 
$
230,213

Basic earnings per share:
 
 
 
 
 
Continuing operations
$
1.41

 
$
1.59

 
$
1.54

Discontinued operations
(0.01
)
 
(0.00
)
 

Basic earnings per share
$
1.40

 
$
1.59

 
$
1.54

Diluted earnings per share:
 
 
 
 
 
Continuing operations
$
1.38

 
$
1.54

 
$
1.45

Discontinued operations
(0.01
)
 
(0.00
)
 

Diluted earnings per share
$
1.38

 
$
1.54

 
$
1.45

_______________
(1)    Amounts have been adjusted for the reclassification of certain discontinued operations to continuing operations.





















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

36


FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
 
December 31,
 
2011
 
2010
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
440,846

 
$
193,137

Accounts receivable, net
325,370

 
339,723

Inventories
336,051

 
303,156

Prepaid expenses and other current assets
104,285

 
95,663

Deferred income taxes, net
27,443

 
23,128

Total current assets
1,233,995

 
954,807

Property and equipment, net
186,269

 
189,119

Deferred income taxes, net
31,644

 
22,742

Goodwill
498,343

 
482,019

Intangible assets, net
164,440

 
177,385

Other assets
32,338

 
31,280

 
$
2,147,029

 
$
1,857,352

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
84,190

 
$
85,881

Deferred revenue
24,046

 
17,867

Accrued payroll and related liabilities
49,475

 
54,894

Accrued product warranties
13,370

 
15,711

Advance payments from customers
13,219

 
22,616

Accrued expenses
41,183

 
36,578

Accrued income taxes
2,161

 
8,218

Other current liabilities
3,886

 
8,186

Total current liabilities
231,530

 
249,951

Long-term debt
247,861

 

Deferred income taxes
17,237

 
13,163

Accrued income taxes
17,537

 
19,793

Pension and other long-term liabilities
53,835

 
51,897

Commitments and contingencies (Notes 12 and 13)

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at December 31, 2011 or 2010

 

Common stock, $0.01 par value, 500,000 shares authorized, 154,969 and 159,212 shares issued at December 31, 2011 and 2010, respectively, and additional paid-in capital
352,157

 
465,467

Retained earnings
1,238,866

 
1,055,429

Accumulated other comprehensive (loss) earnings
(11,994
)
 
1,652

Total shareholders’ equity
1,579,029

 
1,522,548

 
$
2,147,029

 
$
1,857,352










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

37


FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE EARNINGS
(in thousands)
 
Common Stock and
Additional
Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Earnings
(Loss)
 
Total
Shareholder’s
Equity
 
Annual
Comprehensive
Earnings
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2008
141,387

 
$
282,849

 
$
577,090

 
$
(15,214
)
 
$
844,725

 
 
Net earnings for the year

 

 
230,213

 

 
230,213

 
$
230,213

Income tax benefit of common stock options exercised

 
9,245

 

 

 
9,245

 

Repurchase of common stock
(3,232
)
 
(73,169
)
 

 

 
(73,169
)
 

Common stock issued pursuant to stock-based compensation plans, net
2,717

 
17,581

 

 

 
17,581

 

Stock-based compensation expense

 
23,888

 

 

 
23,888

 

Conversion of convertible debt
11,954

 
128,427

 

 

 
128,427

 

Capital contribution

 
495

 

 

 
495

 

Change in minimum liability for pension plans, net of tax effects of $402

 

 

 
781

 
781

 
781

Translation adjustment

 

 

 
21,563

 
21,563

 
21,563

Balance, December 31, 2009
152,826

 
389,316

 
807,303

 
7,130

 
1,203,749

 
 
Comprehensive earnings, year ended December 31, 2009
 
 
 
 
 
 
 
 
 
 
$
252,557

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings for the year

 

 
248,126

 

 
248,126

 
$
248,126

Income tax benefit of common stock options exercised

 
8,263

 

 

 
8,263

 

Repurchase of common stock
(1,306
)
 
(35,725
)
 

 

 
(35,725
)
 

Common stock issued pursuant to stock-based compensation plans, net
2,397

 
17,388

 

 

 
17,388

 

Stock-based compensation expense

 
25,352

 

 

 
25,352

 

Conversion of convertible debt
5,295

 
58,752

 

 

 
58,752

 

Stock issued for acquisitions

 
2,121

 

 

 
2,121

 

Change in minimum liability for pension plans, net of tax effects of $350

 

 

 
664

 
664

 
664

Translation adjustment

 

 

 
(6,142
)
 
(6,142
)
 
(6,142
)
Balance, December 31, 2010
159,212

 
465,467

 
1,055,429

 
1,652

 
1,522,548

 
 
Comprehensive earnings, year ended December 31, 2010
 
 
 
 
 
 
 
 
 
 
$
242,648

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings for the year

 

 
221,474

 

 
221,474

 
$
221,474

Income tax benefit of common stock options exercised

 
5,545

 

 

 
5,545

 

Repurchase of common stock
(6,135
)
 
(160,669
)
 

 

 
(160,669
)
 

Common stock issued pursuant to stock-based compensation plans, net
1,892

 
16,751

 

 

 
16,751

 

Stock-based compensation expense

 
25,063

 

 

 
25,063

 

Dividends paid

 

 
(38,037
)
 

 
(38,037
)
 

Change in minimum liability for pension plans, net of tax effects of $653

 

 

 
(1,113
)
 
(1,113
)
 
(1,113
)
Translation adjustment

 

 

 
(12,533
)
 
(12,533
)
 
(12,533
)
Balance, December 31, 2011
154,969

 
$
352,157

 
$
1,238,866

 
$
(11,994
)
 
$
1,579,029

 
 
Comprehensive earnings, year ended December 31, 2011
 
 
 
 
 
 
 
 
 
 
$
207,828


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

38


FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Year Ended December 31,
 
2011
 
2010
 
2009
CASH PROVIDED BY OPERATING ACTIVITIES:
 
 
 
 
 
Net earnings
$
221,474

 
$
248,126

 
$
230,213

Income items not affecting cash:
 
 
 
 
 
Depreciation and amortization
77,498

 
61,297

 
42,426

Deferred income taxes
(12,195
)
 
(14,099
)
 
(608
)
Stock-based compensation arrangements
24,917

 
25,575

 
23,955

Inducement loss on exchange offer for convertible notes

 

 
1,997

Other non-cash items
12,654

 
10,320

 
(1,749
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
Decrease (increase) in accounts receivable
17,992

 
(47,711
)
 
9,981

Increase in inventories
(48,361
)
 
(25,151
)
 
(301
)
(Increase) decrease in prepaid expenses and other current assets
(11,473
)
 
23,975

 
(22,946
)
Increase in other assets
(5,589
)
 
(28,573
)
 
(10,906
)
(Decrease) increase in accounts payable
(5,565
)
 
11,563

 
3,293

Increase (decrease) in deferred revenue
5,426

 
(15,448
)
 
(6,214
)
Decrease in accrued payroll and other liabilities
(25,599
)
 
(5,753
)
 
(20,327
)
(Decrease) increase in accrued income taxes
(9,865
)
 
(2,928
)
 
13,887

Increase in pension and other long-term liabilities
2,577

 
14,058

 
9,059

Cash provided by operating activities
243,891

 
255,251

 
271,760

CASH USED BY INVESTING ACTIVITIES:
 
 
 
 
 
Additions to property and equipment
(42,014
)
 
(65,973
)
 
(41,874
)
Proceeds on sale of property and equipment
68

 
225

 
2,892

Business acquisitions, net of cash acquired
(27,182
)
 
(402,721
)
 
(73,565
)
Other investments
1,991

 
3,080

 
4,850

Cash used by inves