FLIR Systems, Inc.
FLIR SYSTEMS INC (Form: 10-Q, Received: 08/03/2016 14:39:07)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________  
FORM 10-Q
______________________________________
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from             to             
Commission file number 0-21918
______________________________________  
FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)
______________________________________
Oregon
 
93-0708501
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
27700 SW Parkway Avenue,
Wilsonville, Oregon
 
97070
(Address of principal executive offices)
 
(Zip Code)
(503) 498-3547
(Registrant’s telephone number, including area code)
______________________________________  
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
   x
 
Accelerated filer
   ¨
Non-accelerated filer
   ¨
 
Smaller reporting company
   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
At July 29, 2016 , there were 137,281,232 shares of the Registrant’s common stock, $0.01 par value, outstanding.





INDEX
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 




PART 1. FINANCIAL INFORMATION  
Item 1.
Financial Statements

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
402,729

 
$
392,975

 
$
782,201

 
$
737,492

Cost of goods sold
219,407

 
203,360

 
421,189

 
371,980

Gross profit
183,322

 
189,615

 
361,012

 
365,512

Operating expenses:
 
 
 
 
 
 
 
Research and development
36,945

 
35,126

 
73,356

 
69,900

Selling, general and administrative
81,165

 
83,958

 
165,067

 
159,327

Total operating expenses
118,110

 
119,084

 
238,423

 
229,227

 
 
 
 
 
 
 
 
Earnings from operations
65,212

 
70,531

 
122,589

 
136,285

 
 
 
 
 
 
 
 
Interest expense
4,360

 
3,358

 
7,807

 
7,019

Interest income
(328
)
 
(295
)
 
(588
)
 
(542
)
Other expense (income), net
1,327

 
1,020

 
(103
)
 
320

Earnings before income taxes
59,853

 
66,448

 
115,473

 
129,488

Income tax provision
14,485

 
15,948

 
68,980

 
31,078

Net earnings
$
45,368

 
$
50,500

 
$
46,493

 
$
98,410

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
0.36

 
$
0.34

 
$
0.70

Diluted
$
0.33

 
$
0.36

 
$
0.33

 
$
0.70

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
137,861

 
140,063

 
137,686

 
139,916

Diluted
138,993

 
141,491

 
138,832

 
141,484





The accompanying notes are an integral part of these consolidated financial statements.
1



FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net earnings
$
45,368

 
$
50,500

 
$
46,493

 
$
98,410

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Cash flow hedges
(196
)
 
194

 
(865
)
 
(410
)
Foreign currency translation adjustments
(24,888
)
 
30,499

 
(1,526
)
 
(35,465
)
    Total other comprehensive income (loss)
(25,084
)
 
30,693

 
(2,391
)
 
(35,875
)
Comprehensive income
$
20,284

 
$
81,193

 
$
44,102

 
$
62,535

























The accompanying notes are an integral part of these consolidated financial statements.
2



FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
 
June 30,
2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
903,179

 
$
472,785

Accounts receivable, net
279,323

 
326,098

Inventories
387,393

 
393,092

Prepaid expenses and other current assets
87,927

 
95,539

Total current assets
1,657,822

 
1,287,514

Property and equipment, net
271,726

 
272,629

Deferred income taxes, net
55,578

 
55,429

Goodwill
592,946

 
596,316

Intangible assets, net
133,364

 
141,302

Other assets
83,515

 
53,210

    Total assets
$
2,794,951

 
$
2,406,400

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
101,170

 
$
139,540

Deferred revenue
30,738

 
31,933

Accrued payroll and related liabilities
46,629

 
54,806

Accrued product warranties
14,661

 
13,406

Advance payments from customers
21,189

 
33,848

Accrued expenses
35,597

 
40,930

Accrued income taxes
3,007

 
201

Other current liabilities
4,441

 
5,987

Current portion, long term debt
264,924

 
264,694

Total current liabilities
522,356

 
585,345

Long-term debt
505,040

 
93,750

Deferred income taxes
3,893

 
3,623

Accrued income taxes
51,807

 
10,457

Other long-term liabilities
64,311

 
63,710

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2016, and December 31, 2015

 

Common stock, $0.01 par value, 500,000 shares authorized, 137,265 and 137,350 shares issued at June30, 2016, and December 31, 2015, respectively, and additional paid-in capital
1,373

 
1,374

Retained earnings
1,773,688

 
1,773,267

Accumulated other comprehensive loss
(127,517
)
 
(125,126
)
Total shareholders’ equity
1,647,544

 
1,649,515

    Total liabilities and shareholders’ equity
$
2,794,951

 
$
2,406,400



The accompanying notes are an integral part of these consolidated financial statements.
3



FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
2016
 
2015
CASH PROVIDED BY OPERATING ACTIVITIES:
 
 
 
Net earnings
$
46,493

 
$
98,410

Income items not affecting cash:
 
 
 
Depreciation and amortization
27,778

 
24,611

Deferred income taxes
(372
)
 
142

Stock-based compensation arrangements
14,381

 
12,938

Other non-cash items
15,451

 
(823
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Decrease in accounts receivable
50,711

 
22,594

Decrease (increase) in inventories
14,995

 
(44,072
)
(Increase) decrease in prepaid expenses and other current assets
(1,634
)
 
489

(Increase) decrease in other assets
(8,613
)
 
1,610

(Decrease) increase in accounts payable
(44,165
)
 
24,539

(Decrease) increase in deferred revenue
(1,052
)
 
2,303

(Decrease) in accrued payroll and other liabilities
(34,534
)
 
(28,170
)
Increase in accrued income taxes
46,617

 
5,230

Increase of pension & other long term liabilities
565

 
4,058

Cash provided by operating activities
126,621

 
123,859

CASH USED BY INVESTING ACTIVITIES:
 
 
 
Additions to property and equipment, net
(20,876
)
 
(30,783
)
Proceeds on sale of property and equipment
4,875

 
30

Business acquisitions, net of cash acquired
(42,445
)
 

Cash used by investing activities
(58,446
)
 
(30,753
)
CASH USED BY FINANCING ACTIVITIES:
 
 
 
Net proceeds from credit agreement and long-term debt
525,766

 

Repayments of credit agreements and long-term debt
(112,500
)
 
(7,500
)
Common stock repurchased
(29,747
)
 
(31,426
)
Dividends paid
(33,090
)
 
(30,774
)
Proceeds from employee stock based compensation plans
6,541

 
19,636

Excess tax benefits from share-based payment arrangements
1,579

 
4,041

Other financing activities
10

 
(8
)
Cash provided (used) by financing activities
358,559

 
(46,031
)
Effect of exchange rate changes on cash
3,660

 
(18,259
)
Net increase in cash and cash equivalents
430,394

 
28,816

Cash and cash equivalents, beginning of period
472,785

 
531,374

Cash and cash equivalents, end of period
$
903,179

 
$
560,190








The accompanying notes are an integral part of these consolidated financial statements.
4


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 1.
Basis of Presentation
The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 .
The accompanying consolidated financial statements include the accounts of FLIR Systems, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2016 .

Reclassifications
The Company made certain reclassifications to the prior year's financial statements to conform them to the presentation as of June 30, 2016 . Restructuring expenses of $0.5 million and $0.7 million have been reclassified to selling, general and administrative expenses, respectively, for the three and six months ended June 30, 2015 . These reclassifications had no effect on consolidated financial position, shareholders' equity or net cash flows for any of the periods presented.

Note 2.
Stock-based Compensation

Stock Incentive Plans

The Company has a stock-based compensation program that provides equity incentives for employees, consultants and directors. This program includes incentive and non-statutory stock options and nonvested stock awards (referred to as restricted stock unit awards) administered by the Compensation Committee of the Company's Board of Directors.

Under the stock-based compensation program, the Company has granted time-based options, time-based restricted stock unit awards, performance-based restricted stock unit awards and market-based restricted stock unit awards. Options generally expire ten years from their grant dates. Time-based options and restricted stock unit awards generally vest over a three year period. Shares issuable under the performance-based restricted stock unit awards are earned based upon the Company's return on invested capital over a three year period. Shares issuable under market-based restricted stock unit awards are earned based upon the Company's total shareholder return compared to the total shareholder return over a three year period of the component company at the 60th percentile level in the Standard & Poor's 500 Index. Shares vested under the performance-based restricted stock unit awards and the market-based restricted stock unit awards must be held by the participant for a period of one year from the vest date.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (the “ESPP”) which allows employees to purchase shares of the Company’s common stock at 85 percent of the lower of the fair market value at the date of enrollment or the fair market value at the purchase date. The ESPP provides for six-month offerings commencing on May 1 and November 1 of each year with purchases on April 30 and October 31 of each year. Shares purchased under the ESPP must be held by the purchasing plan participant for a period of at least 18 months after the date of purchase.


5


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 2.
Stock-based Compensation - (Continued)

Stock-based Compensation Expense
Stock-based compensation expense recognized in the Consolidated Statements of Income are as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Cost of goods sold
$
855

 
$
766

 
$
1,470

 
$
1,484

Research and development
1,233

 
1,185

 
2,414

 
2,325

Selling, general and administrative
6,205

 
6,229

 
10,497

 
9,129

Stock-based compensation expense
$
8,293

 
$
8,180

 
$
14,381

 
$
12,938

Stock-based compensation costs capitalized in inventory are as follows (in thousands):
 
 
June 30,
 
2016
 
2015
Capitalized in inventory
685

 
703

As of June 30, 2016 , the Company had $53.6 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.2 years.  


Note 3.
Net Earnings Per Share
The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator for earnings per share:
 
 
 
 
 
 
 
Net earnings for basic and diluted earnings per share
$
45,368

 
$
50,500

 
$
46,493

 
$
98,410

 
 
 
 
 
 
 
 
Denominator for earnings per share:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
137,861

 
140,063

 
137,686

 
139,916

Assumed exercises of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method
1,132

 
1,428

 
1,146

 
1,568

Weighted average diluted shares outstanding
138,993

 
141,491

 
138,832

 
141,484


The effect of outstanding stock-based compensation awards for the three and six months ended June 30, 2016 , which in the aggregate consisted of 295,000 and 440,000 shares, respectively; and for the three and six months ended June 30, 2015 , which in the aggregate consisted of 285,000 and 389,000 shares, respectively, have been excluded for purposes of calculating diluted earnings per share since their inclusion would have had an anti-dilutive effect.



6


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 4.
Fair Value of Financial Instruments
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories in accordance with FASB ASC Topic 820, “Fair Value Measurement”:
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors and methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Company had $329.5 million and $29.0 million of cash equivalents at June 30, 2016 and December 31, 2015 , respectively, which were primarily investments in money market funds. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets. The fair values of the Company’s foreign currency forward contracts and interest rate swap contracts as of June 30, 2016 and December 31, 2015 are disclosed in Note 5, "Derivative Financial Instruments," of the Notes to the Consolidated Financial Statements below and are based on Level 2 inputs. The fair value of the Company’s senior unsecured notes as described in Note 13, "Long-Term Debt," of the Notes to the Consolidated Financial Statements is approximately $689.0 million and $254.1 million based upon Level 2 inputs at June 30, 2016 and December 31, 2015 , respectively. The fair value of the Company's term loan, also described in Note 13, approximates the carrying value due to the variable market rate used to calculate interest payments. The Company does not have any other significant financial assets or liabilities that are measured at fair value.

Note 5.
Derivative Financial Instruments
Foreign Currency Exchange Rate Contracts
In general, the gains and losses related to the Company's foreign currency exchange rate contracts recorded in other expense (income), net are offset by the reciprocal gains and losses from the underlying assets or liabilities which originally gave rise to the exposure. The net losses for the three and six months ended June 30, 2016 were $9.1 million and $2.1 million , respectively. The net gains for the three and six months ended June 30, 2015 were $5.8 million and $1.8 million , respectively.

The following table provides volume information about the Company's foreign currency exchange rate contracts. The table below presents the net notional amounts of the Company's outstanding foreign currency forward contracts in United States dollar equivalent amounts (in thousands):
 
June 30,
2016
 
December 31,
2015
Swedish kronor
$
93,760

 
$
59,198

Euro
21,280

 
281

Canadian dollar
14,954

 
10,799

Brazilian real
8,145

 
6,440

British pound sterling
3,064

 
10,203

Australian dollar
2,856

 
2,342

Norwegian krone
836

 
453

Other
1,035

 
2,197

 
$
145,930

 
$
91,913

At June 30, 2016 , the Company’s foreign currency forward contracts, in general, had maturities of one month or less.

7


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 5.
Derivative Financial Instruments - (Continued)
Foreign Currency Exchange Rate Contracts - (Continued)
The carrying amount of the foreign currency forward contracts included in the Consolidated Balance Sheets are as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Other current assets
 
Other current liabilities
 
Other current assets
 
Other current liabilities
Foreign currency forward contracts
$
447

 
$
2,034

 
$
767

 
$
1,314


Interest Rate Swap Contracts
At June 30, 2016 , the effective interest rate on the Company's revolving credit facility was 2.37 percent . As of June 30, 2016 , the following interest rate swaps were outstanding:
Contract Date
 
Notional Amount
(in millions)
 
Fixed Rate
 
Effective Date
 
Maturity Date
March 15, 2013
 
$
50.6

 
1.02
%
 
April 5, 2013
 
March 31, 2019
March 29, 2013
 
$
50.6

 
0.97
%
 
April 5, 2013
 
March 31, 2019
The net fair value carrying amount of the Company's interest rate swaps was a liability of $0.9 million of which $0.5 million has been recorded in other current liabilities and $0.4 million has been recorded to other long-term liabilities in the Consolidated Balance Sheet as of June 30, 2016 .

Note 6.
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $7.8 million at June 30, 2016 and $6.9 million at December 31, 2015 .


Note 7.
Inventories
Inventories consist of the following (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Raw material and subassemblies
$
202,343

 
$
216,107

Work-in-progress
51,599

 
38,639

Finished goods
133,451

 
138,346

 
$
387,393

 
$
393,092



Note 8.
Property and Equipment
Property and equipment are net of accumulated depreciation of $269.8 million and $253.4 million at June 30, 2016 and December 31, 2015 , respectively.



8


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 9.
Goodwill
The carrying value of goodwill and the activity for the six months ended June 30, 2016 are as follows (in thousands):
Balance, December 31, 2015
 
$
596,316

Currency translation adjustments and other
 
(3,370
)
Balance, June 30, 2016
 
$
592,946


See Note 17, "Operating Segments and Related Information - Operating Segments, " of the Notes to the Consolidated Financial Statements for additional information on the carrying value of goodwill by operating segment at June 30, 2016 .

    
Note 10.
Intangible Assets
Intangible assets are net of accumulated amortization of $69.6 million and $61.3 million at June 30, 2016 and December 31, 2015 , respectively.


Note 11.
Credit Agreement
At June 30, 2016 , the Company had $101.3 million borrowings outstanding under its revolving credit facility pursuant to the Credit Agreement, dated February 8, 2011, by and among the Company, with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders, as amended on April 5, 2013, October 27, 2015 and May 31, 2016 (the "Credit Agreement"), and had $20.7 million of letters of credit outstanding, which reduced the available credit under the revolving credit facility to $378.1 million .


Note 12.
Accrued Product Warranties
The following table summarizes the Company’s accrued product warranties and activity (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Accrued product warranties, beginning of period
$
17,227

 
$
15,840

 
$
16,514

 
$
16,175

Amounts paid for warranty services
(5,458
)
 
(3,547
)
 
(9,598
)
 
(6,971
)
Warranty provisions for products sold
5,826

 
3,595

 
10,560

 
6,985

Currency translation adjustments and other
(103
)
 
134

 
16

 
(167
)
Accrued product warranties, end of period
$
17,492

 
$
16,022

 
$
17,492

 
$
16,022

Current accrued product warranties, end of period
 
 
 
 
$
14,661


$
13,232

Long-term accrued product warranties, end of period
 
 
 
 
$
2,831


$
2,790




9


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 13.
Long-Term Debt
Long-term debt consists of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Unsecured notes
$
675,000

 
$
250,000

Term loan

 
108,750

Credit Agreement
101,250

 

Unamortized discounts and issuance costs
(6,286
)
 
(306
)
 
$
769,964

 
$
358,444

Current portion, long-term debt
$
264,924

 
$
264,694

Long-term debt
$
505,040

 
$
93,750


In August 2011, the Company issued $250 million aggregate principal amount of its 3.75 percent senior unsecured notes due September 1, 2016 (the “2011 Notes”). The net proceeds from the issuance of the 2011 Notes were approximately $247.7 million , after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2011 Notes is payable semiannually in arrears on March 1 and September 1 . The proceeds from the 2011 Notes were used for general corporate purposes, which include working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock. The 2011 Notes were repaid on July 5, 2016.
In June 2016, the Company issued $425 million aggregate principal amount of its 3.125 percent senior unsecured notes due June 15, 2021 (the “2016 Notes”). The net proceeds from the issuance of the 2016 Notes were approximately $421.0 million , after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2016 Notes is payable semiannually in arrears on December 15 and June 15 . The proceeds from the 2016 Notes were used to repay the principal amount of the 2011 Notes outstanding in July 2016 and for working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock and other general corporate purposes.
The Credit Agreement discussed in Note 11, "Credit Agreement," of the Notes to the Consolidated Financial Statements above, consisted of a $150 million term loan facility and a revolving credit facility. On May 31, 2016, the Company repaid its term loan and drew down $105.0 million under the revolving credit facility. Interest on amounts outstanding under the revolving credit facility accrues at the one-month LIBOR rate plus the applicable scheduled spread for the amount outstanding and is paid monthly in arrears. See Note 5, "Derivative Financial Instruments - Interest Rate Swap Contracts ," of the Notes to the Consolidated Financial Statements for additional information on the effective interest rate on the revolving credit facility at June 30, 2016 .


Note 14.
Shareholders’ Equity
The following table summarizes the common stock and additional paid-in capital activity during the six months ended June 30, 2016 (in thousands):
 
Common stock and additional paid-in capital, December 31, 2015
$
1,374

Income tax benefit of common stock options exercised
1,451

Common stock issued pursuant to stock-based compensation plans, net
938

Stock-based compensation expense
14,375

Repurchase of common stock
(16,765
)
Common stock and additional paid-in capital, June 30, 2016
$
1,373

On February 5, 2015, the Company's Board of Directors authorized the repurchase in the open market or through privately negotiated transactions of up to 15.0 million shares of the Company's outstanding common stock. The authorization will expire on February 5, 2017. During the six months ended June 30, 2016, the Company repurchased 1.0 million shares for an aggregate purchase price of $29.7 million, of which $16.8 million reduced common stock and additional paid in capital and $12.9 million reduced retained earnings.

10


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 14.
Shareholders’ Equity - (Continued)
On June 3, 2016 , the Company paid a dividend of $0.12 per share on its outstanding common stock to the shareholders of record as of the close of business on May 20, 2016 . The total cash payments for dividends during the six months ended June 30, 2016 were $33.1 million .

Note 15.
Contingencies

FLIR Systems, Inc. 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. Raytheon's 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 complaint on September 2, 2008, in which they denied all material allegations. On October 27, 2010, the FLIR Parties and Raytheon entered into a settlement agreement that resolved the patent infringement claims (the "Patent Claims") pursuant to which the FLIR Parties paid $3 million to Raytheon and entitles the FLIR Parties to certain license rights in the patents that were the subject of the Patent Claims.  On October 28, 2014, a four-week trial began with respect to Raytheon's remaining claims of misappropriations of trade secrets and claims related to 31 alleged trade secrets. On November 24, 2014, a jury in the United States District Court for the Eastern District of Texas rejected Raytheon’s claims and determined that 27 of the alleged trade secrets were not in fact trade secrets and that neither Indigo, prior to its acquisition by FLIR Systems, Inc., nor FLIR Systems, Inc. infringed any of the trade secrets claimed and awarded Raytheon no damages.  On March 31, 2016 the United States District Court for the Eastern District of Texas issued a Final Judgment denying Raytheon’s claims and awarding FLIR court costs and denying each of Raytheon’s and FLIR’s Renewed Motions for Judgment as a Matter of Law and denying FLIR’s Amended Rule 54(d) Motion for Attorneys’ Fees and Costs Under the Texas Theft Liability Act.

On April 29, 2016, Raytheon filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit of the denial by the United States District Court for the Eastern District of Texas of Raytheon’s Renewed Motion for Judgment as a Matter of Law, or in the Alternative, Motion for New Trial. On May 11, 2016, the FLIR Parties filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit of the Order of the United States District Court for the Eastern District of Texas Denying the FLIR Parties’ Amended Rule 54(d) Motion for Attorneys’ Fees and Costs under the Texas Theft Liability Act, the Order Denying the FLIR Parties’ Renewed Motion For Judgment as a Matter Of Law, and the Final Judgment to the extent it denied the FLIR Parties Attorneys’ Fees and Costs under the Texas Theft Liability Act. The matter remains ongoing and is subject to appeal and the Company is unable to estimate the amount or range of potential loss or recovery, if any, which might result if the final determination of this matter is favorable or unfavorable, but an adverse ruling on the merits of the original claims against the FLIR Parties, while remote, could be material.

On October 22, 2014, the Company initially contacted the United States Department of State Office of Defense Trade Controls Compliance (“DDTC”), pursuant to International Traffic in Arms Regulation (“ITAR”) § 127.12(c), regarding the unauthorized export of technical data and defense services to dual and third country nationals in at least four facilities of the Company.  On April 27, 2015, the Company submitted its initial report to DDTC regarding the details of the issues raised in the October 22, 2014 submission.  DDTC subsequently notified the Company that it was considering administrative proceedings under Part 128 of ITAR and requested a tolling agreement, which the Company executed on June 16, 2015. On June 6, 2016, the Company executed a subsequent tolling agreement extending the tolling period for matters to be potentially included in an administrative proceeding for an additional 18 months until December 2017. DDTC continues its review and the Company is unable to reasonably estimate the time it may take to resolve the matter or the amount or range of potential loss, penalty or other government action, if any, that may be incurred in connection with this matter. However, an unfavorable outcome could result in fines and penalties or loss or modification of exporting privileges that could potentially be material to the financial condition and results of operations of the Company in and following the period in which such an outcome becomes estimable or known.


11


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 15.
Contingencies - (Continued)

In March 2016, the Company learned of potential quality concerns with respect to as many as 310 Level III and Level IV SkyWatch Surveillance Towers sold by FLIR and companies acquired by FLIR from 2002 through 2014. The Company is currently investigating the cause of these quality issues and remedial steps which may be required to repair or replace affected SkyWatch Towers. The Company has notified customers who purchased the Towers of the potential concerns and, as a precautionary measure, has also temporarily suspended production of all Level III and Level IV SkyWatch Towers pending completion of its review and implementation of any necessary remedial measures. Due to the uncertainty of costs associated with a potential remedy and number of units which may require such remedy, the Company is currently unable to reasonably estimate the amount or range of potential loss or recovery that may result from this matter, however, such loss could be material to the financial condition and results of operations of the Company in the period in which such amount or range becomes estimable or known.

The Company is also subject to other legal and administrative proceedings, investigations, claims and litigation arising in the ordinary course of business not specifically identified above. In these identified matters and others not specifically identified, the Company makes a provision for a liability with respect to a matter when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated for such matter. The Company believes it has recorded adequate provisions for any probable and estimable losses for matters in existence on the date hereof. While the outcome of each of these matters is currently not determinable, the Company does not expect that the ultimate resolution of any such matter will individually have a material adverse effect on the Company’s financial position, results of operations or cash flows. The costs to resolve all such matters may in the aggregate have a material adverse effect on the Company’s financial position, results of operations or cash flows.


Note 16.
Income Taxes
The provision for income taxes was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Income tax provision
$
14,485

 
$
15,948

 
$
68,980

 
$
31,078

Effective tax rate
24
%
 
24
%
 
60
%
 
24
%
         
The effective tax rate for the three months ended June 30, 2016 is lower than the US Federal tax rate of 35 percent because of the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits and discrete adjustments. During the first quarter of 2016, the Company recorded discrete tax expenses of $40.0 million primarily related to the European Commission’s decision regarding certain tax legislation in Belgium impacting one of the Company’s international subsidiaries. The Belgian Government announced that they have appealed this decision and filed an action for annulment with the General Court of the European Union. Companies directly affected by the decision may also appeal. The outcome of an appeal, new information received from the Belgian Government, or other future events may cause the income tax provision associated with the decision to be entirely or partially reversed. We expect the annual effective tax rate for the full year of 2016 to be approximately 25 percent, excluding discrete items.
As of June 30, 2016 , the Company had approximately $52.9 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates an immaterial portion of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of the applicable statute of limitations.
The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2016 , the Company had approximately $2.0 million of net accrued interest and penalties related to uncertain tax positions.

12


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 16.
Income Taxes - (Continued)
The Company currently has the following tax years open to examination by major taxing jurisdictions:
 
 
Tax Years:
US Federal
2012 – 2014
State of Oregon
2012 – 2014
State of Massachusetts
2011 – 2014
State of California
2012 – 2014
Sweden
2011 – 2014
United Kingdom
2011 – 2014
Belgium
2011 - 2014


Note 17.
Operating Segments and Related Information
Operating Segments
The operating segments of the Company are as follows:
Surveillance
The Surveillance segment develops and manufactures enhanced imaging and recognition solutions for a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. Offerings include airborne, land, maritime, and man-portable multi-spectrum imaging systems, radars, lasers, imaging components, integrated multi-sensor system platforms, hand-held and weapon-mounted thermal and image intensified imaging systems for use by consumers and services related to these systems.
Instruments
The Instruments segment develops and manufactures devices that image, measure, and assess thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications. Products include thermal imaging cameras, gas detection cameras, firefighting cameras, process automation cameras, and environmental test and measurement devices.
Security
The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home security applications. Products include thermal and visible-spectrum cameras, digital and networked video recorders, and related software and accessories that enable the efficient and effective safeguarding of assets at all hours of the day and through adverse weather conditions.
OEM & Emerging Markets
The OEM & Emerging Markets segment develops and manufactures thermal imaging camera cores and components that are utilized by third parties to create thermal and other types of imaging systems. The segment also develops and manufactures intelligent traffic monitoring and signal control systems, imaging solutions for the smartphone and mobile devices market, and provides thermal cameras and cores for use or integration into unmanned aerial systems.
Maritime
The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market. The segment provides a full suite of networked electronic systems including multi-function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and communications equipment for boats of all sizes.

13


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.        Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Detection
The Detection segment develops and manufactures sensor instruments and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE") threats for military force protection, homeland security, and commercial applications.

  Operating segment information is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue – External Customers:
 
 
 
 
 
 
 
Surveillance
$
113,440

 
$
107,814

 
$
237,591

 
$
220,715

Instruments
78,068

 
90,260

 
157,487

 
174,080

Security
63,380

 
60,048

 
110,441

 
98,854

OEM & Emerging Markets
56,980

 
46,285

 
104,825

 
86,120

Maritime
55,163

 
52,030

 
106,883

 
103,002

Detection
35,698

 
36,538

 
64,974

 
54,721

 
$
402,729

 
$
392,975

 
$
782,201

 
$
737,492

Revenue – Intersegments:
 
 
 
 
 
 
 
Surveillance
$
4,755

 
$
2,065

 
$
8,979

 
$
5,747

Instruments
1,213

 
1,068

 
2,788

 
1,910

Security
3,836

 
4,032

 
6,308

 
8,007

OEM & Emerging Markets
8,833

 
9,072

 
17,010

 
17,758

Maritime
1,458

 
925

 
2,072

 
1,582

Detection
31

 

 
31

 

Elimination
(20,126
)
 
(17,162
)
 
(37,188
)
 
(35,004
)
 
$

 
$

 
$

 
$

Earnings (loss) from operations:
 
 
 
 
 
 
 
Surveillance
$
26,135

 
$
26,378

 
$
61,374

 
$
56,546

Instruments
19,133

 
28,341

 
38,629

 
56,404

Security
3,214

 
7,874

 
(430
)
 
11,689

OEM & Emerging Markets
16,094

 
10,495

 
26,127

 
19,274

Maritime
6,721

 
6,421

 
11,719

 
11,210

Detection
9,963

 
9,380

 
17,843

 
12,059

Other
(16,048
)
 
(18,358
)
 
(32,673
)
 
(30,897
)
 
$
65,212

 
$
70,531

 
$
122,589

 
$
136,285

 

14


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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

 
June 30,
2016
 
December 31,
2015
Segment assets (accounts receivable, net and inventories):
 
 
 
Surveillance
$
255,484

 
$
285,602

Instruments
105,306

 
130,363

Security
92,960

 
105,737

OEM & Emerging Markets
111,703

 
93,925

Maritime
73,414

 
73,506

Detection
27,849

 
30,057

 
$
666,716

 
$
719,190


 
June 30,
2016
 
December 31,
2015
Segment goodwill:
 
 
 
Surveillance
$
120,113

 
$
120,145

Instruments
150,457

 
149,582

Security
102,004

 
101,955

OEM & Emerging Markets
70,332

 
69,973

Maritime
102,025

 
106,549

Detection
48,015

 
48,112

 
$
592,946

 
$
596,316

Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands):  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
United States
224,305

 
204,946

 
418,589

 
371,401

Canada/Latin America
18,085

 
19,972

 
47,327

 
36,399

Europe
84,297

 
95,869

 
168,707

 
189,124

Middle East/Africa
28,629

 
26,009

 
56,341

 
52,576

Asia
47,413

 
46,179

 
91,237

 
87,992

 
$
402,729

 
$
392,975

 
$
782,201

 
$
737,492


Long-lived assets by significant geographic locations are as follows (in thousands):
 
 
June 30,
2016
 
December 31,
2015
United States
$
693,580

 
$
666,759

Europe
373,385

 
383,501

Other international
14,586

 
13,197

 
$
1,081,551

 
$
1,063,457


15


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.        Operating Segments and Related Information - (Continued)
Major Customers
Revenue derived from major customers is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
US Government
$
100,106

 
$
76,125

 
$
185,742

 
$
129,445


Note 18.
Business Acquisitions

On November 30, 2015, the Company acquired 100% of the outstanding stock of DVTEL Inc. ("DVTEL"), a provider of software and hardware technologies for advanced video surveillance, for approximately $97.5 million in cash, subject to customary post-closing adjustments. The excess of the purchase price over the preliminary net tangible and identifiable intangible assets has been recorded as goodwill within the Company's Security segment and is subject to the final determination on the valuation of assets acquired and liabilities assumed.
The preliminary allocation of the purchase price for DVTEL is as follows (in thousands):
Cash acquired
$
5,232

Other tangible assets and liabilities, net
5,160

Net deferred taxes
1,727

Identifiable intangible assets
27,380

Goodwill
57,993

Total purchase price
$
97,492

The allocation of the purchase price related to this acquisition is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets, and preliminary estimates of the fair value of liabilities assumed. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of the identifiable intangible assets, property and equipment, income taxes (including uncertain tax positions) and certain other tangible assets and liabilities. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized during the year ended December 31, 2016. The preliminary goodwill of  $58.0 million  represents future economic benefits expected to arise from synergies from combining operations and the ability of DVTEL to provide the Company domain knowledge and distribution channels in adjacent security markets. 
On June 28, 2016, the Company acquired 100% of the outstanding stock of Armasight, Inc. ("Armasight"), a developer of sporting and military optics products, for approximately $43.5 million in cash, subject to customary post-closing adjustments. As of June 30, 2016, the Company has not yet assessed a valuation on identifiable intangible net assets and the $36.0 million excess of the purchase price over the preliminary net tangible assets acquired has been recorded in Other assets. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized during the year ended December 31, 2016.
In addition, on June 6, 2016, the Company acquired the assets of Innovative Security Designs, LLC ("ISD"), a developer of embedded firmware and advanced camera surveillance platforms, for approximately $1.8 million in cash. As of June 30, 2016, the Company has not yet assessed a valuation on identifiable intangible net assets and the $1.6 million excess of the purchase price over the preliminary net tangible assets acquired has been recorded in Other assets. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized during the year ended December 31, 2016.




16


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 19.
Subsequent Events
On July 5, 2016, the Company paid the outstanding $250 million aggregate principal amount of its 3.75 percent senior unsecured notes that were due September 1, 2016. The Company will record a loss on extinguishment of the debt of approximately $1.3 million in the third quarter of 2016.
On July 21, 2016 , the Company’s Board of Directors declared a quarterly dividend of $0.12 per share on its common stock, payable on September 2, 2016 , to shareholders of record as of the close of business on August 19, 2016 . The total cash payment of this dividend will be approximately $16.5 million .

    

17



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

Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on management’s current expectations, estimates, projections, and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2015 , “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations
The following discussion of operating results provides an overview of our operations by addressing key elements in our Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Our six operating segments are: Surveillance, Instruments, Security, OEM & Emerging Markets, Maritime and Detection. 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 as revenue levels are the most significant indicators of business conditions for each of the respective segments and earnings from operations reflect our ability to manage each of our segments as revenue levels change. 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. See Note 17, "Operating Segments and Related Information," of the Notes to the Consolidated Financial Statements for additional information on the six operating segments.
Revenue. Consolidated revenue for the three months ended June 30, 2016 increased by 2.5 percent year over year, from $393.0 million in the second quarter of 2015 to $402.7 million in the second quarter of 2016 . Consolidated revenue for the six months ended June 30, 2016 increased by 6.1 percent year over year, from $737.5 million in the first six months of 2015 to $782.2 million in the first six months of 2016 . Increases in revenues for the three month period in our Surveillance, Security, OEM & Emerging Markets and Maritime segments were partially offset by declines in revenues in our Instruments and Detection segments. Increases in revenues for the six month period in our Surveillance, Security, OEM & Emerging Markets, Maritime and Detection segments were partially offset by declines in revenues in our Instruments segment.
The timing of orders, scheduling of backlog and fluctuations in demand in various regions of the world can give rise to quarter to quarter and year over year fluctuations in the mix of revenue. Consequently, year over year comparisons for any given quarter may not be indicative of comparisons using longer time periods. While we currently expect total annual revenue for 2016 to be higher than 2015 revenue, unexpected changes in economic conditions from key customer markets or other major unanticipated events may cause total revenue, and the mix of revenue between our segments, to vary from quarter to quarter during the year.
International sales accounted for 44.3 percent and 47.8 percent of total revenue for the three month periods ended June 30, 2016 and 2015 , respectively. The proportion of our international revenue compared to total revenue will fluctuate from quarter to quarter due to normal variation in order activity across various regions as well as specific factors that may affect one region and not another. Overall, we anticipate that revenue from international sales will continue to comprise a significant percentage of total revenue.
Cost of goods sold. Cost of goods sold for the three and six months ended June 30, 2016 was $219.4 million and $421.2 million , respectively, compared to cost of goods sold for the three and six months ended June 30, 2015 of $203.4 million and $372.0 million , respectively. The year over year increase in cost of goods sold primarily related to higher revenues, changes in segment and product mix, and lower manufacturing cost absorption in 2016.

18



Gross profit. Gross profit for the quarter ended June 30, 2016 was $183.3 million compared to $189.6 million for the same quarter last year. Gross profit for the six months ended June 30, 2016 was $361.0 million compared to $365.5 million for the same period last year. Gross margin, defined as gross profit divided by revenue, decreased from 48.3 percent in the second quarter of 2015 to 45.5 percent in the second quarter of 2016 and decreased from 49.6 percent in the first six months of 2015 to 46.2 percent in the first six months of 2016. The decrease in gross margin for the three and six month periods were primarily due to changes in segment and product mix, lower manufacturing cost absorption, inventory adjustments and increased promotional sales activity in our Security segment.
Research and development expenses. Research and development expenses for the second quarter of 2016 totaled $36.9 million , compared to $35.1 million in the second quarter of 2015 . Research and development expenses for the first six months of 2016 totaled $73.4 million , compared to $69.9 million in the first six months of 2015 . Research and development expenses as a percentage of revenue were 9.2 percent and 9.4 percent for the three and six months ended June 30, 2016 , respectively. Research and development expenses as a percentage of revenue were 8.9 percent and 9.5 percent for the three and six months ended June 30, 2015 , respectively. We have, and will continue to have, fluctuations in quarterly spending depending on product development needs and overall business spending priorities and believe that annual spending levels are more indicative of our commitment to research and development. Over the past five annual periods through December 31, 2015 , our annual research and development expenses have varied between 8.5 percent and 9.9 percent of revenue, and we currently expect these expenses to remain within that range, on an annual basis, for the foreseeable future.
Selling, general and administrative expenses. Selling, general and administrative expenses were $81.2 million and $84.0 million for the quarters ended June 30, 2016 and 2015, respectively. Selling, general and administrative expenses were $165.1 million and $159.3 million for the six months ended June 30, 2016 and 2015, respectively. The decrease in selling, general and administrative expenses year over year for the three month period was primarily related to cost control measures and partially offset by incremental expenses associated with DVTEL, acquired in November 2015. The increase in selling, general and administrative expenses year over year for the six month period was primarily related to the inclusion of selling, general and administrative expenses of DVTEL and higher corporate legal expenses, partially offset by lower corporate administration expenses and other cost control efforts realized in the second quarter of 2016. Selling, general and administrative expenses as a percentage of revenue were 20.1 percent and 21.4 percent for the quarters ended June 30, 2016 and 2015 , respectively, and 21.1 percent and 21.6 percent for the six month periods ended June 30, 2016 and 2015, respectively. Over the past five annual periods through December 31, 2015 , our annual selling, general and administrative expenses have varied between 20.1 percent and 23.6 percent of revenue, and we currently expect these expenses to remain within that range, on an annual basis, for the foreseeable future.
Interest expense. Interest expense for the first six months of 2016 was $7.8 million , compared to $7.0 million for the same period of 2015 . Interest expense was primarily associated with the $250 million aggregate principal amount of our 3.75 percent senior unsecured notes and our term loan that was drawn upon under our credit agreement.
Income taxes. The income tax provision of $14.5 million and $69.0 million for the three and six months ended June 30, 2016 , respectively, represents an effective tax rate of 25 percent. The first quarter of 2016 included discrete tax charges totaling $40.0 million, primarily related to the European Commission's decision regarding certain tax legislation in Belgium impacting one of our international subsidiaries. The Belgian Government announced that they have appealed this decision and filed an action for annulment with the General Court of the European Union. Companies directly affected by the decision may also appeal. The outcome of an appeal, new information received from the Belgian Government, or other future events may cause the income tax provision associated with the decision to be entirely or partially reversed. Excluding discrete items, we expect the annual effective tax rate for the full year of 2016 to be approximately 25 percent. The expected effective tax rate is lower than the US Federal tax rate of 35 percent because of the mix of lower foreign jurisdiction tax rates, and the effect of federal, foreign and state tax credits.


19



Segment Operating Results
Surveillance
Surveillance operating results are as follows (in millions, except percentages):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
113.4

 
$
107.8

 
$
237.6

 
$
220.7

Earnings from operations
26.1

 
26.4

 
61.4

 
56.5

Operating margin
23.0
%
 
24.5
%
 
25.8
%
 
25.6
%
Backlog, end of period
 
 
 
 
341

 
286

Revenue for the three and six months ended June 30, 2016 increased by 5.2 percent and 7.6 percent , respectively, compared to the same periods of 2015 . The increase in revenue for the three and six month periods was primarily due to increases in our weapon sights and other portable/hand-held product lines and service, partially offset by a decline in revenue in our airborne product line. Revenues from US government customers in the three and six month periods increased by approximately 55 percent and 37 percent, respectively, over the prior year.
Instruments
Instruments operating results are as follows (in millions, except percentages):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
78.1

 
$
90.3

 
$
157.5

 
$
174.1

Earnings from operations
19.1

 
28.3

 
38.6

 
56.4

Operating margin
24.5
%
 
31.4
%
 
24.5
%
 
32.4
%
Backlog, end of period
 
 
 
 
30

 
25

Revenue for the three and six months ended June 30, 2016 decreased by 13.5 percent and 9.5 percent , respectively, compared to the same periods of 2015 . The year over year decrease in revenue for the three and six month periods were primarily due to a decline in sales in Europe; on a product line basis, the segment revenue decline was primarily in our building and predictive maintenance product line. The decrease in earnings from operations for the three and six months ended June 30, 2016, compared to the same periods of 2015, was primarily due to decreased revenues as well as increased operating expense and higher production costs.
Security
Security operating results are as follows (in millions, except percentages):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
63.4

 
$
60.0

 
$
110.4

 
$
98.9

Earnings (loss) from operations
3.2

 
7.9

 
(0.4
)
 
11.7

Operating margin
5.1
%
 
13.1
%
 
(0.4
)%
 
11.8
%
Backlog, end of period
 
 
 
 
21

 
13

Revenue for the three and six months ended June 30, 2016 increased by 5.5 percent and 11.7 percent , respectively, compared to the same periods of the prior year. The increase in revenue for the three and six month periods was primarily due to the inclusion of revenue from DVTEL products. DVTEL was acquired in November 2015. The decrease in earnings from operations year over year for the three and six month periods was primarily due to gross margin declines associated with sales incentives and promotional activity, a product mix shift to lower margin consumer products and higher operating expenses, primarily from DVTEL.

20



OEM & Emerging Markets
OEM & Emerging Markets operating results are as follows (in millions, except percentages):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
57.0

 
$
46.3

 
$
104.8

 
$
86.1

Earnings from operations
16.1

 
10.5

 
26.1

 
19.3

Operating margin
28.2
%
 
22.7
%
 
24.9
%
 
22.4
%
Backlog, end of period
 
 
 
 
139

 
109

Revenue increased by 23.1 percent and 21.7 percent for the three and six months ended June 30, 2016 , respectively, compared to the same periods of the prior year. The increase in revenue year over year for the three and six month periods was primarily due to higher deliveries in most of our segment product lines, particularly in our cores and components and mobile accessories product lines. Geographically, all regions reported year over year increases. Segment earnings from operations increased for the three and six month periods primarily due to higher revenue, partially offset by lower gross margins.
Maritime
Maritime operating results are as follows (in millions, except percentages):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
55.2

 
$
52.0

 
$
106.9

 
$
103.0

Earnings from operations
6.7

 
6.4

 
11.7

 
11.2

Operating margin
12.2
%
 
12.3
%
 
11.0
%
 
10.9
%
Backlog, end of period
 
 
 
 
24

 
21

Revenue for the three and six months ended June 30, 2016 increased by 6.0 percent and 3.8 percent , respectively, compared to the same periods of 2015 . The increase in revenue year over year for the three and six month periods was primarily due to an increase in the Americas region. On a product basis, increased shipments of multifunction displays and infrared displays more than offset declines in autopilot and instrument shipments.

Detection
Detection operating results are as follows (in millions, except percentages):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenue
$
35.7

 
$
36.5

 
$
65.0

 
$
54.7

Earnings from operations
10.0

 
9.4

 
17.8

 
12.1

Operating margin
27.9
%
 
25.7
%
 
27.5
%
 
22.0
%
Backlog, end of period


 


 
74

 
83


Revenue for the three and six months ended June 30, 2016 decreased by 2.3 percent and increased by 18.7 percent , respectively, compared to the same periods of 2015 . The increase in revenue for the six month period was primarily related to increased shipments from our CBRNE threat response systems to United States government customers. The increase in earnings from operations and operating margins for the six month period ended June 30, 2016 compared to the same periods during the prior year were primarily due to the increases in revenue and reduced intangible asset amortization expense.

21



Liquidity and Capital Resources
At June 30, 2016 , we had a total of $903.2 million in cash and cash equivalents, of which $457.1 million was in the United States and $446.1 million was at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 2015 of $472.8 million , of which $129.6 million was in the United States and $343.2 million was at our foreign subsidiaries. The increase in cash and cash equivalents during the six months ended June 30, 2016 was primarily due to the proceeds from long-term debt and cash from operating activities, partially offset by $42.4 million spent on the acquisitions of Armasight and ISD, payments on our term loan under the credit agreement, capital expenditures of $20.9 million , repurchase of common stock of $29.7 million and dividend payments of $33.1 million .
Cash provided by operating activities totaled $126.6 million for the six months ended June 30, 2016 , which primarily consisted of net earnings, adjusted for non-cash charges for depreciation and amortization, stock-based compensation and other non-cash items.
Cash used by investing activities totaled $58.4 million for the six months ended June 30, 2016 , consisting of $42.4 million, net of cash acquired, for the acquisitions of Armasight and ISD and capital expenditures in the ordinary course of business.
Cash provided by financing activities totaled $358.6 million for the six months ended June 30, 2016 , which primarily consisted of the net proceeds from long-term debt and the new credit agreement, partially offset by repurchases of common stock, payment of dividends and the term loan principal payments.
On February 8, 2011, we signed a Credit Agreement (“Credit Agreement”) with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders. The Credit Agreement provides for a $200 million, five-year revolving line of credit. On April 5, 2013, the Credit Agreement was amended to extend the maturity of the revolving credit facility from February 8, 2016 to April 5, 2018 in addition to incorporating a $150 million term loan facility maturing April 5, 2019. On May 31, 2016, the Credit Agreement was further amended to increase the borrowing capacity to $500 million and to extend the maturity of the revolving credit facility from April 5, 2018 to May 31, 2021. 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 $200 million until May 31, 2021. The Credit Agreement allows us and certain designated subsidiaries to borrow in US dollars, euros, Swedish kronor, pound sterling and other agreed upon currencies. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on the Company’s leverage ratio, which ranges from 0.25 percent to 0.40 percent. The Credit Agreement contains two financial covenants that require the maintenance of certain leverage ratios with which we were in compliance at June 30, 2016 . The five-year revolving line of credit available under the Credit Agreement and the term loan facility are not secured by any of our assets.
As noted above, the Credit Agreement amendment of April 5, 2013 incorporated a $150 million term loan facility that was scheduled to mature on April 5, 2019. On May 31, 2016, we drew down $105 million under the revolving credit facility and repaid the term loan facility in full. Interest is accrued at the one-month LIBOR rate plus the scheduled spread and paid monthly. By entering into interest rate swap agreements, we have effectively fixed the basis for calculating the interest rate on the term loan. The effective interest rate paid is equal to the fixed rate in the swap agreements plus the credit spread then in effect. At June 30, 2016 , the effective interest rate on the term loan was 2.37 percent . Principal payments of $3.75 million, at our option, will continue to be made in quarterly installments through December 31, 2018 with the final maturity payment including any accrued interest due on April 5, 2019.
At June 30, 2016 , we had $101.3 million outstanding under our revolving credit facility pursuant to the Credit Agreement and the commitment fee on the amount of unused credit was 0.175 percent . We had $20.7 million of letters of credit outstanding at June 30, 2016 , which reduced the total available credit under the revolving credit facility.
On August 19, 2011, we issued $250 million aggregate principal amount of our 3.75 percent senior unsecured notes due September 1, 2016 (the "2011 Notes"). The interest on the Notes is payable semiannually in arrears on March 1 and September 1. The proceeds from the Notes were used for general corporate purposes, which include working capital and capital expenditure needs, business acquisitions and repurchases of our common stock. The 2011 Notes were repaid on July 5, 2016.
In June 2016, we issued $425 million aggregate principal amount of our 3.125 percent senior unsecured notes due June 15, 2012 (the “2016 Notes”). The net proceeds from the issuance of the 2016 Notes were approximately $421.0 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2016 Notes is payable semiannually in arrears on December 15 and June 15. The proceeds from the 2016 Notes were used to repay the 2011 Notes in July 2016 and are being used for general corporate purposes, which include working capital and capital expenditure needs, business acquisitions and repurchases of the our common stock.
On February 5, 2015 , our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. As of June 30, 2016 , 1.0 million shares had been repurchased under this authorization, which expires on February 5, 2017 .

22



United States income taxes have not been provided for on accumulated earnings of certain subsidiaries outside of the United States as we intend to reinvest the earnings in operations outside the United States indefinitely. Should we subsequently elect to repatriate such foreign earnings, we would need to accrue and pay United States income taxes, thereby reducing the amount of our cash.
We believe that our existing cash combined with the cash we expect to generate from operating activities and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant capital commitments for the next twelve months nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.


Off-Balance Sheet Arrangements

Through June 30, 2016 , we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which establishes new guidance under which companies will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides for additional disclosure requirements. While ASU 2014-09 was to be effective for annual periods and interim periods beginning after December 15, 2016, on July 9, 2015, the FASB approved the deferral of the effective date to periods beginning on or after December 15, 2017. Accordingly, the Company currently intends to adopt ASU 2014-09 on January 1, 2018, and is currently evaluating the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" ("ASU 2014-15"). Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016. Accordingly, the Company currently intends to adopt ASU 2014-15 on January 1, 2017, and does not expect the adoption of ASU 2014-15 to have any impact on its consolidated financial statements.
In July 2015, the FASB issued FASB Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendments in this update require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted. The Company currently intends to adopt ASU 2015-11 on January 1, 2017, and does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The pronouncement revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU 2016-01 requires the change in fair value of many equity investments to be recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company currently intends to adopt ASU 2016-01 on January 1, 2018, and does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendment requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company currently intends to adopt ASU 2016-02 on January 1, 2019, and is currently evaluating the potential effects of adopting the provisions of ASU 2016-02.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation - Stock Compensation (Topic 718)” (“ASU 2016-09”). The amendment identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an

23



option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company currently intends to adopt ASU 2016-09 on January 1, 2017, and is currently evaluating the potential effects of adopting the provisions of ASU 2016-09.


Critical Accounting Policies and Estimates
The Company reaffirms the critical accounting policies and its use of estimates as reported in its Form 10-K for the fiscal year ended December 31, 2015 , as described in Note 1, "Nature of Business and Significant Accounting Policies," of the Notes to the Consolidated Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2015 .

Contractual Obligations
There were no material changes to the Company's contractual obligations outside the ordinary course of its business during the quarter ended June 30, 2016 other than the issuance of $425 million aggregate principal amount of its 3.125 percent senior unsecured notes due June 15, 2012 and the related interest, as discussed above.

Contingencies
See Note 15, "Contingencies," of the Notes to the Consolidated Financial Statements for a description of an ongoing lawsuit filed by Raytheon Company against FLIR Systems, Inc. and its subsidiary, FLIR Commercial Systems, Inc., the disclosure of certain matters by the Company to the United States Department of State Office of Defense Trade Controls Compliance and the potential quality concerns of the SkyWatch Surveillance Towers.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2016 , the Company has not experienced any changes in market risk exposure that would materially affect the quantitative and qualitative disclosures about market risk presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 .

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
As of June 30, 2016 , the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2016 such that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

24



PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of its business. See Note 15, “Contingencies,” of the Notes to the Consolidated Financial Statements for additional information on the Company’s legal proceedings.


Item 1A.
Risk Factors

There has been no material change in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 .


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

During the three months ended June 30, 2016 , the Company repurchased the following shares:
Period
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (2)
June 1 to June 30, 2016
950,000

 
$
31.31

 
950,000

 
 
Total
950,000

 
$
31.31

 
950,000

 
9,881,131

(1) The share repurchases were through open market transactions.
(2) All share repurchases are subject to applicable securities laws, and are at times and in amounts as management deems appropriate. On February 6, 2015, we announced that our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. This repurchase was authorized on February 5, 2015 and will expire on February 5, 2017.



Item 3.
Defaults Upon Senior Securities
None.


Item 4.
Mine Safety Disclosures
Not applicable.


Item 5.
Other Information
None.



25



Item 6.
Exhibits

Number
  
Description
3.1
 
Third Restated Bylaws of FLIR Systems, Inc., as amended through June 2, 2016.
4.1
 
Fourth Supplemental Indenture dated as of June 10, 2016 by and between FLIR Systems, Inc. and U.S. Bank National Association. (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on June 10, 2016).
10.1
 
Amended and Restated Credit Agreement by and among FLIR Systems, Inc., the subsidiaries of FLIR Systems Inc. party thereto, Bank of America N.A. and the other lenders party thereto, dated as of May 31, 2016.
31.1
  
Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
31.2
  
Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
32.1
  
Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
32.2
  
Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extension Schema Document
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document


    

26



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FLIR SYSTEMS, INC.
 
 
 
Date August 3, 2016
 
    /s/ AMIT SINGHI
 
 
Amit Singhi
 
 
     Sr. Vice President, Finance and Chief Financial Officer
 
 
(Duly Authorized and Principal Financial Officer)

27


Exhibit 3.1
Reflecting all amendments through June 2, 2016

THIRD RESTATED BYLAWS
OF
FLIR SYSTEMS, INC.
ARTICLE I

OFFICES
1.1  Principal Office . The principal office of the corporation shall be located at 27700 SW Parkway Avenue, Wilsonville, Oregon 97070. The corporation may have such other offices as the Board of Directors may designate or as the business of the corporation may from time to time require.
1.2  Registered Office . The registered office of the corporation required by the Oregon Business Corporation Act to be maintained in the State of Oregon may be, but need not be, identical with the principal office in the State of Oregon, and the address of the registered office may be changed from time to time by the Board of Directors.
ARTICLE II

SHAREHOLDERS
2.1  Annual Meeting . The annual meeting of the shareholders shall be held during the month of May each year, unless a different date and time are fixed by the Board of Directors and stated in the notice of the meeting, beginning with the year 1994. The failure to hold an annual meeting at the time stated herein shall not affect the validity of any corporate action.
2.2  Special Meeting . Special meetings of the shareholders may be called by the President or by the Board of Directors and shall be called by the President (or in the event of absence, incapacity, or refusal of the President, by the Secretary or any other officer) at the request of the holders of not less than one-tenth of all the outstanding shares of the corporation entitled to vote at the meeting. The requesting shareholders shall sign, date, and deliver to the Secretary a written demand describing the purpose or purposes for holding the special meeting in accordance with Sections 2.4 and 2.12.
2.3  Place of Meetings . Meetings of the shareholders shall be held at the principal business office of the corporation or at such other place, within or without the State of Oregon, as may be determined by the Board of Directors.
2.4  Notice of Meetings . Written notice stating the date, time, and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be mailed to each shareholder entitled to vote at the meeting at the shareholder’s address shown in the corporation’s current record of shareholders, with postage thereon prepaid, not less than 10 nor more than 60 days before the date of the meeting.
2.5  Waiver of Notice . A shareholder may at any time waive any notice required by law, the Articles of Incorporation, or these Third Restated Bylaws. The waiver must be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes for filing with the corporate records. A shareholder’s attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting.




The shareholder’s attendance also waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.
2.6  Record Date
(a) For the purpose of determining shareholders entitled to notice of a shareholders’ meeting, to demand a special meeting, or to vote or to take any other action, the Board of Directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days before the meeting or action requiring a determination of shareholders. The record date shall be the same for all voting groups.
(b) A determination of shareholders entitled to notice of or to vote at a shareholders’ meeting is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.
(c) If a court orders a meeting adjourned to a date more than 120 days after the date fixed for the original meeting, it may provide that the original record date continue in effect or it may fix a new record date.
2.7  Shareholders’ List for Meeting . After the record date for a shareholders’ meeting is fixed by the Board of Directors, the Secretary of the corporation shall prepare an alphabetical list of the names of all its shareholders entitled to notice of the shareholders’ meeting. The list must be arranged by voting group and within each voting group by class or series of shares and show the address of and number of shares held by each shareholder. The shareholders’ list must be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held. The corporation shall make the shareholders’ list available at the meeting, and any shareholder or the shareholder’s agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Refusal or failure to prepare or make available the shareholders’ list does not affect the validity of action taken at the meeting.
2.8  Quorum; Adjournment . Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action in that matter. A majority of shares represented at the meeting, although less than a quorum, may adjourn the meeting from time to time to a different time and place without further notice to any shareholder of any adjournment. At such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting originally held. Once a share is represented for any purpose at a meeting, it shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting, unless a new record date is set for the adjourned meeting.
2.9  Voting Requirements; Action Without Meeting . Unless otherwise provided in the Articles of Incorporation, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. If a quorum exists, action on a matter, other than the election of directors, is approved if the votes cast by the shares entitled to vote favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes is required by law or the Articles of Incorporation. If a quorum exists, directors are elected by a plurality of the votes cast by the shares entitled to vote unless otherwise provided in the Articles of Incorporation. No cumulative voting for directors shall be permitted unless the Articles of Incorporation so provide. Action required or permitted by law to be taken at a shareholders’ meeting may be taken without a meeting




if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by all the shareholders entitled to vote on the action and delivered to the corporation for inclusion in the minutes for filing with the corporate records. Action taken under this section is effective when the last shareholder signs the consent, unless the consent specifies an earlier or later effective date. If the law requires that notice of proposed action be given to nonvoting shareholders and the action is to be taken by unanimous consent of the voting shareholders, the corporation must give its nonvoting shareholders written notice of the proposed action at least 10 days before the action is taken. The notice must contain or be accompanied by the same material that, under the Oregon Business Corporation Act, would have been required to be sent to nonvoting shareholders in a notice of meeting at which the proposed action would have been submitted to the shareholders for action.
2.10  Proxies .
(a) A shareholder may vote shares in person or by proxy by signing an appointment, either personally or by the shareholder’s attorney-in-fact. An appointment of a proxy shall be effective when received by the Secretary or other officer of the corporation authorized to tabulate votes. An appointment is valid for 11 months unless a longer period is provided in the appointment form. An appointment is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest that has not been extinguished.
(b) The death or incapacity of a shareholder appointing a proxy shall not affect the right of the corporation to accept the proxy’s authority unless notice of the death or incapacity is received by the Secretary or other officer authorized to tabulate votes before the proxy exercises the proxy’s authority under the appointment.
2.11  Corporation’s Acceptance of Votes .
(a) If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder.
(b) If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of a shareholder, the corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if:
(i) The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity;
(ii) The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
(iii) The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
(iv) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory’s authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; or




(v) Two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners.
(c) The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory’s authority to sign for the shareholder.
(d) The shares of a corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation; provided, however, a corporation may vote any shares, including its own shares, held by it in a fiduciary capacity.
(e) The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this provision shall not be liable in damages to the shareholder for the consequences of the acceptance or rejection. Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this provision is valid unless a court of competent jurisdiction determines otherwise.
2.12  Notice of Business to be Conducted at Meeting . At an annual or special meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before a meeting by a shareholder who (i) is a shareholder of record on the date of the giving of the notice provided for in this Section 2.12 and on the record date for determination of shareholders entitled to vote at such meeting of shareholders and (ii) complies with the notice procedures set forth in this Section 2.12.
In addition to any other applicable requirements, for business to be properly brought before an annual or special meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary of the corporation. In the case of an annual meeting, to be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder to be timely must be so received not later than the close of business on the 10 th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever occurs first. In the case of a special meeting, to be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the date of the meeting; provided, however, that in the event that less than 100 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10 th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first.
To be in proper written form, a shareholder’s notice to the Secretary shall set forth as to each matter such shareholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear




on the corporation’s books, of the shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made, (c) the class or series and number of shares of stock of the corporation which are owned beneficially or of record by such shareholder or such beneficial owner, (d) a description of all agreements, arrangements or understandings between such shareholder or such beneficial owner and any other person or persons (including their names) with respect to the proposal of such business by the shareholder and any material interest of such shareholder or such beneficial owner in such business, (e) a description of all agreements, arrangements or understandings (including any derivative or short positions, profit interests, options, warrants, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that have been entered into as of the date of the shareholder’s notice by, or on behalf of, such shareholder or such beneficial owner, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such shareholder or such beneficial owner, with respect to shares of stock of the corporation (which information shall be updated by such shareholder and beneficial owner, if any, as of the record date of the meeting not later than 10 days after such record date), (f) the name in which all such shares of stock are registered on the stock transfer books of the corporation, (g) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (h) a representation as to whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to approve or adopt the proposal (B) otherwise to solicit proxies from shareholders in support of such proposal, and (i) all other information relating to such shareholder, such beneficial owner, if any, or the proposed business which may be required to be disclosed under applicable law. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 2.12.
The Chairman of the annual or special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.12, and if the Chairman should so determine, the Chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted.
ARTICLE III

BOARD OF DIRECTORS
3.1  Duties . All corporate powers shall be exercised by or under the authority of the Board of Directors and the business and affairs of the corporation shall be managed by or under the direction of the Board of Directors.
3.2  Number and Qualification . As set forth in the Third Restated Articles of Incorporation, the number of directors of the corporation shall be not less than five nor more than twelve, and within such limits, the exact number shall be fixed and increased or decreased from time to time by resolution of the Board of Directors. []At each annual meeting of shareholders after the 2014 annual meeting, directors elected to succeed those directors whose terms expire shall be elected to serve for one-year terms and until their successors are elected and qualified, so that the term of each director will expire each year. When the number of directors is changed within the limits provided herein, any newly created directorships, or any decrease in directorships, shall be so apportioned among the classes as to make all classes as nearly equal as possible, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent directors. Directors need not be residents of the State of Oregon or shareholders of the corporation.




3.3  Chairman of the Board of Directors . The directors may elect a director to serve as Chairman of the Board of Directors to preside at all meetings of the Board of Directors and to fulfill any other responsibilities delegated by the Board of Directors.
3.4  Regular Meetings . A regular meeting of the Board of Directors shall be held without other notice than this Section 3.4 immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Oregon, for the holding of additional regular meetings without other notice than the resolution.
3.5  Special Meetings . Special meetings of the Board of Directors may be called by or at the request of the President or any director. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Oregon, as the place for holding any special meeting of the Board of Directors called by them.
3.6  Notice . Notice of the date, time, and place of any special meeting of the Board of Directors shall be given at least three days prior to the meeting by any means provided by law. If mailed, notice shall be deemed to be given upon deposit in the United States mail addressed to the director at the director’s business address, with postage thereon prepaid. If by telegram, notice shall be deemed to be given when the telegram is delivered to the telegraph company. Notice by all other means shall be deemed to be given when received by the director or a person at the director’s business or residential address whom the person giving notice reasonably believes will deliver or report the notice to the director within 24 hours. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
3.7  Waiver of Notice . A director may at any time waive any notice required by law, the Articles of Incorporation, or these Third Restated Bylaws. Unless a director attends or participates in a meeting, a waiver must be in writing, must be signed by the director entitled to notice, must specify the meeting for which notice is waived, and must be filed with the minutes or corporate records.
3.8  Quorum . A majority of the number of directors fixed by Section 3.2 shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.
3.9  Manner of Acting .
(c) The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a different number is provided by law, the Articles of Incorporation, or these Third Restated Bylaws.
(d) Members of the Board of Directors may hold a board meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at the meeting.
(e) Any action that is required or permitted to be taken by the directors at a meeting may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the directors entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier or later time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the directors, shall be filed with the minutes of the corporation.




3.10  Vacancies . Any vacancy, including a vacancy resulting from an increase in the number of directors, occurring on the Board of Directors may be filled by the shareholders, the Board of Directors, or the affirmative vote of a majority of the remaining directors if less than a quorum of the Board of Directors, or by a sole remaining director. If the vacant office is filled by the shareholders and was held by a director elected by a voting group of shareholders, then only the holders of shares of that voting group are entitled to vote to fill the vacancy. Any directorship not so filled by the directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of shareholders and until a successor shall be duly elected and qualified. A vacancy that will occur at a specific later date, by reason of a resignation or otherwise, may be filled before the vacancy occurs, and the new director shall take office when the vacancy occurs.
3.11  Compensation . By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.
3.12  Presumption of Assent . A director of the corporation who is present at a meeting of the Board of Directors or a committee of the Board of Directors shall be presumed to have assented to the action taken (a) unless the director’s dissent to the action is entered in the minutes of the meeting, (b) unless a written dissent to the action is filed with the person acting as the secretary of the meeting before the adjournment thereof or forwarded by certified or registered mail to the Secretary of the corporation immediately after the adjournment of the meeting or (c) unless the director objects at the meeting to the holding of the meeting or transacting business at the meeting. The right to dissent shall not apply to a director who voted in favor of the action.
3.13  Director Conflict of Interest .
(a) A transaction in which a director of the corporation has a direct or indirect interest shall be valid notwithstanding the director’s interest in the transaction if the material facts of the transaction and the director’s interest are disclosed or known to the Board of Directors or a committee thereof and it authorizes, approves, or ratifies the transaction by a vote or consent sufficient for the purpose without counting the votes or consents of directors with a direct or indirect interest in the transaction; or the material facts of the transaction and the director’s interest are disclosed or known to shareholders entitled to vote and they, voting as a single group, authorize, approve, or ratify the transaction by a majority vote; or the transaction is fair to the corporation.
(b) A conflict of interest transaction may be authorized, approved, or ratified if it receives the affirmative vote of a majority of directors on the Board of Directors or a committee thereof who have no direct or indirect interest in the transaction. If a majority of such directors vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action.
(c) A conflict of interest transaction may be authorized, approved, or ratified by a majority vote of shareholders entitled to vote thereon. Shares owned by or voted under the control of a director or an entity controlled by a director who has a direct or indirect interest in the transaction are entitled to vote with respect to a conflict of interest transaction. A majority of the shares, whether or not present, that are entitled to be counted in a vote on the transaction constitutes a quorum for the purpose of authorizing, approving, or ratifying the transactions.
(d) A director has an indirect interest in a transaction if (i) another entity in which the director has a material financial interest or in which the director is a general partner is a party to the transaction or (ii) another




entity of which the director is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the Board of Directors.
3.14  Removal . All or any number of the directors of the corporation may be removed only for cause and at a meeting of shareholders called expressly for that purpose, by the vote of a majority of the votes then entitled to be cast for the election of directors. At any meeting of shareholders at which one or more directors are removed, a majority of votes then entitled to be cast for the election of directors may fill any vacancy created by such removal. If any vacancy created by removal of a director is not filled by the shareholders at the meeting at which the removal is effected, such vacancy may be filled by a majority vote of the remaining directors.
3.15  Resignation . Any director may resign by delivering written notice to the Board of Directors, its chairperson, or the corporation. Such resignation shall be effective at the earliest of the following, unless the notice specifies a later effective date, (a) on receipt, (b) five days after its deposit in the United States mails, if mailed postpaid and correctly addressed, or (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by addressee. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the Board of Directors.
3.16  Nominations for Election to Board of Directors . Only persons who are nominated in accordance with the procedures set forth in this Section 3.16 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of the corporation who (i) is a shareholder of record on the date of the giving of the notice provided for in this Section 3.16 and on the record date for determination of shareholders entitled to vote on the election of directors at such meeting and (ii) complies with the notice procedures set forth in this Section 3.16.
In addition to any other applicable requirements, such nominations, other than (i) nominations made by or at the direction of the Board of Directors and (ii) nominations submitted by one or more shareholders in accordance with the requirements under Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the “Proxy Rules”) governing director nominations submitted by shareholders for inclusion in the corporation’s proxy materials (as to which the requisite timing and form of notice thereof shall be governed by the Proxy Rules and not the provisions of this Section 3.16), shall be made pursuant to timely notice in proper written form to the Secretary of the corporation. In the case of an annual meeting, to be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder to be timely must be so received not later than the close of business on the 10 th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever occurs first. In the case of a special meeting, to be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the date of the meeting; provided, however, that in the event that less than 100 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10 th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first.
To be in proper written form, such shareholder’s notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and




residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the corporation which are owned beneficially or of record by such person, and (iv) any other information relating to such person that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice, (i) the name and address, as they appear on the corporation’s books, of such shareholder and the beneficial owner, if any, on whose behalf the nomination is made, (ii) the class or series and number of shares of stock of the corporation which are owned beneficially or of record by such shareholder or such beneficial owner, (iii) a description of all agreements, arrangements or understandings between such shareholder or such beneficial owner and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (iv) a description of all agreements, arrangements or understandings (including any derivative or short positions, profit interests, options, warrants, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that have been entered into as of the date of the shareholder’s notice by, or on behalf of, such shareholder or such beneficial owner, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such shareholder or such beneficial owner, with respect to shares of stock of the corporation (which information shall be updated by such shareholder and beneficial owner, if any, as of the record date of the meeting not later than 10 days after such record date), (v) the name in which all such shares of stock are registered on the stock transfer books of the corporation, (vi) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear at the meeting in person or by proxy to submit the nomination specified in such notice, (vii) a representation as to whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to elect the nominee and/or (B) otherwise to solicit proxies from shareholders in support of such nomination, and (viii) all other information relating to such shareholder, such beneficial owner, if any, or the proposed nomination which may be required to be disclosed under applicable law. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 3.16.
A shareholder seeking to submit such nomination at a shareholder meeting shall promptly provide any other information reasonably requested by the corporation. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee. In addition, the Board of Directors may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the corporation.
The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the provisions of this Section 3.16, and if the Chairman should so determine, the Chairman shall so declare to the meeting, and the defective nomination shall be disregarded.
ARTICLE IV

EXECUTIVE COMMITTEE AND OTHER COMMITTEES
4.1  Designation of Executive Committee . The Board of Directors may designate two or more directors to constitute an executive committee. The designation of an executive committee, and the delegation of authority to it,




shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. No member of the executive committee shall continue to be a member thereof after ceasing to be a director of the corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the executive committee, to fill vacancies thereon, to change any member thereof, and to change the functions or terminate the existence thereof. The creation of the executive committee and the appointment of members to it shall be approved by a majority of the directors in office when the action is taken, unless a greater number is required by the Articles of Incorporation or these Third Restated Bylaws.
4.2  Powers of Executive Committee . During the interval between meetings of the Board of Directors, and subject to such limitations as may be imposed by resolution of the Board of Directors, the executive committee may have and may exercise all the authority of the Board of Directors in the management of the corporation, provided that the committee shall not have the authority of the Board of Directors with respect to the following matters: authorizing distributions; approving or proposing to the shareholders actions that are required to be approved by the shareholders under the Articles of Incorporation or these Third Restated Bylaws or by law; filling vacancies on the Board of Directors or any committee thereof; amending the Articles of Incorporation; adopting, amending, or repealing bylaws; approving a plan of merger not requiring shareholder approval; authorizing or approving a reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; authorizing or approving the issuance or sale or contract for sale of shares or determining the designation and relative rights, preferences, and limitations of a class or series of shares except within limits specifically prescribed by the Board of Director.
4.3  Procedures; Meetings; Quorum .
(a) The Board of Directors shall appoint a chairperson from among the members of the executive committee and shall appoint a secretary who may, but need not, be a member of the executive committee. The chairperson shall preside at all meetings of the executive committee and the secretary of the executive committee shall keep a record of its acts and proceedings, which shall be filed with the minutes of the corporation.
(b) Regular meetings of the executive committee, of which no notice shall be necessary, shall be held on such days and at such places as shall be fixed by resolution adopted by the executive committee. Special meetings of the executive committee shall be called at the request of the President or of any member of the executive committee, and shall be held upon such notice as is required by these Third Restated Bylaws for special meetings of the Board of Directors.
(c) Attendance of any member of the executive committee at a meeting shall constitute a waiver of notice of the meeting. A majority of the executive committee, from time to time, shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the executive committee. Members of the executive committee may hold a meeting of such committee by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meeting shall constitute presence in person at the meeting.
(d) Any action that is required or permitted to be taken at a meeting of in the executive committee may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all members of the executive committee entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier or later time as is set forth therein. Such consent, which shall




have the same effect as a unanimous vote of the members of the executive committee, shall be filed with the minutes of the corporation.
(e) The Board of Directors may approve a reasonable fee for the members of the executive committee as compensation for attendance at meetings of the executive committee.
4.4  Other Committees . By the approval of a majority of the directors when the action is taken (unless a greater number is required by the Articles of Incorporation), the Board of Directors, by resolution, may create one or more additional committees, appoint directors to serve on them, and define the duties of such committee or committees. Each such committee shall have two or more members, who shall serve at the pleasure of the Board of Directors. Such additional committee or committees, shall not have the powers proscribed in Section 4.2.
ARTICLE V

OFFICERS
5.1  Number . The officers of the corporation shall be a President and a Secretary. Such other officers and assistant officers as are deemed necessary or desirable may be appointed by the Board of Directors and shall have such powers and duties prescribed by the Board of Directors or the officer authorized by the Board of Directors to prescribe the duties of other officers. A duly appointed officer may appoint one or more officers or assistant officers if such appointment is authorized by the Board of Directors. Any two or more offices may be held by the same person.
5.2  Appointment and Term of Office . The officers of the corporation shall be appointed annually by the Board of Directors at the first meeting of the Board of Directors held after the annual meeting of the shareholders. If the officers shall not be appointed at the meeting, a meeting shall be held as soon thereafter as is convenient for such appointment of officers. Each officer shall hold office until a successor shall have been duly appointed and qualified or until the officer’s death, resignation, or removal.
5.3  Qualification . An officer need not be a director, shareholder, or a resident of the State of Oregon.
5.4  Resignation and Removal . An officer may resign at any time by delivering notice of such resignation to the corporation. A resignation is effective on receipt unless the notice specifies a later effective date. If the corporation accepts a specified later effective date, the Board of Directors may fill the pending vacancy before the effective date, but the successor may not take office until the effective date. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the Board of Directors. Any officer appointed by the Board of Directors may be removed at any time with or without cause. Appointment of an officer shall not of itself create contract rights. Removal or resignation of an officer shall not affect the contract rights, if any, of the corporation or the officer.
5.5  Vacancies . A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the Board of Directors for the unexpired portion of the term.
5.6  President . The President shall be the chief executive officer of the corporation and shall be in general charge of its business and affairs, subject to the control of the Board of Directors. The President shall preside at all meetings of shareholders and at all meetings of directors (unless there is an acting Chairman of the Board presiding at the meeting). The President may execute on behalf of the corporation all contracts, agreements, stock certificates, and other instruments. The President shall from time to time report to the Board of Directors all matters within the President’s knowledge affecting the corporation that should be brought to the attention of the Board of Directors. The President shall vote all shares of stock in other corporations owned by the corporation and is empowered to




execute proxies, waivers of notice, consents, and other instruments in the name of the corporation with respect to such stock. The President shall perform other duties assigned by the Board of Directors.
5.7  Vice Presidents . In the absence of the President or in the event of the President’s death or inability or refusal to act, the Vice President (or, in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election), if any, shall perform the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President shall perform other duties assigned by the President or by the Board of Directors.
5.8  Secretary . The Secretary shall prepare the minutes of all meetings of the directors and shareholders, shall have custody of the minute books and other records pertaining to the corporate business, and shall be responsible for authenticating the records of the corporation. The Secretary shall countersign all instruments requiring the seal of the corporation and shall perform other duties assigned by the Board of Directors. In the event no Vice President exists to succeed to the President under the circumstances set forth in Section 5.7 above, the Secretary shall make such succession.
5.9  Assistant Secretaries . The Assistant Secretaries, when authorized by the Board of Directors or these Third Restated Bylaws, may sign, with the President or Vice President, certificates for shares of the corporation the issuance of which shall have been authorized by resolution of the Board of Directors. The Assistant Secretaries shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries shall, in general, perform such duties as shall be specifically assigned to them in writing by the President or the Board of Directors.
5.10  Salaries . The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary because the officer is also a director of the corporation.
ARTICLE VI

ISSUANCE OF SHARES
6.1  Certificates for Shares .
(f) Certificates representing shares of the corporation shall be in any form determined by the Board of Directors consistent with the Oregon Business Corporation Act and these Bylaws; provided that any shares of the corporation may be uncertificated, whether upon original issuance, reissuance or subsequent transfer. Shares represented by certificates shall be signed, either manually or in facsimile, by two officers of the corporation, at least one of whom shall be the President or a Vice President, and may be sealed with the seal of the corporation, if any, or a facsimile thereof. The signatures of officers upon a certificate may be facsimiles if the certificate is countersigned on behalf of a transfer agent or by a registrar other than the corporation itself or an employee of the corporation. All certificates for shares shall be consecutively numbered or otherwise identified. The name and mailing address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. Each shareholder shall have the duty to notify the corporation of his or her mailing address. Except as otherwise provided by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of certificated shares shall be identical.
(g) Every certificate for shares of stock that are subject to any restriction on transfer pursuant to the Articles of Incorporation, these Bylaws, applicable securities laws, agreements among or between shareholders, or




any agreement to which the corporation is a party shall have conspicuously noted on the face or back of the certificate either (i) the full text of the restriction or (ii) a statement of the existence of such restriction and that the corporation retains a copy of the restriction. Every certificate issued when the corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either (i) the full text of the designations, relative rights, preferences, and limitations of the shares of each class and series authorized to be issued and the authority of the Board of Directors to determine variations for future series or (ii) a statement of the existence of such designations, relative rights, preferences, and limitations and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge.
6.2  Transfer of Shares . A transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by the holder’s legal representative, who shall furnish proper evidence of authority to transfer, or by the holder’s attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, or with its transfer agent, if any, and on surrender for cancellation of the certificate for such shares or upon proper instruction from the holder of uncertificated shares. All certificates surrendered to the corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors prescribes. Upon receipt of proper transfer instructions from the holder of uncertificated shares, the corporation shall cancel such uncertificated shares and issue new equivalent uncertificated shares, or, upon such holder’s request, certificated shares, to the person entitled thereto, and record the transaction upon its books. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes.
6.3  Transfer Agent and Registrar . The Board of Directors may from time to time appoint one or more transfer agents and one or more registrars for the shares of the corporation, with such powers and duties as the Board of Directors determines by resolution. The signatures of officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or by a registrar other than the corporation itself or an employee of the corporation.

6.4  Officer Ceasing to Act . If the person who signed a share certificate, either manually or in facsimile, no longer holds office when the certificate is issued, the certificate is nevertheless valid.
ARTICLE VII 
CONTRACTS, LOANS, CHECKS, AND OTHER INSTRUMENTS
7.1  Contracts . The Board of Directors may authorize any officer or officers and agent or agents to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.
7.2  Loans . No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances.




7.3  Checks; Drafts . All checks, drafts, or other orders for the payment of money and notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers and agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.
7.4  Deposits . All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select.
ARTICLE VIII 
EXCLUSIVE FORUM
Unless the corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the corporation to the corporation or the corporation’s shareholders, (iii) any action asserting a claim against the corporation or any director or officer or other employee of the corporation arising pursuant to any provision of the Oregon Business Corporation Act or the Articles of Incorporation or these Third Restated Bylaws (as either may be amended or restated from time to time), or (iv) any action asserting a claim against the corporation or any director or officer or other employee of the corporation governed by the internal affairs doctrine shall be a state court located within the State of Oregon (or, if no state court located within the State of Oregon has jurisdiction, the federal district court for the District of Oregon).
ARTICLE IX

MISCELLANEOUS PROVISIONS
9.1  Seal . The Board of Directors from time to time may provide for a seal of the corporation, which shall be circular in form and shall have inscribed thereon the name of the corporation, the state of incorporation and the words “Corporate Seal.”
9.2  Severability . Any determination that any provision of these Third Restated Bylaws is for any reason inapplicable, invalid, illegal, or otherwise ineffective shall not affect or invalidate any other provision of these Third Restated Bylaws.
9.3  Oregon Control Share Act Not Applicable . ORS 60.801 to 60.816 do not apply to acquisitions of voting shares of the corporation.
ARTICLE X

AMENDMENTS
These Third Restated Bylaws may be altered, amended, or repealed and new bylaws may be adopted by the Board of Directors at any regular or special meeting, subject to repeal or change by action of the shareholders of the corporation.




Exhibit 3.1
Published CUSIP Number 339718AH1





AMENDED AND RESTATED CREDIT AGREEMENT

dated as of May 31, 2016

among

FLIR SYSTEMS, INC.

and

CERTAIN SUBSIDIARIES OF FLIR SYSTEMS, INC. IDENTIFIED HEREIN,
as the Borrowers,

CERTAIN SUBSIDIARIES OF FLIR SYSTEMS, INC. IDENTIFIED HEREIN,
as the Subsidiary Guarantors,

BANK OF AMERICA, N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer,

JPMORGAN CHASE BANK, N.A.
and
U.S. BANK NATIONAL ASSOCIATION,
as Co-Syndication Agents,

and

THE OTHER LENDERS PARTY HERETO


Arranged By:

BANK OF AMERICA MERRILL LYNCH,
as Sole Lead Arranger and Bookrunner








TABLE OF CONTENTS


ARTICLE I DEFINITIONS AND ACCOUNTING TERMS    1
1.01      Defined Terms .    1
1.02      Other Interpretive Provisions .    25
1.03      Accounting Terms .    26
1.04      Rounding .    26
1.05      Exchange Rates; Currency Equivalents .    27
1.06      Additional Alternative Currencies .    27
1.07      Change of Currency .    28
1.08      Times of Day .    28
1.09      Letter of Credit Amounts .    29
ARTICLE II THE COMMITMENTS AND CREDIT EXTENSIONS    29
2.01      Revolving Loans .    29
2.02      Borrowings, Conversions and Continuations of Loans .    30
2.03      Letters of Credit .    31
2.04      Swing Line Loans .    40
2.05      Prepayments.     42
2.06      Termination or Reduction of Aggregate Revolving Commitments .    43
2.07      Repayment of Loans .    44
2.08      Interest .    44
2.09      Fees .    45
2.10      Computation of Interest and Fees; Retroactive Adjustments of Applicable Rate .    45
2.11      Evidence of Debt .    46
2.12      Payments Generally; Administrative Agent’s Clawback .    46
2.13      Sharing of Payments by Lenders .    48
2.14      Designated Borrowers .    49
2.15      Concerning Joint and Several Liability of the Domestic Borrowers .    50
2.16      Cash Collateral .    51
2.17      Defaulting Lenders .    53
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY    55
3.01      Taxes .    55
3.02      Illegality .    59
3.03      Inability to Determine Rates .    60
3.04      Increased Cost and Reduced Return; Capital Adequacy .    61
3.05      Funding Losses .    62
3.06      Matters Applicable to Requests for Compensation.     63
3.07      Mitigation Obligations; Replacement of Lenders .    63
3.08      Survival .    64
ARTICLE IV GUARANTY     64
4.01      The Guaranty .    64
4.02      Obligations Unconditional .    64
4.03      Reinstatement .    65
4.04      Certain Additional Waivers .    65



4.05      Remedies .    66
4.06      Rights of Contribution .    66
4.07      Guarantee of Payment; Continuing Guarantee .    67
4.08      Release of Subsidiary Guarantors .    67
ARTICLE V CONDITIONS PRECEDENT TO CREDIT EXTENSIONS    68
5.01      Conditions of Initial Credit Extension .    68
5.02      Conditions to all Credit Extensions .    69
ARTICLE VI REPRESENTATIONS AND WARRANTIES    70
6.01      Existence, Qualification and Power .    70
6.02      Authorization; No Contravention .    70
6.03      Governmental Authorization; Other Consents .    70
6.04      Binding Effect .    70
6.05      Financial Statements; No Material Adverse Effect .    71
6.06      Litigation .    71
6.07      Ownership of Property .    71
6.08      Environmental Compliance .    72
6.09      Insurance .    72
6.10      Taxes .    72
6.11      ERISA Compliance .    72
6.12      Subsidiaries .    73
6.13      Margin Regulations; Investment Company Act .    73
6.14      Disclosure .    73
6.15      Compliance with Laws .    73
6.16      Intellectual Property; Licenses, Etc .    74
6.17      Solvency .    74
6.18      Labor Matters .    74
6.19      Taxpayer Identification Number .    74
6.20      Foreign Loan Parties .    74
6.21      OFAC .    75
6.22      Anti-Corruption Laws .    75
6.23      No EEA Financial Institution .    75
ARTICLE VII AFFIRMATIVE COVENANTS    76
7.01      Financial Statements .&#