Quarterly Report


Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2009

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 file   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

At October 31, 2009, there were 151,782,318 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

INDEX

 

  PART I. FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Consolidated Statements of Income – Three Months and Nine Months Ended September 30, 2009 and 2008 (unaudited)    1
  Consolidated Balance Sheets – September 30, 2009 and December 31, 2008 (unaudited)    2
  Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2009 and 2008 (unaudited)    3
  Notes to the Consolidated Financial Statements (unaudited)    4

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    16

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    20

Item 4.

  Controls and Procedures    20
  PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings    21

Item 1A.

  Risk Factors    21

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    21

Item 3.

  Defaults Upon Senior Securities    21

Item 4.

  Submission of Matters to a Vote of Shareholders    21

Item 5.

  Other Information    21

Item 6.

  Exhibits    22
  Signature    23


Table of Contents

PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  
          (As Adjusted)          (As Adjusted)  

Revenue

   $ 285,553    $ 276,740      $ 835,527    $ 774,624   

Cost of goods sold

     122,736      121,478        353,047      341,969   
                              

Gross profit

     162,817      155,262        482,480      432,655   

Operating expenses:

          

Research and development

     21,294      21,639        66,935      68,296   

Selling, general and administrative

     52,204      56,973        158,199      167,946   
                              

Total operating expenses

     73,498      78,612        225,134      236,242   

Earnings from operations

     89,319      76,650        257,346      196,413   

Interest expense

     1,238      3,473        5,743      10,900   

Other expense (income), net

     1,664      (4,956     1,732      (8,627
                              

Earnings before income taxes

     86,417      78,133        249,871      194,140   

Income tax provision

     26,382      23,354        79,912      58,224   
                              

Net earnings

   $ 60,035    $ 54,779      $ 169,959    $ 135,916   
                              

Net earnings per share:

          

Basic

   $ 0.40    $ 0.39      $ 1.14    $ 0.98   
                              

Diluted

   $ 0.38    $ 0.35      $ 1.07    $ 0.87   
                              

Weighted average shares outstanding:

          

Basic

     151,573      139,211        148,475      138,090   
                              

Diluted

     160,287      163,124        161,477      162,393   
                              

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

 

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Table of Contents

FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

     September 30,
2009
   December 31,
2008
 
          (As Adjusted)  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 403,320    $ 289,442   

Accounts receivable, net

     209,079      239,183   

Inventories

     221,694      207,487   

Prepaid expenses and other current assets

     77,059      59,824   

Deferred income taxes, net

     16,833      16,566   
               

Total current assets

     927,985      812,502   

Property and equipment, net

     138,219      122,304   

Deferred income taxes, net

     8,152      2,217   

Goodwill

     239,059      225,685   

Intangible assets, net

     51,112      56,174   

Other assets

     31,719      22,195   
               
   $ 1,396,246    $ 1,241,077   
               
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 55,753    $ 47,823   

Deferred revenue

     21,879      27,554   

Accrued payroll and related liabilities

     34,856      43,337   

Accrued product warranties

     8,435      7,826   

Advance payments from customers

     9,870      19,183   

Accrued expenses

     23,616      21,978   

Accrued income taxes

     2,942      —     

Other current liabilities

     2,588      4,574   
               

Total current liabilities

     159,939      172,275   

Long-term debt

     60,200      182,825   

Deferred tax liability, net

     6,311      5,983   

Accrued income taxes

     4,568      5,697   

Pension and other long-term liabilities

     36,281      29,572   

Commitments and contingencies

     

Shareholders’ equity:

     

Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at September 30, 2009, and December 31, 2008

     —        —     

Common stock, $0.01 par value, 500,000 shares authorized, 151,666 and 141,387 shares issued at September 30, 2009, and December 31, 2008, respectively, and additional paid-in capital

     367,226      282,848   

Retained earnings

     747,049      577,090   

Accumulated other comprehensive earnings (loss)

     14,672      (15,213
               

Total shareholders’ equity

     1,128,947      844,725   
               
   $ 1,396,246    $ 1,241,077   
               

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

 

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Table of Contents

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  
           (As Adjusted)  

Cash flows from operating activities:

    

Net earnings

   $ 169,959      $ 135,916   

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

    

Depreciation and amortization

     30,903        34,307   

Deferred income taxes

     (2,774     (2,991

Stock-based compensation plans

     17,640        15,160   

Cash inducement on exchange offer for convertible notes

     1,997        —     

Other non-cash items

     (1,566     (67

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

    

Decrease (increase) in accounts receivable

     35,911        (36,741

Increase in inventories

     (8,339     (33,623

Increase in prepaid expenses and other current assets

     (14,897     (17,084

(Increase) decrease in other assets

     (12,098     3,476   

Increase in accounts payable

     6,630        7,164   

(Decrease) increase in deferred revenue

     (5,933     9,080   

(Decrease) increase in accrued payroll and other liabilities

     (25,975     13,876   

Increase (decrease) in accrued income taxes

     1,505        (679

Increase in pension and other long-term liabilities

     6,449        1,982   
                

Cash provided by operating activities

     199,412        129,776   
                

Cash flows from investing activities:

    

Additions to property and equipment

     (34,523     (21,086

Proceeds from sale of property and equipment

     2,891        —     

Business acquisitions, net of cash acquired

     (13,148     (79,303

Other investments

     601        (8,320
                

Cash used by investing activities

     (44,179     (108,709
                

Cash flows from financing activities:

    

Repayments on credit agreement

     —          (19,000

Repayment of capital leases and other long-term debt

     (23     (2,401

Cash inducement on exchange offer for convertible notes

     (1,997     —     

Repurchase of common stock

     (73,169     (40,739

Proceeds from shares issued pursuant to stock-based compensation plans

     12,969        30,640   

Excess tax benefit from stock-based compensation plans

     6,005        19,098   

Capital contribution

     330        —     
                

Cash used by financing activities

     (55,885     (12,402
                

Effect of exchange rate changes on cash

     14,530        (6,243
                

Net increase in cash and cash equivalents

     113,878        2,422   

Cash and cash equivalents, beginning of period

     289,442        203,681   
                

Cash and cash equivalents, end of period

   $ 403,320      $ 206,103   
                

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

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2009.

The Company has performed a review for subsequent events through November 6, 2009.

Note 2. Accounting for Convertible Debt

On January 1, 2009, the Company adopted the provisions of the Financial Accounting Standards Board Accounting Standards Codification Subtopic 470-20, “Debt with Conversion and Other Options” (“ASC Subtopic 470-20”). ASC Subtopic 470-20 requires that issuers of convertible debt instruments that may be settled in cash should separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC Subtopic 470-20 was effective for financial statements issued for fiscal years beginning after December 15, 2008 with retrospective application required.

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

The Company has retrospectively applied the provisions of ASC Subtopic 470-20 to its financial statements beginning in 2003. The retrospective application includes the separation of the liability and equity components of the convertible notes, the reallocation of the $6.1 million of issuance costs between the liability and equity components, an increase in interest expense for periods subsequent to issuance to reflect the estimated nonconvertible borrowing rate, and the related tax effects.

ASC Subtopic 470-20 also requires that when debt is extinguished, a gain or loss is recognized for the difference between the fair value of the liability component and its carrying value. The Company’s retrospective application, therefore, also includes the impact of conversions of notes with an aggregate principal amount of $18.6 million prior to January 1, 2009.

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Accounting for Convertible Debt – (Continued)

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

 

     September 30,
2009
    December 31,
2008
 

Liability component:

    

Principal amount

   $ 61,489      $ 191,419   

Unamortized discount

     (1,185     (7,682

Unamortized issuance costs

     (142     (942
                
   $ 60,162      $ 182,795   
                

Equity component

   $ (115,100   $ 222   
                

The unamortized discount and issuance costs will be amortized through June 2010. As of September 30, 2009, 5.5 million shares of the Company’s common stock were issuable upon conversion of the remaining notes, valued at $155.0 million as of the closing market price on that day. The $155.0 million is in excess of the principal amount by $93.5 million.

The effective interest rate of the convertible notes is 6%. Interest and amortization expense of the convertible notes recognized in the Consolidated Statements of Income are as follows (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Cash interest (3% coupon)

   $ 466    $ 1,575    $ 2,414    $ 4,725

Amortization of discount

     435      1,400      2,155      4,131

Amortization of issuance costs

     53      182      270      547
                           
   $ 954    $ 3,157    $ 4,839    $ 9,403
                           

The following table presents the effect of the retrospective application of ASC Subtopic 470-20 and related tax effects made to the Company’s previously reported Consolidated Statements of Income for the three month and nine month period ended September 30, 2008 (in thousands):

 

     Three Months Ended
September 30, 2008
    Nine Months Ended
September 30, 2008
 
     As Reported     As Adjusted     As Reported     As Adjusted  

Earnings from operations

   $ 76,650      $ 76,650      $ 196,413      $ 196,413   

Interest expense

     2,110        3,473        6,880        10,900   

Other income, net

     (4,956     (4,956     (8,627     (8,627
                                

Earnings before income taxes

     79,496        78,133        198,160        194,140   

Income tax provision

     23,863        23,354        59,750        58,224   
                                

Net earnings

   $ 55,633      $ 54,779      $ 138,410      $ 135,916   
                                

Net earnings per share:

        

Basic

   $ 0.40      $ 0.39      $ 1.00      $ 0.98   
                                

Diluted

   $ 0.35      $ 0.35      $ 0.87      $ 0.87   
                                

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Accounting for Convertible Debt – (Continued)

The following table presents the effect of the retrospective application of ASC Subtopic 470-20 and related tax effects made to the Company’s previously reported Consolidated Balance Sheet as of December 31, 2008 (in thousands):

 

     December 31, 2008
     As Reported    As Adjusted

Deferred income taxes, net

   $ 5,047    $ 2,217

Total assets

     1,243,907      1,241,077

Long-term debt

     190,318      182,825

Common stock and additional paid-in capital

     262,509      282,849

Retained earnings

     592,766      577,090

Total shareholders’ equity

     840,062      844,725

Total liabilities and shareholders’ equity

     1,243,907      1,241,077

The following table presents the effect of the retrospective application of ASC Subtopic 470-20 and related tax effects made to the Company’s previously reported Consolidated Statement of Cash Flows for the nine months ended September 30, 2008 (in thousands):

 

     Nine Months Ended
September 30, 2008
 
     As Reported     As Adjusted  

Net earnings

   $ 138,410      $ 135,916   

Depreciation and amortization

     30,287        34,307   

Deferred taxes

     (1,465     (2,991

Cash provided by operating activities

     129,776        129,776   

Note 3. Stock-based Compensation

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Cost of goods sold

   $ 824      $ 701      $ 2,425      $ 1,945   

Research and development

     1,298        1,325        3,641        3,530   

Selling, general and administrative

     4,001        3,343        11,574        9,685   
                                

Stock-based compensation expense before income taxes

     6,123        5,369        17,640        15,160   

Income tax benefit

     (1,866     (1,524     (5,287     (3,980
                                

Total stock-based compensation expense after income taxes

   $ 4,257      $ 3,845      $ 12,353      $ 11,180   
                                

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

 

     September 30,
     2009    2008

Stock-based compensation costs capitalized in inventory

   $ 879    $ 962
             

As of September 30, 2009, the Company had $38.3 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.0 years.

 

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Table of Contents

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3. Stock-based Compensation – (Continued)

The fair value of the stock-based awards, as determined under the Black-Scholes model, granted in the three months and nine months ended September 30, 2009 and 2008 was estimated with the following weighted-average assumptions:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
     2009     2008    2009     2008  

Stock Option Awards:

         

Risk-free interest rate

   1.6   —      1.5   2.8

Expected dividend yield

   0.0   —      0.0   0.0

Expected term

   3.3 years      —      4.3 years      4.1 years   

Expected volatility

   48.1   —      46.9   40.8

Employee Stock Purchase Plan:

         

Risk-free interest rate

   —        —      0.3   1.7

Expected dividend yield

   —        —      0.0   0.0

Expected term

   —        —      6 months      6 months   

Expected volatility

   —        —      60.9   50.0

The fair value of stock-based compensation awards granted and vested, and the intrinsic value of options exercised during the period were (in thousands, except per share amounts):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Stock Option Awards:

           

Weighted average grant date fair value per share

   $ 7.63    $ —      $ 9.96    $ 12.25

Total fair value of awards granted

   $ 140    $ —      $ 10,534    $ 7,175

Total fair value of awards vested

   $ 215    $ 177    $ 6,924    $ 8,243

Total intrinsic value of options exercised

   $ 6,655    $ 12,039    $ 17,825    $ 76,709

Restricted Stock Unit Awards:

           

Weighted average grant date fair value per share

   $ 21.49    $ 39.37    $ 25.37    $ 34.31

Total fair value of awards granted

   $ 774    $ 83    $ 16,749    $ 18,981

Total fair value of awards vested

   $ 237    $ 364    $ 17,047    $ 15,371

Employee Stock Purchase Plan:

           

Weighted average grant date fair value per share

   $ —      $ —      $ 8.37    $ 10.32

Total fair value of shares estimated to be issued

   $ —      $ —      $ 1,073    $ 1,039

The total amount of cash received from the exercise of stock options in the three months ended September 30, 2009 and 2008 was $4.0 million and $3.7 million, respectively, and the related tax benefit realized from the exercise of the stock options was $1.9 million and $4.5 million, respectively. The total amount of cash received from the exercise of stock options in the nine months ended September 30, 2009 and 2008 was $10.4 million and $28.1 million, respectively, and the related tax benefit realized from the exercise of the stock options was $6.1 million and $22.3 million, respectively.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 3. Stock-based Compensation – (Continued)

Information with respect to stock option activity is as follows:

 

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

(in thousands)

Outstanding at December 31, 2008

   9,218      $ 13.34    5.7   

Granted

   1,057        25.57      

Exercised

   (1,075     9.67      

Forfeited

   (12     22.10      
                  

Outstanding at September 30, 2009

   9,188      $ 15.17    5.7    $ 121,314
                        

Exercisable at September 30, 2009

   7,640      $ 12.83    5.0    $ 117,211
                        

Vested and expected to vest at September 30, 2009

   9,111      $ 15.07    5.7    $ 121,109
                        

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

 

     Shares
(in thousands)
    Weighted
Average
Grant Date
Fair Value

Outstanding at December 31, 2008

   1,356      $ 23.98

Granted

   660      $ 25.37

Vested

   (755   $ 19.50

Forfeited

   (22   $ 26.04
            

Outstanding at September 30, 2009

   1,239      $ 27.42
            

There were approximately 135,000 shares issued under the 1999 Employee Stock Purchase Plan (the “1999 ESPP”) during the nine months ended September 30, 2009. The 1999 ESPP expired for new offerings in January 2009. On May 1, 2009, the Company’s shareholders approved the FLIR Systems, Inc. 2009 Employee Stock Purchase Plan (the “2009 ESPP”). The first offering period under the 2009 ESPP commenced on May 4, 2009. The Company has reserved 5,000,000 shares of common stock for issuance under the 2009 ESPP.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Net Earnings Per Share

The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
          (As Adjusted)         (As Adjusted)

Numerator for earnings per share:

           

Net earnings, as reported

   $ 60,035    $ 54,799    $ 169,959    $ 135,916

Interest associated with convertible notes, net of tax

     404      1,961      3,200      5,815
                           

Net earnings available to common shareholders – diluted

   $ 60,439    $ 56,760    $ 173,159    $ 141,731
                           

Denominator for earnings per share:

           

Weighted average number of common shares outstanding

     151,573      139,211      148,475      138,090

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

     2,996      4,988      3,297      5,378

Assumed conversion of convertible notes

     5,718      18,925      9,705      18,925
                           

Diluted shares outstanding

     160,287      163,124      161,477      162,393
                           

The effect of stock options and restricted stock units for the three and nine months ended September 30, 2009 that aggregated 830,000 shares and 663,000 shares, respectively, has been excluded for purposes of calculating diluted earnings per share since the effect would have been anti-dilutive. For the three and nine months ended September 30, 2008, no shares of stock underlying outstanding stock options or restricted stock units were excluded from the calculations of diluted earnings per share.

Note 5. Fair Value of Financial Instruments

As of September 30, 2009, the Company had $298.7 million of cash equivalents. The Company has categorized its cash and cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets, in accordance with Accounting Standards Codification Topic 820 “Fair Value Measurements and Disclosures.” The Company does not have any other financial assets or liabilities that are measured at fair value.

As of September 30, 2009, the Company had $60.2 million of convertible notes included in long-term debt. The fair value of the convertible notes, estimated based on quoted market prices of the convertible notes, as of September 30, 2009 was $156.8 million.

Note 6. Accounts Receivable

Accounts receivable are net of an allowance for doubtful accounts of $2.5 million and $1.3 million at September 30, 2009 and December 31, 2008, respectively.

Note 7. Inventories

Inventories consist of the following (in thousands):

 

     September 30,
2009
   December 31,
2008

Raw material and subassemblies

   $ 134,997    $ 129,108

Work-in-progress

     47,121      40,325

Finished goods

     39,576      38,054
             
   $ 221,694    $ 207,487
             

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 8. Property and Equipment

Property and equipment are net of accumulated depreciation of $98.9 million and $86.5 million at September 30, 2009 and December 31, 2008, respectively.

Note 9. Goodwill

The carrying value of goodwill by reporting segment and the activity for the nine months ended September 30, 2009 is as follows (in thousands):

 

     Government
Systems
   Thermography     Commercial
Vision
Systems
    Total  

Balance, December 31, 2008

   $ 12,802    $ 102,313      $ 110,570      $ 225,685   

Business acquisitions

     —        1,323        8,585        9,908   

Other

     —        (585     (8     (593

Currency translation adjustments

     448      3,381        230        4,059   
                               

Balance, September 30, 2009

   $ 13,250    $ 106,432      $ 119,377      $ 239,059   
                               

Note 10. Intangible Assets

Intangible assets are net of accumulated amortization of $49.9 million and $43.5 million at September 30, 2009 and December 31, 2008, respectively.

Note 11. Accrued Product Warranties

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Accrued product warranties, beginning of period

   $ 8,095      $ 7,961      $ 7,826      $ 6,594   

Amounts paid for warranty services

     (2,444     (1,880     (6,996     (5,879

Warranty provisions for products sold

     2,784        1,883        7,454        7,249   

Other

     —          —          151        —     
                                

Accrued product warranties, end of period

   $ 8,435      $ 7,964      $ 8,435      $ 7,964   
                                

Note 12. Credit Agreements

At September 30, 2009, the Company had no borrowings outstanding under its Credit Agreement, dated October 6, 2006, with Bank of America, N.A., Union Bank of California, N.A., U.S. Bank National Association and other Lenders, and $11.7 million of letters of credit outstanding, which reduces the total available credit.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 13. Long-Term Debt

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

 

     September 30,
2009
    December 31,
2008
 
           (As Adjusted)  

Convertible notes

   $ 61,489      $ 191,419   

Issuance cost and discount of the convertible notes

     (1,327     (8,624

Other long-term debt

     38        30   
                
   $ 60,200      $ 182,825   
                

On February 5, 2009, the Company commenced an exchange offer for any and all of its outstanding convertible notes. Holders who elected to exchange their notes in this offer and whose notes were accepted for exchange by the Company received 90.1224 shares of the Company’s common stock and a cash payment of $20 per $1,000 principal amount of notes. The offer expired on March 9, 2009. Notes with an aggregate principal amount of $99.9 million were exchanged pursuant to the exchange offer and were converted into 9.0 million shares of the Company’s common stock. The Company recognized a gain of $2.2 million from the extinguishment of the notes; the gain and the $2.0 million expense associated with the cash inducement are reported in other expense (income), net.

In addition, in July 2009, convertible notes with an aggregate principal amount of $30.1 million were converted into 2.7 million shares of the Company’s common stock. The Company recognized a gain of $0.3 million from the extinguishment of the notes, which is reported in other expense (income), net.

Note 14. Shareholders’ Equity

The following table summarizes the common stock and additional paid-in capital activity during the nine months ended September 30, 2009 (in thousands):

 

Common stock and additional paid-in capital, December 31, 2008 (as adjusted)

   $ 282,848   

Income tax benefit of common stock options exercised

     6,113   

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

     8,260   

Stock-based compensation expense

     17,556   

Repurchase of common stock

     (73,169

Conversion of convertible debt

     125,288   

Capital contribution

     330   
        

Common stock and additional paid in capital, September 30, 2009

   $ 367,226   
        

During the nine months ended September 30, 2009, the Company repurchased 3,231,700 shares of the Company’s common stock under the February 2009 repurchase authorization by the Company’s Board of Directors pursuant to which the Company is authorized to repurchase up to 20.0 million shares of the Company’s outstanding common stock through open market purchases, privately negotiated transactions including accelerated stock repurchase agreements, or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934. The February 2009 repurchase authorization will expire in February 2011.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 15. Comprehensive Earnings

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  
          (As Adjusted)          (As Adjusted)  

Net earnings

   $ 60,035    $ 54,779      $ 169,959    $ 135,916   

Translation adjustment

     22,745      (43,803     29,885      (17,592
                              

Total comprehensive earnings

   $ 82,780    $ 10,976      $ 199,844    $ 118,324   
                              

Note 16. Contingencies

In June 2007, the Company was named as a nominal defendant in a shareholder derivative action filed in the United States District Court for the District of Oregon:  Kathleen Edith Sommers v. Earl R. Lewis, et al.  The Sommers complaint alleged that certain stock options granted by the Company were improperly dated, purported to assert claims under various common law theories and under the federal securities laws and alleged the Company is entitled to damages from various individual defendants on a variety of legal theories. Following orders of dismissal entered on June 16, 2008 and February 12, 2009, the court entered a judgment dismissing the amended complaint with prejudice on February 19, 2009. This ruling was appealed to the United States Court of Appeals for the Ninth Circuit. On September 9, 2009, plaintiff stipulated to a dismissal of her appeal with prejudice. On September 10, 2009, an Order to this effect was entered by the Court of Appeals. This case is now concluded.

The Company and its subsidiary, Indigo Systems Corporation, (together, the “FLIR Parties”) were named in a lawsuit filed by Raytheon Company on March 2, 2007 in the United States District Court for the Eastern District of Texas. On August 11, 2008, Raytheon Company was granted leave to file a second amended complaint. The complaint, as amended, asserts claims for tortious interference, patent infringement, trade secret misappropriation, unfair competition, breach of contract and fraudulent concealment. The FLIR Parties filed an answer to the second amended complaint and counterclaims on September 2, 2008, in which they denied all material allegations. On August 31, 2009, the court entered an order granting the FLIR Parties’ motion for summary judgment on Raytheon’s trade secret misappropriation claim based on the FLIR Parties’ statute of limitations defense. Raytheon has abandoned all of its other claims except its patent claims which are currently set for trial to commence on April 19, 2010. The Company intends to vigorously defend itself in this matter and is unable to estimate the amount or range of potential loss, if any, which might result if the outcome in this matter is unfavorable.

Note 17. Income Taxes

As of September 30, 2009, the Company had approximately $5.4 million of net unrecognized tax benefits of which all $5.4 million would affect the Company’s effective tax rate if recognized. The Company anticipates a portion of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of statute of limitations.

The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2009, the Company had approximately $0.5 million of accrued interest related to uncertain tax positions.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Income Taxes – Continued

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

 

     Tax Years:

US Federal

   1999 – 2008

State of Oregon

   1999 – 2008

State of Massachusetts

   2002 – 2008

State of California

   2003 – 2008

Sweden

   2002 – 2008

United Kingdom

   2006 – 2008

Germany

   2003 – 2008

France

   2006 – 2008

Note 18. Operating Segments and Related Information

Operating Segments

Operating segment information is as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenue – External Customers:

        

Government Systems

   $ 162,985      $ 151,743      $ 485,552      $ 397,004   

Thermography

     69,933        79,161        200,641        239,400   

Commercial Vision Systems

     52,635        45,836        149,334        138,220   
                                
   $ 285,553      $ 276,740      $ 835,527      $ 774,624   
                                

Revenue – Intersegments:

        

Government Systems

   $ 5,001      $ 4,918      $ 16,169      $ 25,420   

Thermography

     2,975        2,416        8,331        6,096   

Commercial Vision Systems

     4,314        6,279        14,198        17,467   

Eliminations

     (12,290     (13,613     (38,698     (48,983
                                
   $ —        $ —        $ —        $ —     
                                

Earnings from operations:

        

Government Systems

   $ 71,802      $ 64,166      $ 217,597      $ 159,753   

Thermography

     18,265        16,702        49,591        47,886   

Commercial Vision Systems

     11,728        10,134        36,298        29,412   

Other

     (12,476     (14,352     (46,140     (40,638
                                
   $ 89,319      $ 76,650      $ 257,346      $ 196,413   
                                

 

     September 30,
2009
   December 31,
2008

Segment assets (accounts receivable, net and inventories):

     

Government Systems

   $ 266,440    $ 273,821

Thermography

     101,439      112,728

Commercial Vision Systems

     62,894      60,121
             
   $ 430,773    $ 446,670
             

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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

Revenue and Long-Lived Assets by Geographic Area

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

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

United States

   $ 161,207    $ 190,556    $ 496,480    $ 495,459

Europe

     59,516      51,521      167,242      172,295

Other foreign

     64,830      34,663      171,805      106,870
                           
   $ 285,553    $ 276,740    $ 835,527    $ 774,624
                           

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

 

     September 30,
2009
   December 31,
2008

United States

   $ 339,714    $ 318,183

Europe

     116,037      105,813

Other foreign

     4,358      2,362
             
   $ 460,109    $ 426,358
             

Major Customers

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

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

US Government

   $ 125,067    $ 118,455    $ 375,310    $ 308,818
                           

Note 19. Business Acquisitions

In April 2009, the Company acquired certain assets from Infrared Korea, Ltd. (“Korea”), a distributor of infrared camera systems, for $2.0 million in cash. The portion of the $2.0 million purchase price in excess of the assets acquired is reported in intangible assets and goodwill of $0.6 million and $1.3 million, respectively, in the Thermography business segment.

In June 2009, the Company acquired all of the outstanding stock of Salvador Imaging, Inc. (“Salvador”), a leading provider of high-performance visible and low light imaging systems, for approximately $13.1 million in cash. The Company has recorded $2.9 million of identifiable intangible assets and $8.6 million of goodwill in the Commercial Vision Systems business segment.

The operating results of these acquisitions are included in the Company’s results of operations since their respective dates of acquisition. The goodwill recognized on both of these acquisitions is not deductible for United States tax purposes.

These acquisitions are not significant, as defined in Regulation S-X of the Securities and Exchange Commission, compared to the Company’s overall financial position. Accordingly, pro forma financial statements of the combined entities are not presented.

 

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 20. Subsequent Event

On October 19, 2009, the Company acquired all of the outstanding stock of OmniTech Partners, Inc., Optical Systems Technology, Inc. and Keystone Applied Technologies, Inc., operating together as a provider in the development and manufacturing of weapon-mounted image intensified and fused image intensified/thermal imagers, for approximately $42.0 million in cash.

 

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on management’s current expectations, estimates, projections, and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in the “Risk Factors” in Part II, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations

Revenue. Revenue for the three months ended September 30, 2009 increased by 3.2 percent, from $276.7 million in the third quarter of 2008 to $285.6 million in the third quarter of 2009. Revenue for the nine months ended September 30, 2009 increased 7.9 percent, from $774.6 million in the first nine months of 2008 to $835.5 million in the first nine months of 2009. World-wide revenues for both the three and nine month periods were impacted by currency translation as the US dollar was stronger in 2009 compared to the same periods of 2008. The effects of exchange rates decreased our consolidated revenue for the third quarter and first nine months of 2009 by 1.9 percent and 5.0 percent, respectively, over the same periods of 2008.

Government Systems revenue increased $11.2 million, or 7.4 percent, from $151.7 million in the third quarter of 2008 to $163.0 million in the third quarter of 2009. Government Systems revenue for the nine months ended September 30, 2009 increased $88.5 million, or 22.3 percent, from $397.0 million in the first nine months of 2008 to $485.6 million in the first nine months of 2009. The increase in Government Systems revenue in the third quarter and the first nine months of 2009 compared to the same periods in 2008 was primarily due to an increase in unit sales of our large-gimbaled systems.

Thermography revenue decreased $9.2 million, or 11.7 percent, from $79.2 million in the third quarter of 2008 to $69.9 million in the third quarter of 2009. Thermography revenue for the nine months ended September 30, 2009 decreased $38.8 million, or 16.2 percent, from $239.4 million in the first nine months of 2008 to $200.6 million in the first nine months of 2009. The decrease in Thermography revenue in both the three and nine month periods was primarily due to lower demand for high-value products and currency translation. The effects of exchange rates decreased Thermography revenue for the third quarter and first nine months of 2009 by 1.7 percent and 6.7 percent, respectively, over the same periods of 2008.

Commercial Vision Systems revenue increased $6.8 million, or 14.8 percent, from $45.8 million in the third quarter of 2008 to $52.6 million in the third quarter of 2009. Commercial Vision Systems revenue for the nine months ended September 30, 2009 increased $11.1 million, or 8.0 percent, from $138.2 million in the first nine months of 2008 to $149.3 million in the first nine months of 2009. The increase in Commercial Vision Systems revenue in the third quarter and first nine months of 2009 compared to the same periods in 2008 was primarily due to increased unit sales in our cores and components product lines. The effects of exchange rates decreased Commercial Vision Systems revenue for the third quarter and first nine months of 2009 by 2.4 percent and 3.7 percent, respectively, over the same periods of 2008.

 

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The timing of deliveries against large contracts, especially for our Government Systems and Commercial Vision Systems products, can give rise to quarter-to-quarter and year-over-year fluctuations in the mix of revenue. Consequently, year-over-year comparisons for any given quarter may not be indicative of comparisons using longer time periods. While we currently expect an overall increase in total annual revenue for 2009 of between 2 percent and 7 percent, the mix of revenue between our three business segments and within certain product categories in our business segments will vary from quarter to quarter.

As a percentage of revenue, international sales were 43.5 percent and 31.1 percent for the quarters ended September 30, 2009 and 2008, respectively, and 40.6 percent and 36.0 percent for the nine months ended September 30, 2009 and 2008, respectively. The increase in international revenue as a percentage of total revenue is primarily due to the weakened economic conditions in the United States in 2009 as compared to 2008. While the percentage of revenue from international sales will continue to fluctuate from quarter to quarter partially due to the timing of shipments under international and domestic government contracts, management anticipates that revenue from international sales will continue to comprise a significant percentage of total revenue.

At September 30, 2009, we had an order backlog of $608 million. Backlog in the Government Systems, Thermography and Commercial Vision Systems divisions was $487 million, $28 million and $93 million, respectively. Backlog is defined as orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.

Gross profit. Gross profit for the quarter ended September 30, 2009 was $162.8 million compared to $155.3 million for the same quarter last year. Gross profit for the nine months ended September 30, 2009 was $482.5 million compared to $432.7 million for the same period of 2008. As a percentage of revenue, gross profit increased from 56.1 percent in the third quarter of 2008 to 57.0 percent in the third quarter of 2009, and from 55.9 percent in the first nine months of 2008 to 57.7 percent in the first nine months of 2009. The increase in gross profit as a percentage of revenue for both the three and nine month periods in 2009 was primarily due to cost and production efficiencies related to increased volume, product mix and lower production costs in Sweden.

Research and development expenses. Research and development expenses for the third quarter of 2009 totaled $21.3 million, compared to $21.6 million in the third quarter of 2008. Research and development expenses for the first nine months of 2009 and 2008 were $66.9 million and $68.3 million, respectively. The decrease in research and development expenses was due to cost containment efforts in response to current economic conditions and currency translation. As a percentage of revenue, research and development expenses were 7.5 percent and 7.8 percent for the three months ended September 30, 2009 and 2008, respectively, and 8.0 percent and 8.8 percent for the nine months ended September 30, 2009 and 2008, respectively.

Selling, general and administrative expenses. Selling, general and administrative expenses were $52.2 million for the quarter ended September 30, 2009, compared to $57.0 million for the quarter ended September 30, 2008. Selling, general and administrative expenses for the first nine months of 2009 and 2008 were $158.2 million and $167.9 million, respectively. The decrease in selling, general and administrative expenses was due to cost containment efforts in response to current economic conditions and currency translation. Selling, general and administrative expenses as a percentage of revenue were 18.3 percent and 20.6 percent for the quarters ended September 30, 2009 and 2008, respectively, and 18.9 percent and 21.7 percent for the nine months ended September 30, 2009 and 2008, respectively.

Interest expense. Interest expense for the third quarter and first nine months of 2009 was $1.2 million and $5.7 million, respectively, compared to $3.5 million and $10.9 million for the same periods of 2008. Interest expense is primarily attributable to the accrual of interest on the convertible notes that were issued in June 2003 and the amortization of the discounts recorded on the notes and the costs related to the issuance of the notes. The decrease in interest expense in 2009 compared to the same period of 2008 is primarily due to the conversion of some of our outstanding convertible notes in the fourth quarter of 2008 and the third quarter of 2009 and the exchange of a portion of the convertible notes pursuant to the Company’s exchange offer in the first quarter of 2009.

Other income/expense. For the quarter and nine months ended September 30, 2009, we recorded other expense of $1.7 million and $1.7, respectively, compared to other income of $5.0 million and $8.6 million for the same periods of 2008. Other expense in 2009 and other income in 2008 primarily consist of interest income earned on short-term investments and foreign currency transaction gains and losses.

 

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Income taxes. The income tax provision of $79.9 million for the nine months ended September 30, 2009, represents an effective tax rate of 32.0 percent for that period. We expect the annual effective tax rate for the full year of 2009 to be approximately 32 percent to 33 percent. The effective tax rate is lower than the US Federal tax rate of 35 percent because of foreign tax rates and the effect of federal, foreign and state tax credits.

Liquidity and Capital Resources

At September 30, 2009, we had cash and cash equivalents on hand of $403.3 million compared to $289.4 million at December 31, 2008. The increase in cash and cash equivalents was primarily due to cash provided from operations, offset by the purchase of shares of our outstanding common stock, capital expenditures and business acquisitions.

Cash used in investing activities of $44.2 million for the nine months ended September 30, 2009 primarily related to capital expenditures and the acquisition of Salvador. Cash used in investing activities of $108.7 million for the nine months ended September 30, 2008 includes the acquisitions of Cedip Infrared Systems and Ifara Tecnologias, S.L. for $79.3 million, capital expenditures and other investments.

Cash used in financing activities of $55.9 million for the nine months ended September 30, 2009 primarily related to the repurchase of 3.2 million shares of our common stock, partially offset by cash provided from our stock-based compensation plans. Cash used in financing activities of $12.4 million for the nine months ended September 30, 2008 primarily related to the repurchase of 1.4 million shares of our common stock and the repayment of borrowings under the Credit Agreement, partially offset by cash provided from our stock-based compensation plans.

On October 6, 2006, we entered into the Credit Agreement, which provides for a $300 million, five-year revolving line of credit. We have the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the line of credit by an additional $150 million until October 6, 2011. The Credit Agreement includes a $100 million sublimit multicurrency option, permitting us and certain of our designated subsidiaries to borrow in Euro, Swedish Kronor, Sterling and other agreed upon currencies.

Under the Credit Agreement, borrowings will bear interest based upon the prime lending rate of the Bank of America or Eurodollar rates with a provision for a spread over Eurodollar rates based upon the Company’s leverage ratio. The Eurodollar interest rate was 1.037 percent and the prime lending rate was 3.25 percent at September 30, 2009. These rates were 2.175 percent and 3.25 percent, respectively, at December 31, 2008. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on our leverage ratio, which ranges from 0.175 percent to 0.325 percent. At September 30, 2009 and December 31, 2008, the commitment fee rate was 0.175 percent. The Credit Agreement contains five financial covenants that require the maintenance of certain leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth, a maximum level of capital expenditures and, commencing December 31, 2009, a minimum liquidity of cash and availability under the Credit Agreement. The Credit Agreement is collateralized by substantially all assets of the Company. At September 30, 2009 and December 31, 2008, we had no borrowings outstanding under the Credit Agreement and were in compliance with all of its financial covenants. We had $11.7 million and $12.5 million of letters of credit outstanding under the Credit Agreement at September 30, 2009 and December 31, 2008, respectively, which reduces the total available credit thereunder.

A Sweden subsidiary has a 30 million Swedish Kronor (approximately $4.3 million) line of credit with an interest rate at 0.95 percent at September 30, 2009. At September 30, 2009, the Company had no amounts outstanding on this line of credit. The 30 million Swedish Kronor line of credit is secured primarily by accounts receivable and inventories of the Sweden subsidiary and is subject to automatic renewal on an annual basis.

In June 2003, we issued $210 million of 3.0 percent senior convertible notes due in 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance were approximately $203.9 million. Issuance costs are being amortized over a period of seven years. Interest is payable semiannually on June 1 and December 1 of each year. The holders of the notes may convert all or some of their notes into shares of our common stock at a conversion rate of 90.1224 shares per $1,000 principal amount of notes prior to the maturity date in certain circumstances. We may redeem for cash all or part of the notes on or after June 8, 2010. The convertible notes are eligible for conversion at the option of the note holders.

 

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On February 5, 2009, we commenced an exchange offer for any and all of the outstanding convertible notes. The offer was made pursuant to an Offer to Exchange and related documents, each dated February 5, 2009, and the completion of the offer was subject to conditions described in the offer documents. Holders who elected to exchange their notes in this offer and whose notes were accepted for exchange by us received 90.1224 shares of our common stock and a cash payment of $20 per $1,000 principal amount of notes. The offer expired on March 9, 2009. Notes with an aggregate principal amount of $99.9 million were exchanged pursuant to the exchange offer for approximately 9.0 million shares of the Company’s common stock and approximately $2.0 million in cash.

In addition, in July 2009, convertible notes with an aggregate principal amount of $30.1 million were converted into 2.7 million shares of the Company’s common stock.

As of September 30, 2009, notes with an aggregate principal value of $148.5 million have been converted into 13.4 million shares of the Company’s common stock.

On January 1, 2009, we adopted the provisions of the Financial Accounting Standards Board Accounting Standards Codification Subtopic 470-20, “Debt with Conversion and Other Options” (“ASC Subtopic 470-20”). ASC Subtopic 470-20 requires that issuers of convertible debt instruments that may be settled in cash should separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC Subtopic 470-20 was effective for financial statements issued for fiscal years beginning after December 15, 2008 with retrospective application.

Accordingly, we have retrospectively applied the provisions of ASC Subtopic 470-20 to our financial statements beginning in 2003. The retrospective application includes the separation of the liability and equity components of the convertible notes, the reallocation of the $6.1 million of issuance costs between the liability and equity components, an increase in interest expense for periods subsequent to issuance to reflect the estimated nonconvertible borrowing rate, and the related tax effects.

We believe that our existing cash combined with the cash we anticipate to generate from operating activities and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant capital commitments for the current year nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Codification Topic 105, “Generally Accepted Accounting Principles” (“ASC Topic 105”), which establishes the FASB Accounting Standards Codification TM (the “Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. The Company has adopted ASC Topic 105, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which provides amendments to the criteria in Subtopic 605-25, “Revenue Recognition – Multiple-Element Arrangements,” for separating consideration in multiple-deliverable arrangements and expands the disclosures related to multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Accordingly, the Company will adopt ASU 2009-13 on January 1, 2011. The Company’s adoption of ASU 2009-13 is not expected to have a material impact on its consolidated financial statements.

 

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In October 2009, the FASB issued Accounting Standards Update No. 2009-14, “Software (Topic 985): Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-14”), which changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Accordingly, the Company will adopt ASU 2009-13 on January 1, 2011. The Company’s adoption of ASU 2009-13 is not expected to have a material impact on its consolidated financial statements.

Critical Accounting Policies and Estimates

The Company reaffirms the critical accounting policies and our use of estimates as reported in our Form 10-K for the year ended December 31, 2008. As described in Note 1 to the Consolidated Financial Statements included in the Form 10K, the determination of fair value for stock-based compensation awards requires the use of management’s estimates and judgments.

Contractual Obligations

As of September 30, 2009, our contractual obligations on our long-term debt were as follows (in thousands):

 

     Payments Due by Period
     Total    Less than
1 Year
   1 – 3
Years
   3 – 5
Years
   More than
5 Years

Long-term debt

   $ 61,525    $ 20    $ 16    $ —      $ 61,489

Interest on long-term debt

     26,133      1,845      3,689      3,689      16,909

There have been no other material changes to our contractual obligations outside the ordinary course of our business since December 31, 2008.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of September 30, 2009, 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, 2008.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

 

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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 16, “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, 2008, which was filed with the Securities and Exchange Commission on February 27, 2009.

 

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

During the three months ended September 30, 2009, the Company repurchased the following shares:

 

Period

   Total Number
of Shares
Purchased (1)
   Average
Price Paid
per Share
   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
   Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs

July 1 to July 31, 2009

   1,120,000    $ 21.40    1,120,000   
                   

Total

   1,120,000    $ 21.40    1,120,000    16,768,300
                     

 

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

All share repurchases are subject to applicable securities law, and are at times and in amounts as management deems appropriate. On February 4, 2009, our Board of Directors authorized the repurchase of up to 20.0 million shares of our outstanding common stock through open market purchases, privately negotiated transactions including accelerated stock repurchase agreements, or in such other manner as will comply with the provisions of the Securities Exchange Act of 1934. This authorization will expire on February 4, 2011.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Shareholders

None.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Number

  

Description

31.1    Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
31.2    Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
32.1    Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
32.2    Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    FLIR SYSTEMS, INC.
Date November 9, 2009    

/s/    S TEPHEN M. B AILEY        

    Stephen M. Bailey
    Sr. Vice President, Finance and Chief Financial Officer
   

(Principal Accounting and Financial Officer

and Duly Authorized Officer)

 

23

Exhibit 31.1

I, Earl R. Lewis, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FLIR Systems, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control of financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date November 9, 2009    

/s/  E ARL R. L EWIS

    Earl R. Lewis
    President and Chief Executive Officer

Exhibit 31.2

I, Stephen M. Bailey, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FLIR Systems, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control of financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date November 9, 2009    

/s/  S TEPHEN M. B AILEY

    Stephen M. Bailey
    Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FLIR Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Earl R. Lewis, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date November 9, 2009    

/s/  E ARL R. L EWIS

    Earl R. Lewis
    President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FLIR Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen M. Bailey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date November 9, 2009    

/s/  S TEPHEN M. B AILEY

    Stephen M. Bailey
    Chief Financial Officer