0000354908-12-000016.txt : 20121105 0000354908-12-000016.hdr.sgml : 20121105 20121105163105 ACCESSION NUMBER: 0000354908-12-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20120930 FILED AS OF DATE: 20121105 DATE AS OF CHANGE: 20121105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLIR SYSTEMS INC CENTRAL INDEX KEY: 0000354908 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 930708501 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21918 FILM NUMBER: 121180406 BUSINESS ADDRESS: STREET 1: 27700 SW PARKWAY AVENUE CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5034983547 MAIL ADDRESS: STREET 1: 27700 SW PARKWAY AVENUE CITY: WILSONVILLE STATE: OR ZIP: 97070 10-Q 1 flir-2012930x10q.htm 10-Q FLIR-2012.9.30-10Q


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, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from             to             
Commission file number 0-21918
______________________________________ 
FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)
______________________________________
Oregon
 
93-0708501
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
27700 SW Parkway Avenue,
Wilsonville, Oregon
 
97070
(Address of principal executive offices)
 
(Zip Code)
(503) 498-3547
(Registrant’s telephone number, including area code)
______________________________________ 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
  x
 
Accelerated filer
  ¨
Non-accelerated filer
  ¨
 
Smaller reporting company
  ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
At October 31, 2012, there were 150,025,959 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
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Revenue
$
332,230

 
$
371,327

 
$
1,018,973

 
$
1,138,850

Cost of goods sold
158,877

 
169,430

 
492,865

 
535,030

Gross profit
173,353

 
201,897

 
526,108

 
603,820

Operating expenses:
 
 
 
 
 
 
 
Research and development
29,593

 
35,188

 
103,674

 
112,257

Selling, general and administrative
69,523

 
81,300

 
219,181

 
288,036

Total operating expenses
99,116

 
116,488

 
322,855

 
400,293

 
 
 
 
 
 
 
 
Earnings from operations
74,237

 
85,409

 
203,253

 
203,527

 
 
 
 
 
 
 
 
Interest expense
3,096

 
1,526

 
8,930

 
2,311

Interest income
(268
)
 
(155
)
 
(1,073
)
 
(505
)
Other expense (income), net
2,175

 
66

 
1,190

 
(1,206
)
Earnings from continuing operations before income taxes
69,234

 
83,972

 
194,206

 
202,927

Income tax provision
13,285

 
19,582

 
47,027

 
57,109

Earnings from continuing operations
55,949

 
64,390

 
147,179

 
145,818

(Loss) earnings from discontinued operations, net of tax
(44
)
 
329

 
(2,042
)
 
(475
)
Net earnings
$
55,905

 
$
64,719

 
$
145,137

 
$
145,343

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.41

 
$
0.96

 
$
0.92

Discontinued operations
(0.00
)
 
0.00

 
(0.01
)
 
(0.00
)
Basic earnings per share
$
0.37

 
$
0.41

 
$
0.95

 
$
0.91

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.40

 
$
0.95

 
$
0.90

Discontinued operations
(0.00
)
 
0.00

 
(0.01
)
 
(0.00
)
Diluted earnings per share
$
0.37

 
$
0.40

 
$
0.94

 
$
0.90

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
150,878

 
158,665

 
152,820

 
159,225

Diluted
152,327

 
160,798

 
154,758

 
161,811





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



FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net earnings
$
55,905

 
$
64,719

 
$
145,137

 
$
145,343

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
22,693

 
(33,349
)
 
15,812

 
(1,549
)
Comprehensive income
$
78,598

 
$
31,370

 
$
160,949

 
$
143,794


























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)
 
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
424,489

 
$
440,846

Accounts receivable, net
283,669

 
325,370

Inventories
360,767

 
336,051

Prepaid expenses and other current assets
130,244

 
104,285

Deferred income taxes, net
27,013

 
27,443

Total current assets
1,226,182

 
1,233,995

Property and equipment, net
200,850

 
186,269

Deferred income taxes, net
31,832

 
31,644

Goodwill
502,401

 
498,343

Intangible assets, net
145,511

 
164,440

Other assets
39,238

 
32,338

 
$
2,146,014

 
$
2,147,029

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
77,693

 
$
84,190

Deferred revenue
19,741

 
24,046

Accrued payroll and related liabilities
39,717

 
49,475

Accrued product warranties
13,094

 
13,370

Advance payments from customers
13,681

 
13,219

Accrued expenses
33,249

 
41,183

Accrued income taxes

 
2,161

Other current liabilities
4,162

 
3,886

Total current liabilities
201,337

 
231,530

Long-term debt
248,205

 
247,861

Deferred income taxes
17,358

 
17,237

Accrued income taxes
17,052

 
17,537

Pension and other long-term liabilities
59,639

 
53,835

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at September 30, 2012, and December 31, 2011

 

Common stock, $0.01 par value, 500,000 shares authorized, 150,063 and 154,969 shares issued at September 30, 2012, and December 31, 2011, respectively, and additional paid-in capital
246,622

 
352,157

Retained earnings
1,351,983

 
1,238,866

Accumulated other comprehensive earnings
3,818

 
(11,994
)
Total shareholders’ equity
1,602,423

 
1,579,029

 
$
2,146,014

 
$
2,147,029



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



FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings
$
145,137

 
$
145,343

Income items not affecting cash:
 
 
 
Depreciation and amortization
44,859

 
61,208

Deferred income taxes
599

 
(1,904
)
Stock-based compensation plans
19,997

 
19,313

Other non-cash items
(6,332
)
 
3,007

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Decrease in accounts receivable
41,476

 
26,711

Increase in inventories
(22,427
)
 
(34,921
)
Increase in prepaid expenses and other current assets
(24,243
)
 
(40,050
)
Decrease (increase) in other assets
4,918

 
(2,502
)
Decrease in accounts payable
(6,720
)
 
(8,355
)
(Decrease) increase in deferred revenue
(4,382
)
 
3,466

Decrease in accrued payroll and other liabilities
(21,438
)
 
(34,047
)
Decrease in accrued income taxes
(4,226
)
 
(9,267
)
Increase (decrease) in pension and other long-term liabilities
5,453

 
(307
)
Cash provided by operating activities
172,671

 
127,695

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(39,188
)
 
(31,096
)
Business acquisitions, net of cash acquired

 
(27,182
)
Other investments
(3,000
)
 

Cash used by investing activities
(42,188
)
 
(58,278
)
Cash flows from financing activities:
 
 
 
Net proceeds of long-term debt, including current portion

 
247,708

Repurchase of common stock
(129,010
)
 
(124,384
)
Dividends paid
(32,020
)
 
(28,686
)
Proceeds from shares issued pursuant to stock-based compensation plans
7,117

 
15,085

Excess tax benefit of stock options exercised
1,231

 
4,468

Other financing activities
(139
)
 
(317
)
Cash (used) provided by financing activities
(152,821
)
 
113,874

Effect of exchange rate changes on cash
5,981

 
(1,929
)
Net (decrease) increase in cash and cash equivalents
(16,357
)
 
181,362

Cash and cash equivalents, beginning of period
440,846

 
193,137

Cash and cash equivalents, end of period
$
424,489

 
$
374,499











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 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, 2011.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2012.

Note 2.
Stock-based Compensation
Stock-based compensation expense and related tax benefit recognized in the Consolidated Statements of Income are as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Cost of goods sold
$
895

 
$
941

 
$
2,516

 
$
2,462

Research and development
1,297

 
1,152

 
3,771

 
3,997

Selling, general and administrative
4,405

 
3,344

 
13,710

 
12,854

Stock-based compensation expense before income taxes
6,597

 
5,437

 
19,997

 
19,313

Income tax benefit
(2,005
)
 
(1,574
)
 
(6,067
)
 
(5,565
)
Total stock-based compensation expense after income taxes
$
4,592

 
$
3,863

 
$
13,930

 
$
13,748

Stock-based compensation costs capitalized in inventory are as follows (in thousands):
 
 
September 30,
 
2012
 
2011
Capitalized in inventory
$
514

 
$
795

As of September 30, 2012, the Company had $44.4 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.1 years. 

5


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

Note 2.
Stock-based Compensation - (Continued)
The fair value of the stock-based awards, as determined under the Black-Scholes model, granted in the three and nine months ended September 30, 2012 and 2011 was estimated with the following weighted-average assumptions:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Stock option awards:
 
 
 
 
 
 
 
Risk-free interest rate

 

 
0.4
%
 
1.0
%
Expected dividend yield

 

 
1.3
%
 
0.7
%
Expected term

 

 
4.2 years

 
4.3 years

Expected volatility

 

 
39.7
%
 
42.3
%
Employee stock purchase plan:
 
 
 
 
 
 
 
Risk-free interest rate

 

 
0.2
%
 
0.1
%
Expected dividend yield

 

 
1.3
%
 
0.7
%
Expected term

 

 
6 months

 
6 months

Expected volatility

 

 
27.4
%
 
21.3
%
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,
 
2012
 
2011
 
2012
 
2011
Stock Option Awards:
 
 
 
 
 
 
 
Weighted average grant date fair value per share
$

 
$

 
$
6.43

 
$
11.68

Total fair value of awards granted
$

 
$

 
$
4,104

 
$
4,513

Total fair value of awards vested
$
38

 
$
75

 
$
6,023

 
$
8,037

Total intrinsic value of options exercised
$
3,278

 
$
2,016

 
$
5,637

 
$
15,169

Restricted Stock Unit Awards:
 
 
 
 
 
 
 
Weighted average grant date fair value per share
$
19.84

 
$
27.43

 
$
17.23

 
$
34.41

Total fair value of awards granted
$
121

 
$
169

 
$
30,643

 
$
21,692

Total fair value of awards vested
$
174

 
$
165

 
$
12,276

 
$
19,098

Employee Stock Purchase Plan:
 
 
 
 
 
 
 
Weighted average grant date fair value per share
$

 
$

 
$
5.02

 
$
7.36

Total fair value of shares estimated to be issued
$

 
$

 
$
1,106

 
$
1,051

The total amount of cash received from the exercise of stock options in the three months ended September 30, 2012 and 2011 was $1.5 million and $0.8 million, respectively, and the related tax impact realized from the exercise of the stock options was a benefit of $0.8 million and $0.6 million, respectively. The total amount of cash received from the exercise of stock options in the nine months ended September 30, 2012 and 2011 was $3.1 million and $11.1 million, respectively, and the related tax impact realized from the exercise of the stock options was a benefit of $0.1 million and $4.7 million, respectively.


6


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

Note 2.
Stock-based Compensation - (Continued)
 Information with respect to stock option activity is as follows:

 
Shares
(in  thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2011
6,570

 
$
20.73

 
5.0

 
 
Granted
638

 
22.30

 
 
 
 
Exercised
(405
)
 
7.74

 
 
 
 
Forfeited
(125
)
 
24.41

 
 
 
 
Outstanding at September 30, 2012
6,678

 
$
21.60

 
5.0

 
$
15,662

Exercisable at September 30, 2012
5,767

 
$
20.76

 
4.4

 
$
15,661

Vested and expected to vest at September 30, 2012
6,632

 
$
21.56

 
5.0

 
$
15,662

Information with respect to restricted stock unit activity is as follows:
 
 
Shares
(in  thousands)
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2011
1,305

 
$
30.89

Granted
1,781

 
17.23

Vested and distributed
(555
)
 
29.23

Forfeited
(119
)
 
28.71

Outstanding at September 30, 2012
2,412

 
$
21.39


During the three months ended September 30, 2012 and 2011, the Company granted approximately 6,000 time-vested restricted stock units in each period. During the nine months ended September 30, 2012 and 2011, the Company granted approximately 984,000 and 630,000 time-vested restricted stock units, respectively. The fair value of time-vested restricted stock units is fixed and determined on the date of grant based upon the Company's stock price on the date of grant. The weighted average fair values of the time-vested restricted stock units granted during the three months ended September 30, 2012 and 2011 were $19.84 and $27.43, respectively. The weighted average fair values of the time-vested restricted stock units granted during the nine months ended September 30, 2012 and 2011 were $21.67 and $34.41, respectively.
During the nine months ended September 30, 2012, the Company also granted approximately 795,000 market-based restricted stock units. These units may be earned based upon the Company's total shareholder return compared to the total shareholder return of the S&P 500 Index over a three year period. The fair value of the market-based restricted units was determined and fixed on the date of the grant using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation and considered the likelihood of the Company achieving the market-based condition. The fair value of the market-based restricted stock units granted during the nine months ended September 30, 2012 was $11.73.
There were 208,383 shares issued under the 2011 Employee Stock Purchase Plan ("ESPP") during the nine months ended September 30, 2012 and 4,072,134 shares remain available under the ESPP at September 30, 2012 for future issuance. Shares issued for ESPP purchases are new shares.


7


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

Note 3.
Net Earnings Per Share
The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Numerator for earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
55,949

 
$
64,390

 
$
147,179

 
$
145,818

(Loss) earnings from discontinued operations
(44
)
 
329

 
(2,042
)
 
(475
)
Net earnings for basic and diluted earnings per share
$
55,905

 
$
64,719

 
$
145,137

 
$
145,343

 
 
 
 
 
 
 
 
Denominator for earnings per share:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
150,878

 
158,665

 
152,820

 
159,225

Assumed exercises of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method
1,449

 
2,133

 
1,938

 
2,586

Weighted average diluted shares outstanding
152,327

 
160,798

 
154,758

 
161,811


The effect of stock-based compensation awards for the three and nine months ended September 30, 2012, which aggregated 6,792,000 shares and 3,100,000 shares, respectively, and for the three and nine months ended September 30, 2011, which aggregated 731,000 shares and 307,000 shares, respectively, has been excluded for purposes of calculating diluted earnings per share since including such stock-based compensation awards would have been anti-dilutive.

Note 4.
Fair Value of Financial Instruments
The Company had $69.4 million and $192.6 million of cash equivalents at September 30, 2012 and December 31, 2011, respectively, which were primarily investments in money market funds. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets. The fair value of the Company’s forward currency contracts and the zero-cost collar options as of September 30, 2012 and December 31, 2011 are disclosed in Note 5 below and based on Level 2 inputs. The fair value of the Company’s long-term debt is approximately $261.2 million based upon Level 2 inputs at September 30, 2012. The Company does not have any other significant financial assets or liabilities that are measured at fair value.

Note 5.
Foreign Currency Exchange Rate Risk
The gains and losses related to outstanding derivative instruments recorded in other expense (income) are offset by the reciprocal gains and losses from the underlying assets or liabilities which originally gave rise to the exposure. The net amount of these gains and losses for the three and nine months ended September 30, 2012 were gains of $2.6 million and $2.9 million, respectively. The net amount of these gains and losses for the three and nine months ended September 30, 2011 were a loss of $3.2 million and a loss of $7.9 million, respectively.
 


8


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

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

The net notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency gains or losses. The table below presents the net notional amounts of the Company’s outstanding foreign currency forward contracts by currency (in thousands):
 
September 30,
2012
 
December 31,
2011
Euro
$
3,645

 
$
19,640

Swedish kronor
3,647

 
18,091

British pound sterling
6,686

 
3,050

Australian dollar
2,361

 
609

Danish kroner
520

 
174

Japanese yen
4,515

 
3,581

 
$
21,374

 
$
45,145


At September 30, 2012, all of the Company’s foreign currency forward contracts had maturities of 45 days or less.
On June 29, 2012, the Company entered into two zero-cost collar options to limit the Company's exposure to changes in the US dollar/Euro and the US dollar/Swedish kronor exchange rates. The zero-cost collar option hedges are designed to protect the Company as the US dollar strengthens, but also provide the Company with some flexibility if the US dollar weakens. The foreign exchange hedging structure is set up, generally, on a six month time horizon. These options are not designated as hedging instruments and accordingly, gains and losses related to these options will be recorded as a component of net income. For the three months ended September 30, 2012, the Company recorded a loss of $1.7 million related to these options.
The fair value carrying amount of our derivative instruments included in the Consolidated Balance Sheets are as follows (in thousands):
 
September 30, 2012
 
December 31, 2011
 
Other Current Assets
 
Other Current Liabilities
 
Other Current Assets
 
Other Current Liabilities
Foreign exchange contracts
$
1,147

 
$
383

 
$
245

 
$
640

Zero-cost collar options

 
1,671

 

 


Note 6.
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $5.7 million and $5.6 million at September 30, 2012 and December 31, 2011, respectively.

Note 7.
Inventories
Inventories consist of the following (in thousands):
 
 
September 30,
2012
 
December 31,
2011
Raw material and subassemblies
$
231,736

 
$
225,573

Work-in-progress
56,153

 
55,886

Finished goods
72,878

 
54,592

 
$
360,767

 
$
336,051



9


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 $184.1 million and $164.6 million at September 30, 2012 and December 31, 2011, respectively.

Note 9.
Goodwill
As of June 30, 2012, the Company has determined that there is no impairment on its recorded goodwill and as of September 30, 2012, there have been no triggering events that would require an updated impairment review. The carrying value of goodwill by reporting segment and the activity for the nine months ended September 30, 2012 are as follows (in thousands):
 
 
Thermal Vision and Measurement
 
Raymarine
 
Surveillance
 
Detection
 
Integrated Systems
 
Total
Balance, December 31, 2011
$
251,187

 
$
98,364

 
$
90,501

 
$
38,162

 
$
20,129

 
$
498,343

Currency translation adjustments
1,007

 
2,745

 
306

 

 

 
4,058

Balance, September 30, 2012
$
252,194

 
$
101,109

 
$
90,807

 
$
38,162

 
$
20,129

 
$
502,401


Note 10.
Intangible Assets
Intangible assets are net of accumulated amortization of $116.3 million and $98.2 million at September 30, 2012 and December 31, 2011, respectively.

Note 11.
Credit Agreements
At September 30, 2012, the Company had no borrowings outstanding under its Credit Agreement, dated February 8, 2011, with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders, and $9.7 million of letters of credit outstanding, which reduces the total available credit under the Credit Agreement to $190.3 million.

Note 12.
Accrued Product Warranties
The following table summarizes the Company’s warranty liability and activity (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Accrued product warranties, beginning of period
$
15,322

 
$
19,214

 
$
16,046

 
$
18,686

Amounts paid for warranty services
(2,465
)
 
(948
)
 
(6,722
)
 
(6,128
)
Warranty provisions for products sold
1,689

 
(388
)
 
4,823

 
4,639

Currency translation adjustments and other
646

 
(448
)
 
1,045

 
233

Accrued product warranties, end of period
$
15,192

 
$
17,430

 
$
15,192

 
$
17,430

Current accrued product warranties, end of period
 
 
 
 
$
13,094

 
$
14,090

Long-term accrued product warranties, end of period
 
 
 
 
$
2,098

 
$
3,340


Note 13.
Long-Term Debt
Long-term debt consists of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
Unsecured notes
$
250,000

 
$
250,000

Unamortized issuance costs
(1,795
)
 
(2,139
)
 
$
248,205

 
$
247,861


10


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

Note 13.
Long-Term Debt - (Continued)
In August 2011, the Company issued $250 million aggregate principal amount of its 3.750% senior unsecured notes due September 1, 2016 (the “Notes”). The net proceeds from the issuance of the Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest is payable on the Notes semiannually in arrears on March 1 and September 1, which commenced March 1, 2012. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock.

Note 14.
Shareholders’ Equity
The following table summarizes the common stock and additional paid-in capital activity during the nine months ended September 30, 2012 (in thousands):
 
Common stock and additional paid-in capital, December 31, 2011
$
352,157

Income tax benefit of common stock options exercised
129

Common stock issued pursuant to stock-based compensation plans, net
3,654

Stock-based compensation expense
19,692

Repurchase of common stock
(129,010
)
Common stock and additional paid in capital, September 30, 2012
$
246,622

During the nine months ended September 30, 2012, the Company repurchased 5.9 million shares of the Company’s common stock under the February 2011 repurchase authorization by the Company’s Board of Directors pursuant to which the Company is authorized to repurchase up to 20.0 million shares of the Company’s outstanding common stock. This authorization expires in February 2013.
On February 9, 2011, the Company’s Board of Directors adopted a dividend policy under which the Company intends to pay quarterly cash dividends on its common stock. Accordingly, a dividend of $0.07 per share of outstanding common stock was paid on September 7, 2012 to shareholders of record as of the close of business on August 20, 2012. The total cash payments for dividends in the three and nine months ended September 30, 2012 were $10.5 million and $32.0 million, respectively.

Note 15.
Contingencies
The Company and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.) (together, the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007, in the United States District Court for the Eastern District of Texas. 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 August 31, 2009, the court entered an order granting the FLIR Parties' motion for summary judgment on Raytheon's trade secret misappropriation claim based on the FLIR Parties' statute of limitations defense. Raytheon abandoned all of its other claims except its claims relating to four patents (the “Patent Claims”). On August 11, 2010, the FLIR Parties and Raytheon entered into an agreement in principle to resolve the remaining Patent Claims, which resulted in a payment of $3 million by the FLIR Parties to Raytheon and entitles the FLIR Parties to certain license rights in the patents that were the subject of the Patent Claims. The parties appealed certain rulings of the District Court to the United States Court of Appeals for the Federal Circuit which on August 1, 2012, reversed the judgment of the District Court and remanded the case for further proceedings consistent with the appellate court's opinion.  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.


11


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

Note 16.
Income Taxes
As of September 30, 2012, the Company had approximately $27.9 million of net unrecognized tax benefits of which $17.1 million would affect the Company’s effective tax rate if recognized. The Company anticipates a portion of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of the applicable statute of limitations.
The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2012, the Company had approximately $2.1 million of net accrued interest and penalties related to uncertain tax positions.
The Company currently has the following tax years open to examination by major taxing jurisdictions:
 
 
Tax Years:
US Federal
2009 – 2011
State of Oregon
2008 – 2011
State of Massachusetts
2008 – 2011
State of California
2007 – 2011
Sweden
2007 – 2011
United Kingdom
2006 – 2011
Belgium
2011

Note 17.
Operating Segments and Related Information
Operating Segments
The Company has two business divisions: Commercial Systems and Government Systems.
Commercial Systems Division
The Commercial Systems division is focused on the design, manufacture, and marketing of instrument, sensor, and electronics solutions that facilitate improved situational awareness and environmental analytics for commercial customers. The division is comprised of two operating segments: Thermal Vision and Measurement and Raymarine. The Thermal Vision and Measurement segment provides advanced thermal imaging solutions for emerging commercial and industrial markets that enable people to see at night or through adverse weather conditions and to capture, measure, and analyze temperature data. The Raymarine segment provides electronics for the maritime market and is a leading global provider of fully integrated “stem to stern” networked electronic systems for boats of all sizes.
Government Systems Division
The Government Systems division designs, manufactures, and markets advanced imaging and detection systems for government markets where high performance is required. The division is comprised of three operating segments: Surveillance, Detection, and Integrated Systems. The Surveillance segment provides enhanced imaging and recognition solutions to a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. The Detection segment produces sensor instruments that detect and identify chemical, biological, radiological, nuclear, and explosives (“CBRNE”) threats for military force protection, homeland security, and commercial applications. The Integrated Systems segment develops platform solutions for combating sophisticated security threats and incorporates multiple sensor systems in order to deliver actionable intelligence for wide area surveillance, intrusion detection, and facility security.

12


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

 Note 17.    Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Operating segment information is as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue – External Customers:
 
 
 
 
 
 
 
Thermal Vision and Measurement
$
149,540

 
$
160,998

 
$
447,922

 
$
470,799

Raymarine
31,659

 
35,442

 
125,443

 
136,169

Surveillance
115,915

 
139,827

 
350,005

 
431,164

Detection
15,401

 
21,193

 
50,467

 
56,284

Integrated Systems
19,715

 
13,867

 
45,136

 
44,434

 
$
332,230

 
$
371,327

 
$
1,018,973

 
$
1,138,850

Revenue – Intersegments:
 
 
 
 
 
 
 
Thermal Vision and Measurement
$
3,076

 
$
3,799

 
$
12,527

 
$
14,197

Raymarine

 

 
4

 
7

Surveillance
5,260

 
5,982

 
17,246

 
23,003

Detection
1,027

 
1,913

 
1,803

 
3,391

Integrated Systems
295

 

 
1,342

 
1,811

Eliminations
(9,658
)
 
(11,694
)
 
(32,922
)
 
(42,409
)
 
$

 
$

 
$

 
$

Earnings (loss) from operations:
 
 
 
 
 
 
 
Thermal Vision and Measurement
$
42,916

 
$
47,162

 
$
109,651

 
$
131,447

Raymarine
374

 
(2,824
)
 
9,944

 
11,829

Surveillance
39,243

 
51,872

 
114,965

 
149,672

Detection
1,131

 
1,997

 
801

 
(4,878
)
Integrated Systems
1,333

 
298

 
1,267

 
126

Other
(10,760
)
 
(13,096
)
 
(33,375
)
 
(84,669
)
 
$
74,237

 
$
85,409

 
$
203,253

 
$
203,527



 
September 30,
2012
 
December 31,
2011
Segment assets (accounts receivable, net and inventories):
 
 
 
Thermal Vision and Measurement
$
224,448

 
$
233,888

Raymarine
68,945

 
60,093

Surveillance
295,403

 
316,615

Detection
35,687

 
32,447

Integrated Systems
19,953

 
17,774

Discontinued Operations

 
604

 
$
644,436

 
$
661,421


13


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

 Note 17.    Operating Segments and Related Information - (Continued)
Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
United States
$
185,222

 
$
205,579

 
$
536,150

 
$
598,236

Europe
61,507

 
87,647

 
231,374

 
279,341

Other international
85,501

 
78,101

 
251,449

 
261,273

 
$
332,230

 
$
371,327

 
$
1,018,973

 
$
1,138,850

Long-lived assets by significant geographic locations are as follows (in thousands):
 
 
September 30,
2012
 
December 31,
2011
United States
$
576,520

 
$
587,592

Europe
301,442

 
284,171

Other international
10,038

 
9,627

 
$
888,000

 
$
881,390


Major Customers
Revenue derived from major customers is as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
US Government
$
91,714

 
$
118,659

 
$
265,976

 
$
348,944


Note 18.
Discontinued Operations
During the three months ended June 30, 2012, the Company sold the two remaining business units that had been classified as discontinued operations. The operating losses of those operations up to the time of sale and the net losses on the sales of the units, net of tax, are reflected in the Consolidated Statements of Income for the nine months ended September 30, 2012.

Note 19.
Subsequent Events
On October 18, 2012, the Company’s Board of Directors declared a quarterly dividend of $0.07 per share on its common stock, payable on December 7, 2012, to shareholders of record as of the close of business on November 19, 2012. The total cash payment of this dividend will be approximately $10.5 million.
On October 25, 2012, the Company announced that it has entered into an agreement pursuant to which it has agreed to acquire Lorex Technology Inc., a leading provider of consumer oriented and professional grade video surveillance systems, for CAD$1.30 per share, or a total cash purchase price of CAD$59 million.


14



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

Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on management’s current expectations, estimates, projections, and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2011, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations
The following discussion of operating results provides an overview of our operations by addressing key elements in our Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Given the nature of our business, we believe revenue and earnings from operations (including operating margin percentage) are most relevant to an understanding of our performance at a segment level 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.
Revenue. Consolidated revenue for the three months ended September 30, 2012 decreased by 10.5 percent, from $371.3 million in the third quarter of 2011 to $332.2 million in the third quarter of 2012. Consolidated revenue for the nine months ended September 30, 2012 decreased by 10.5 percent, from $1,138.9 million in the first nine months of 2011 to $1,019.0 million in the first nine months of 2012. Each of our operating segments, except Integrated Systems, reported decreases in year over year revenues for both the three and nine month periods primarily due to continued reductions in demand for our products from the US Government and Middle East government agencies and weaker world-wide economic conditions. Of the $39.1 million decrease in total revenue for the three months ended September 30, 2012 compared to the same period in 2011, $26.9 million, or 68.8 percent, was related to lower revenues from US Government customers; for the nine month periods, the year over year decline in revenue of $119.9 million included a decline of $83.0 million of revenue from US Government customers.
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 2012 to be between 6 percent to 9 percent lower than 2011 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.
The Company expects that the challenging world-wide economic conditions that impacted revenue performance for the three and nine months ended September 30, 2012 will continue to impact the Company's business going forward.   More specifically, reduced spending by US Government and Middle East government agencies, the continuing Eurozone crisis and the scheduled year-end expiration of income tax cuts, the temporary payroll tax cut and, in the absence of action by the US Congress to the contrary, potential material reductions in federal spending resulting from the Budget Control Act of 2011 (referred to as the “fiscal cliff”), among other global economic developments, all present challenges for the Company and render predictions regarding future performance difficult to make.


15



International sales accounted for 44.2 percent and 44.6 percent of total revenue for the quarters ended September 30, 2012 and 2011, respectively and 47.4 percent and 47.5 percent for the nine months ended September 30, 2012 and 2011, 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, but 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 nine months ended September 30, 2012 was $158.9 million and $492.9 million, respectively, compared to cost of goods sold for the three and nine months ended September 30, 2011 of $169.4 million and $535.0 million, respectively. The year over year decreases in cost of goods sold primarily relate to the lower year over year revenues and change in product mix. In the three and nine months ended September 30, 2012, costs of goods sold included restructuring charges of $0.3 million and $3.7 million, respectively, primarily for force reductions in our Thermal Vision and Measurement and Detection segments; in the three and nine months ended September 30, 2011, costs of goods sold included restructuring charges of $0.9 million. For the nine months ended September 30, 2011, costs of goods sold included charges of $7.3 million for the amortization of fair value adjustments on inventory acquired through the acquisition of ICx Technologies in 2010.
Gross profit. Gross profit for the quarter ended September 30, 2012 was $173.4 million compared to $201.9 million for the same quarter last year. Gross profit for the nine months ended September 30, 2012 was $526.1 million compared to $603.8 million for the same period of 2011. The decrease in gross profit was due to the lower revenue year over year and lower consolidated gross margin. Gross margin, defined as gross profit divided by revenue, decreased from 54.4 percent in the third quarter of 2011 to 52.2 percent in the third quarter of 2012, primarily due to lower absorption of overhead costs in our Commercial Systems division partially offset by product mix. For the first nine months of 2012, gross margin was 51.6 percent compared to 53.0 percent in the same period of 2011 with the decline primarily due to lower factory costs absorption in our Commercial Systems division and the year over year increase in restructuring costs partially offset by the elimination of 2011 amortization expenses related to fair value adjustments on inventory acquired through the acquisition of ICx Technologies in 2010.
Research and development expenses. Research and development expenses for the third quarter of 2012 totaled $29.6 million, compared to $35.2 million in the third quarter of 2011. Research and development expenses for the first nine months of 2012 and 2011 were $103.7 million and $112.3 million, respectively. The decrease in research and development expenses for the three and nine month periods year over year is primarily due to cost containment efforts taken across the Company. Research and development expenses as a percentage of revenue were 8.9 percent and 10.2 percent for the three and nine months ended September 30, 2012, respectively, compared to 9.5 percent and 9.9 percent for the three and nine months ended September 30, 2011, respectively. Research and development expenses are expected to remain at the upper end of our anticipated long-term research and development spending relative to sales due to the current sluggish revenue environment. Over the five annual periods through December 31, 2011, our annual research and development expenses have varied between 8.0 percent and 9.5 percent of revenue.
Selling, general and administrative expenses. Selling, general and administrative expenses were $69.5 million for the quarter ended September 30, 2012, compared to $81.3 million for the quarter ended September 30, 2011. Selling, general and administrative expenses for the first nine months of 2012 and 2011 were $219.2 million and $288.0 million, respectively. The decrease in selling, general and administrative expenses for the third quarter year over year was attributable to cost containment efforts taken across the Company in response to the lower revenues. The decrease in expenses for the nine month periods year over year was primarily due to a $39.0 million litigation settlement incurred in 2011, decreased selling, general and administrative spending in each of our business segments, and lower corporate costs. Selling, general and administrative expenses as a percentage of revenue were 20.9 percent and 21.9 percent for the quarters ended September 30, 2012 and 2011, respectively and 21.5 percent and 25.3 percent for the nine months ended September 30, 2012 and 2011, respectively. Over the past five years, our annual selling, general and administrative expenses have varied between 19.2 percent and 23.8 percent of revenue.
Interest expense. Interest expense for the third quarter and first nine months of 2012 was $3.1 million and $8.9 million, respectively, compared to $1.5 million and $2.3 million for the same periods of 2011. The increase in interest expense for the third quarter and first nine months of 2012 compared to the prior year was due to interest expense associated with the $250 million aggregate principal amount of 3.750% senior unsecured notes due September 1, 2016 issued in August 2011.
Income taxes. The income tax provision of $13.3 million for the three months ended September 30, 2012, represents a quarterly effective tax rate of 19.2 percent. We expect the annual effective tax rate for the full year of 2012 to be 26 percent to 28 percent, excluding discrete items. The effective tax rate 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. The quarterly effective tax rate is significantly lower than the expected annual effective rate due to the recognition of previously unrecognized tax benefits which resulted in a $5.2 million reduction of our income tax provision during the quarter ended September 30, 2012.

16




Segment Operating Results
Thermal Vision and Measurement
Thermal Vision and Measurement operating results are as follows (in millions):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
149.5

 
$
161.0

 
$
447.9

 
$
470.8

Earnings from operations
42.9

 
47.2

 
109.7

 
131.4

Operating margin
28.7
%
 
29.3
%
 
24.5
%
 
27.9
%
Backlog, end of period
 
 
 
 
167

 
166

Revenue for the three and nine months ended September 30, 2012 decreased by 7.1 percent and 4.9 percent, respectively, compared to the same periods of 2011. The decrease in the three month period is primarily due to lower revenues from all of our thermography product lines partially offset by increases for the cores and components product line and personal vision system cameras. For the nine month period, the decrease is attributable to lower revenues in the cores and components product line and our thermography product lines. The revenue declines were experienced in all geographies due to world-wide economic weaknesses and lower demand from cores and components customers in the United States. The decline in earnings from operations for both the three months and nine months ended September 30, 2012 compared to the same periods in 2011 was primarily due to the flow through of lower revenues and lower absorption of factory costs partially offset by efforts to control and reduce operating expenses. Backlog at September 30, 2012 was essentially flat compared to September 30, 2011; however, backlog increased by $9 million during the three months ended September 30, 2012.
Raymarine
Raymarine operating results are as follows (in millions):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
31.7

 
$
35.4

 
$
125.4

 
$
136.2

Earnings (loss) from operations
0.4

 
(2.8
)
 
9.9

 
11.8

Operating margin
1.2
%
 
(8.0
)%
 
7.9
%
 
8.7
%
Backlog, end of period
 
 
 
 
6

 
7

Revenue for the three and nine months ended September 30, 2012 decreased by 10.7 percent and 7.9 percent, respectively, compared to the same periods of 2011, primarily due to weak market conditions in Europe. The increase in earnings from operations for the three months ended September 30 , 2012 compared to the same period of 2011 was primarily due to an approximate one-third reduction of operating expenses offsetting the decline in year over year revenue. The decrease in earnings from operations for the nine months ended September 30, 2012 compared to the same period in the prior year was primarily due to the reduced sales partially offset by cost control efforts that have yielded lower 2012 operating expenses.
Surveillance
Surveillance operating results are as follows (in millions):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
115.9

 
$
139.8

 
$
350.0

 
$
431.2

Earnings from operations
39.2

 
51.9

 
115.0

 
149.7

Operating margin
33.9
%
 
37.1
%
 
32.8
%
 
34.7
%
Backlog, end of period
 
 
 
 
289

 
294


17



Revenue for the three and nine months ended September 30, 2012 decreased by 17.1 percent and 18.8 percent, respectively, compared to the same periods of 2011, primarily due to decreases in revenue from US Government customers. The decline in revenues and the change in product mix of the segment, partially offset by a decrease in operating expenses, resulted in the decline in earnings from operations for both the three and nine month periods ended September 30, 2012, compared to the same periods in 2011.

Detection
Detection operating results are as follows (in millions):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
15.4

 
$
21.2

 
$
50.5

 
$
56.3

Earnings (loss) from operations
1.1

 
2.0

 
0.8

 
(4.9
)
Operating margin
7.3
%
 
9.4
%
 
1.6
%
 
(8.7
)%
Backlog, end of period
 
 
 
 
24

 
35


Revenue for three months ended September 30, 2012 decreased by 27.3 percent compared to the same period of 2011, primarily due to two significant sales in 2011 and to lower research and development contract revenues as the segment has eliminated some of its locations. For the nine months, the decrease in revenue is primarily due to lower research and development contract revenues partially offset by a slight increase in product revenues. Earnings from operations decreased for the three month period year over year due to the decline in revenues partially offset by reductions in operating expenses. The loss from operations for the nine months ended September 30, 2011 included the amortization of fair value adjustments on inventory of $4.2 million. The elimination of the inventory adjustment and lower operating expenses partially offset by lower revenues were the main factors contributing to the improvement in operating results for the nine month period year over year.
Integrated Systems
Integrated Systems operating results are as follows (in millions):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
19.7

 
$
13.9

 
$
45.1

 
$
44.4

Earnings from operations
1.3

 
0.3

 
1.3

 
0.1

Operating margin
6.8
%
 
2.1
%
 
2.8
%
 
0.3
%
Backlog, end of period
 
 
 
 
79

 
45


Revenue for the three and nine months ended September 30, 2012 increased by 42.2 percent and 1.6 percent, respectively, compared to the same periods of 2011, primarily due to revenue from a large program that was recognized in the third quarter of 2012. Backlog at September 30, 2012 reflects an increase of approximately $34 million compared to September 30, 2011 due to several large program contracts booked in the second and third quarters of 2012.

Liquidity and Capital Resources
At September 30, 2012, we had a total of $424.5 million in cash and cash equivalents, $212.0 million of which was in the United States and $212.5 million at our foreign subsidiaries, compared to $263.6 million in the United States and $177.2 million at our foreign subsidiaries at December 31, 2011. The decrease in cash and cash equivalents was primarily due to $129.0 million spent for the repurchase of 5.9 million shares of our common stock, capital expenditures of $39.2 million, and dividends paid of $32.0 million during the period, partially offset by cash provided from operations and cash proceeds from our stock-based compensation programs.
Cash provided by operating activities totaled $172.7 million for the nine months ended September 30, 2012 primarily due to net earnings, adjusted for non-cash charges for depreciation and amortization and stock-based compensation, and net collections of our accounts receivable, partially offset by net increases in other working capital components.

18



On February 8, 2011, we signed a Credit Agreement (“Credit Agreement”) with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders. The Credit Agreement provides for a $200 million, five-year revolving line of credit. We have the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the line of credit by an additional $150 million until October 8, 2016. The Credit Agreement allows us and certain designated subsidiaries to borrow in US dollars, euro, Swedish Kronor, pound sterling and other agreed upon currencies. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on the Company’s leverage ratio, which ranges from 0.25 percent to 0.40 percent. The Credit Agreement contains two financial covenants that require the maintenance of certain leverage ratios with which we were in compliance at September 30, 2012. The five-year revolving line of credit available under the Credit Agreement is not secured by any of our assets.
At September 30, 2012, we had no amounts outstanding under the Credit Agreement and the commitment fee on the amount of unused credit was 0.25 percent. We had $9.7 million of letters of credit outstanding at September 30, 2012, which reduced the total available credit under the Credit Agreement.
On August 19, 2011, we issued $250 million aggregate principal amount of our 3.750% senior unsecured notes due September 1, 2016 (the "Notes"). The net proceeds from the issuance of the Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest is payable on the Notes semiannually in arrears on March 1 and September 1, which commenced March 1, 2012. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of our common stock.
A Swedish subsidiary has a 30 million Swedish Kronor (approximately $4.6 million) line of credit. At September 30, 2012, the Company had no amounts outstanding on this line of credit. The 30 million Swedish Kronor line of credit is secured primarily by accounts receivable and inventories of the Sweden subsidiary and is subject to automatic renewal on an annual basis.
Cash used by financing activities of $152.8 million for the nine months ended September 30, 2012 primarily related to the repurchase of 5.9 million shares of our common stock and the payment of dividends, partially offset by cash provided from our stock-based compensation plans.
On February 9, 2011, our Board of Directors authorized the repurchase of up to 20.0 million shares of our outstanding common stock. As of September 30, 2012, there were approximately 7.9 million shares still remaining for repurchase under this authorization, which expires on February 9, 2013.
We believe that our existing cash combined with the cash we expect to generate from operating activities and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant capital commitments for the current year nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.

Critical Accounting Policies and Estimates
The Company reaffirms the critical accounting policies and our use of estimates as reported in our Form 10-K for the year ended December 31, 2011. As described in Note 1 to the Consolidated Financial Statements included in the Form 10-K, the determination of fair value for stock-based compensation awards requires the use of management’s estimates and judgments.
Contractual Obligations
As of September 30, 2012, there have been no material changes to our contractual obligations outside the ordinary course of our business since December 31, 2011.

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

As of September 30, 2012, 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, 2011.


19



Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
As of September 30, 2012, 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 was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2012 that materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

20



PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

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


Item 1A.
Risk Factors

There has been no material change in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 29, 2012.


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

During the three months ended September 30, 2012, 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, 2012
745,800

 
$
19.26

 
745,800

 
 
August 1 to August 31, 2012
750,000

 
$
20.75

 
750,000

 
 
September 1 to September 30, 2012
449,000

 
$
19.78

 
449,000

 
 
Total
1,944,800

 
$
19.96

 
1,944,800

 
7,919,955

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


Item 3.
Defaults Upon Senior Securities

None.


Item 4.
Mine Safety Disclosures

Not Applicable.


Item 5.
Other Information

Employment Agreements.

Earl R. Lewis. On November 5, 2012, the Company entered into an Employment Agreement with Earl R. Lewis, pursuant to which Mr. Lewis is employed by the Company as President and Chief Executive Officer. The Agreement constitutes an amendment and restatement of the Employment Agreement between Mr. Lewis and the Company dated as of February 28, 2011. The Agreement is for a term ending January 1, 2014, and provides for a minimum annual base salary of $875,000 for 2013. Pursuant to the Agreement, Mr. Lewis will also be eligible for bonuses, incentive payments, and equity grants as determined by the Compensation Committee of the Company's Board of Directors. If Mr. Lewis terminates the Agreement or the Company terminates the Agreement for “Cause” (as defined in the Agreement), Mr. Lewis would be paid through the date of termination. In the event that the Agreement

21



terminates as a result of the death of Mr. Lewis, the Company would be required to pay an amount equal to one year's base salary to Mr. Lewis' estate or designated beneficiary. If the Company terminates the Agreement without Cause, the Company would be required to continue to pay Mr. Lewis an amount equal to his base salary in effect at the time of termination for a period equal to the greater of 18 months or the remaining term of the Agreement plus a severance payment in an amount not less than one year's base salary. In addition, if the Company terminates the Agreement without Cause, all equity awards granted to Mr. Lewis would immediately vest. If Mr. Lewis's employment is terminated at a time when a successor as CEO has been identified, he will be paid through termination and will be eligible to receive a prorated award under the Company's annual incentive plan then in effect. The Agreement also provides that Mr. Lewis will be entitled to all benefits made available to other executive officers. The foregoing description of the Employment Agreement with Mr. Lewis does not purport to be complete and is qualified in its entirety by the full text of the agreement, which is filed as an exhibit to this Report and is incorporated herein by reference.



22



Item 6.
Exhibits

Number
  
Description
 
 
 
10.1
  
Executive Employment Agreement between FLIR Systems, Inc. and Earl R. Lewis dated as of November 5, 2012.(1)
 
 
 
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
(1) This exhibit constitutes a management contract or compensatory plan or arrangement.

23



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FLIR SYSTEMS, INC.
 
 
 
Date November 5, 2012
 
    /s/ ANTHONY L. TRUNZO
 
 
Anthony L. Trunzo
 
 
Sr. Vice President, Finance and Chief Financial Officer
 
 
(Duly Authorized and Principal Financial Officer)

24
EX-10.1 2 flir-2012930x10qexx101.htm EMPLOYMENT AGREEMENT FLIR-2012.9.30-10QEx-10.1


Exhibit 10.1

        


EXECUTIVE EMPLOYMENT AGREEMENT


PARTIES:    FLIR Systems, Inc.        (“Company”)
27700 SW Parkway Avenue
Wilsonville, OR 97070

Earl R. Lewis            (“Executive”)
87 Pinckney Street
Boston, MA 02114-4303

EFFECTIVE DATE: January 1, 2013

RECITALS:

The Company wishes to obtain the services of Executive for the duration of this Agreement, and the Executive wishes to provide his services for such period, all upon the terms and conditions set forth in this Agreement.

Therefore, in consideration of the mutual promises contained herein, the parties agree as follows:


ARTICLE I
DEFINITIONS

1.1    Base Salary means regular cash compensation paid on a periodic basis exclusive of benefits, bonuses or incentive payments.

1.2    Board means the Board of Directors of the Company.
    
1.3    Cause means Executive committed any one or more of the following: (i) willful gross misconduct in the performance of any material duties under this Agreement that results in material damage to the Company, and if such misconduct is susceptible of cure, the failure to effect such cure within thirty (30) days after written notice from the Board of such misconduct is given to Executive; (ii) material use of alcohol or illegal drugs which materially interferes with the performance of Executive's duties hereunder and materially damages the Company; (iii) theft, embezzlement, fraud, misappropriation of funds, other willful acts of dishonesty or the willful and material violation of any material law, ethical rule or fiduciary duty relating to Executive's employment by the Company that materially damages the Company; (iv) a felony or any act involving moral turpitude; (v) the willful and material violation of any confidentiality or proprietary rights agreement between Executive and the Company that materially damages the Company; or (vi) the willful and material violation of Company policy or procedure, or breach of any material provision of this Agreement, that materially damages the Company, and if such violation or breach is susceptible of cure, the failure to effect such cure within thirty (30) days after written notice from the Board of such violation or breach is given to Executive.






1.4     Disability means for purposes of Section 4.5, the inability of Executive to perform his duties under this Agreement, with or without reasonable accommodation, because of physical or mental incapacity for a continuous period of five (5) months, as determined by the Board. For purposes of Section 3.3, Disability means total and permanent disability as defined in Internal Revenue Code section 22(e)(3).

1.5     FLIR shall mean FLIR Systems, Inc., and its wholly owned subsidiaries.


ARTICLE II
EMPLOYMENT, DUTIES AND TERM

2.1    Employment. Upon the terms and conditions set forth in this Agreement, the Company hereby employs Executive as President and Chief Executive Officer, and Executive accepts such employment. During the term of this Agreement, Executive will continue to work with the Board in its efforts to identify an individual to serve as Executive's successor as President and/or Chief Executive Officer.

2.2    Duties. Executive shall devote his full‑time and best efforts to the Company and to fulfilling the duties of Chief Executive Officer, which shall include such duties as may from time to time be assigned him by the Board, provided that such duties are reasonably consistent with Executive's education, experience and background. Executive shall comply with the Company's policies and procedures to the extent they are not inconsistent with this Agreement in which case the provisions of this Agreement prevail. Executive shall also be permitted to serve on outside boards, commissions and partnerships to the extent such service does not conflict with the provisions of this Agreement.

2.3    Term. The term of this Agreement shall be until January 1, 2014, unless earlier terminated in accordance with Article IV. This Agreement may be extended by mutual agreement of the parties.


ARTICLE III
COMPENSATION AND EXPENSES

3.1    Base Salary. For all services rendered under this Agreement during the term of Executive's employment, the Company shall pay Executive a minimum annual Base Salary of $875,000 for 2013.

3.2    Bonus. Executive shall be eligible for bonuses, incentive payments and other awards as determined by the Compensation Committee of the Board (the “Committee”) in accordance with the FLIR Systems, Inc. 2012 Executive Bonus Plan then in effect, as amended from time to time.

3.3    Equity Grants. Executive shall annually be eligible for equity grants of FLIR stock, based upon achievement of objectives and for such quantity as determined by the Board. All such grants, including all past and future grants, shall be subject to the terms and conditions set forth in the grant agreements between Executive and the Company associated with each such grant. In the event of any inconsistency between this Agreement and the grant agreements, the terms and conditions of the grant agreements shall take precedence.

3.4    Personal Time Off. Executive shall earn personal time off during the term of his employment in accordance with the Company's policies regarding paid time off that are applicable to the Company's executive officers.






3.5    Benefits. Executive shall be eligible to participate in all Company-sponsored health and welfare benefit plans made available to other executives of the Company for so long as he is employed by the Company.

3.6    Supplemental Employee Retirement Plan.     The Company shall make all contributions to its Supplemental Employee Retirement Plan (“SERP”) on behalf of Executive for each plan year in accordance with the SERP then in effect, as amended from time to time.

3.7    Business Expenses. The Company shall, in accordance with, and to the extent of, its policies in effect from time to time, bear all ordinary and necessary business expenses reasonably incurred by Executive in performing his duties as an employee of the Company, provided that Executive accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company.

3.8    Taxes and Withholding. All amounts payable to Executive under this Agreement shall be net of amounts required to be withheld by law.


ARTICLE IV
EARLY TERMINATION

4.1    Early Termination. This Article sets forth the terms for early termination of Executive's employment with the Company.

4.2    Termination for Cause. The Company may terminate Executive's employment for Cause immediately upon written notice from the Board to Executive. In the event of termination for Cause pursuant to this Section 4.2, Executive shall be paid Executive's Base Salary through the date of termination at the rate then in effect, and (without regard to any language that may be inconsistent in any option grant) for any option granted on or after the date of this Agreement Executive shall have the lesser of three (3) months from such termination or the remaining option term in which to exercise his vested stock options.

4.3    Termination Without Cause. Either Executive or the Company may terminate Executive's employment without Cause on no less than thirty (30) days written notice from or to the Board. In the event Executive terminates his employment without Cause pursuant to this Section 4.3, Executive shall be paid his Base Salary through the date of termination. In the event the Company terminates the Executive's employment without Cause pursuant to this Section 4.3, the Company shall pay to Executive: (i) continuation of Executive's Base Salary in effect at the time of termination for a period of eighteen (18) months or for the duration of the remaining term of the Agreement, whichever is greater, in accordance with the Company's regular payroll practices; (ii) all equity awards granted to Executive shall immediately vest; and (iii) Executive shall be entitled to an additional severance payment in an amount equal to one (1) year's Base Salary, which amount shall be paid promptly at termination.

4.4    Termination in Connection with Transition. In the event Executive's employment terminates at a time when a successor as Chief Executive Officer has been identified by Executive and the Board, the following provisions shall apply:
(a)The Executive shall be paid his Base Salary through the date of termination.
(b)The Executive shall be eligible to receive a prorated Performance Award under the Company's annual incentive plan in effect for the year in which such a termination occurs.  The amount of the Performance Award payable in any such year shall be determined by the Committee. In the event the Executive does not





agree with the amount as determined by the Committee, the dispute shall be resolved in accordance with Section 6.5, below.
The prorated Performance Award payable under this Section 4.4(b), if any, shall be paid as soon as is practicable following the Executive's termination and the determination, in the ordinary course, of the Company's performance for the relevant Performance Period; provided, however, that in all events, any such prorated Performance Award will be paid no later than March 15th of the year following the year in which the termination takes place.

Capitalized terms in this Sections 4.4(b) are defined terms in the Company's 2012 Executive Bonus Plan.

Any Performance Award made under this Section 4.4(b) is not considered Compensation as defined in the SERP.

(c)For avoidance of doubt, in the event of a termination that is contemplated by this Section 4.4, the Executive shall not, as is contemplated by Section 8 of the version of the Company Corporate Governance Principles that is in effect as of the date hereof, be required to tender a resignation from the Board.

4.5    Termination in the Event of Death or Disability. In the event Executive's employment terminates as a result of the death or Disability of Executive, the following provisions shall apply:

(a)
    In the event of Executive's death, the Company shall pay all accrued wages owing through the date of termination, plus an amount equal to one year's Base Salary. Such amount shall be paid (1) to the beneficiary or beneficiaries designated in writing to the Company by Executive, (2) in the absence of such designation, to the surviving spouse, or (3) if there is no surviving spouse, or such surviving spouse disclaims all or any part, then the full amount, or such disclaimed portion, shall be paid to the executor, administrator or other personal representative of Executive's estate. The amount shall be paid as a lump sum as soon as practicable following the Company's receipt of notice of Executive's death, but in no event later than December 31 of the year of death if Executive dies between January 1 and October 31. If Executive dies in November or December, such payment shall be made in January of the year following the year of death.

(b)
    In the event of Disability, Base Salary shall be paid through the final day of the fifth (5th) month referenced in the definition of “Disability.”

4.6    Entire Termination Payment. The compensation provided for in this Article IV shall constitute Executive's sole remedy for early termination of Executive's employment. Executive shall not be entitled to any other termination or severance payment which may be payable to Executive under any other agreement between Executive and the Company or under any policy in effect at, preceding or following the date of termination except that, in the event that Executive's employment terminates for any reason, the vested benefits accrued under tax-qualified retirement plans, if any, and the Supplemental Executive Retirement Plan (SERP) will be paid as such plans are ordinarily payable upon a termination of employment.





ARTICLE V
CONFLICT OF INTEREST

5.1    During the term of employment with the Company, Executive will engage in no activity or employment which may conflict with the interests of the Company, and will comply with the Company's policies and guidelines pertaining to business conduct and ethics.


ARTICLE VI
GENERAL PROVISIONS

6.1    Successors and Assigns. Except as otherwise provided in Article VI, this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, administrators, executors, legatees, and heirs. In that this Agreement is a personal services contract, it shall not be assigned by Executive.

6.2    Notices. All notices, requests and demands given to or made pursuant hereto shall, except as otherwise specified herein, be in writing and be delivered or mailed to any such party at its address as set forth at the beginning of this Agreement (if to Company, to the attention of the General Counsel). Either party may change its address, by notice to the other party given in the manner set forth in this Section. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the third (3rd) business day thereafter or when it is actually received, whichever is sooner.

6.3    Caption. The various headings or captions in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement.

6.4    Governing Law and Jurisdiction. The validity, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, without regard to its choice of laws provisions.

6.5    Mediation. In the case of any dispute arising under this Agreement which cannot be settled by reasonable discussion, the parties agree that, prior to commencing any proceeding, they will first engage the services of a professional mediator agreed upon by the parties and attempt in good faith to resolve the dispute through confidential nonbinding mediation. Each party shall bear one‑half (½) of the mediator's fees and expenses and shall pay all of its own attorneys' fees and expenses related to the mediation. This Section 6.5 shall not apply to any action to enforce Executive's obligations under a confidentiality or proprietary rights agreement.

6.6    Indemnification. If Executive is made a party or identified as a witness to any threatened or pending action, suit, or proceeding (whether civil, criminal, administrative or investigative) in any matter concerning or relating to Executive's service to or actions or omissions on behalf of the Company as an employee or agent thereof, then the Company shall, to the maximum extent permitted by law, and in addition to any such right granted to or available to Executive under the Company's Charter, By-Laws or standing or other resolutions or agreements, defend, indemnify and hold Executive harmless against all expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement. The Company shall, upon Executive's request, promptly advance or pay any amounts for reasonable costs, charges, or expenses (including any legal fees and expenses incurred by Executive) subject to indemnification hereunder or in furtherance of such right, subject to a later determination as to Executive's ultimate right to receive indemnification.





Executive's right to indemnification will survive until the expiration of all applicable statutes of limitations, without regard to the earlier cessation of Executive's employment or any termination or expiration of this Agreement.

6.7    Attorney Fees. In the event of any suit, action or arbitration to interpret or enforce this Agreement, the prevailing party shall be entitled to recover its attorney fees, costs and out-of-pocket expenses at trial and on appeal.

6.8    Construction. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement.

6.9    Waivers. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law.

6.10    Modification. This Agreement may not be and shall not be modified or amended except by written instrument signed by the parties hereto.

6.11    Section 409A. Any reimbursement of expenses under this Agreement (including, for example, under Section 3.7) shall occur not later than March 15 of the year following the year in which the expense was incurred. Any amount of expenses eligible for reimbursement, or in-kind benefit provided, during a calendar year shall not affect the amount of expenses eligible for reimbursement, or in-kind benefit to be provided, during any other calendar year. The right to any reimbursement or in-kind benefit pursuant to this Agreement shall not be subject to liquidation or exchange for any other benefit. In the event Executive is a “specified employee” within the meaning of Section 409A of the Internal Revenue Code at the time of the termination of Executive's employment, any payments on termination due hereunder (other than accrued salary and vacation pay) which are considered deferred compensation and are payable during the six (6) month period beginning on Executive's termination will be deferred and paid, together with interest at eight percent (8%), in a lump sum six (6) months and one (1) day after the date of termination (or, if earlier, upon Executive's death).

It is the intention of the parties that no payment or entitlement pursuant to this Agreement will give rise to any adverse tax consequences to Executive under Section 409A of the Internal Revenue Code and any guidance issued thereunder. Notwithstanding any provision of this Agreement to the contrary, this Agreement shall be interpreted, applied and (to the minimum extent necessary) amended so that it does not fail to meet, and is operated in accordance with, the requirements of that Section. Any reference in this Agreement to Section 409A of the Internal Revenue Code shall also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to that Section by the U.S. Department of the Treasury or the Internal Revenue Service.

6.12    Entire Agreement. Except as set forth in Section 3.3, this Agreement constitutes the entire agreement between the parties and supersedes all prior or contemporaneous oral or written understandings, statements, representations or promises with respect to its subject matter. This Agreement was the subject of negotiation between the parties and, therefore, the parties agree that the rule of construction requiring that the agreement be construed against the drafter shall not apply to the interpretation of this Agreement.






6.13    Status of Prior Executive Employment Agreements. The parties acknowledge that this Agreement constitutes an amendment and restatement of the prior Executive Employment Agreements between the Executive and the Company, with effective dates of November 1, 2000, January 1, 2002, January 1, 2003, January 1, 2004, January 1, 2005, January 1, 2006, January 1, 2007, January 1, 2008. January 1, 2009, January 1, 2010 and January 1, 2011, and does not effect a termination of any such prior Agreement.

6.14    Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

Signed this 5th day of November, 2012.


EARL R. LEWIS                    FLIR SYSTEMS, INC.

/s/ Earl R. Lewis                    By:    /s/ Angus L. Macdonald    
        
Title:    Chairman of the Compensation Committee                




EX-31.1 3 flir-2012930x10qexx311.htm SECTION 302 CERTIFICATION FLIR-2012.9.30-10QEx-31.1


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 5, 2012
 
    /s/ EARL R. LEWIS
 
 
    Earl R. Lewis
 
 
    President and Chief Executive Officer



EX-31.2 4 flir-2012930x10qexx312.htm SECTION 302 CERTIFICATION FLIR-2012.9.30-10QEx-31.2


Exhibit 31.2
I, Anthony L. Trunzo, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of FLIR Systems, Inc.;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control of financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date November 5, 2012
 
    /s/ ANTHONY L. TRUNZO
 
 
    Anthony L. Trunzo
 
 
    Chief Financial Officer



EX-32.1 5 flir-2012930x10qexx321.htm SECTION 906 CERTIFICATION FLIR-2012.9.30-10QEx-32.1


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, 2012 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 5, 2012
 
    /s/ EARL R. LEWIS
 
 
    Earl R. Lewis
 
 
    President and Chief Executive Officer




EX-32.1 6 flir-2012930x10qexx322.htm SECTION 906 CERTIFICATION FLIR-2012.9.30-10QEx-32.2


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, 2012 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 5, 2012
 
    /s/ ANTHONY L. TRUNZO
 
 
    Anthony L. Trunzo
 
 
    Chief Financial Officer



EX-101.INS 7 flir-20120930.xml XBRL INSTANCE DOCUMENT 0000354908 2010-10-26 2010-10-27 0000354908 2011-07-01 2011-09-30 0000354908 flir:ThreePointSevenFivePercentSeniorUnsecuredNotesDueSeptemberFirstTwentySixteenMember 2011-08-01 2011-08-31 0000354908 2011-01-01 2011-09-30 0000354908 flir:UsGovernmentMember 2011-01-01 2011-09-30 0000354908 flir:SellingGeneralAndAdministrativeExpenseMember 2011-01-01 2011-09-30 0000354908 us-gaap:CostOfSalesMember 2011-01-01 2011-09-30 0000354908 us-gaap:ResearchAndDevelopmentExpenseMember 2011-01-01 2011-09-30 0000354908 flir:TimeVestedRestrictedStockUnitMember 2011-01-01 2011-09-30 0000354908 us-gaap:EmployeeStockMember 2011-01-01 2011-09-30 0000354908 us-gaap:RestrictedStockUnitsRSUMember 2011-01-01 2011-09-30 0000354908 us-gaap:StockOptionsMember 2011-01-01 2011-09-30 0000354908 flir:DetectionMember 2011-01-01 2011-09-30 0000354908 flir:IntegratedSystemsMember 2011-01-01 2011-09-30 0000354908 flir:RaymarineMember 2011-01-01 2011-09-30 0000354908 flir:SurveillanceMember 2011-01-01 2011-09-30 0000354908 flir:ThermalVisionAndMeasurementMember 2011-01-01 2011-09-30 0000354908 us-gaap:AllOtherSegmentsMember 2011-01-01 2011-09-30 0000354908 us-gaap:IntersegmentEliminationMember 2011-01-01 2011-09-30 0000354908 country:US 2011-01-01 2011-09-30 0000354908 us-gaap:SegmentGeographicalGroupsOfCountriesGroupOneMember 2011-01-01 2011-09-30 0000354908 us-gaap:SegmentGeographicalGroupsOfCountriesGroupTwoMember 2011-01-01 2011-09-30 0000354908 flir:UsGovernmentMember 2011-07-01 2011-09-30 0000354908 flir:SellingGeneralAndAdministrativeExpenseMember 2011-07-01 2011-09-30 0000354908 us-gaap:CostOfSalesMember 2011-07-01 2011-09-30 0000354908 us-gaap:ResearchAndDevelopmentExpenseMember 2011-07-01 2011-09-30 0000354908 flir:TimeVestedRestrictedStockUnitMember 2011-07-01 2011-09-30 0000354908 us-gaap:EmployeeStockMember 2011-07-01 2011-09-30 0000354908 us-gaap:RestrictedStockUnitsRSUMember 2011-07-01 2011-09-30 0000354908 us-gaap:StockOptionsMember 2011-07-01 2011-09-30 0000354908 flir:DetectionMember 2011-07-01 2011-09-30 0000354908 flir:IntegratedSystemsMember 2011-07-01 2011-09-30 0000354908 flir:RaymarineMember 2011-07-01 2011-09-30 0000354908 flir:SurveillanceMember 2011-07-01 2011-09-30 0000354908 flir:ThermalVisionAndMeasurementMember 2011-07-01 2011-09-30 0000354908 us-gaap:AllOtherSegmentsMember 2011-07-01 2011-09-30 0000354908 us-gaap:IntersegmentEliminationMember 2011-07-01 2011-09-30 0000354908 country:US 2011-07-01 2011-09-30 0000354908 us-gaap:SegmentGeographicalGroupsOfCountriesGroupOneMember 2011-07-01 2011-09-30 0000354908 us-gaap:SegmentGeographicalGroupsOfCountriesGroupTwoMember 2011-07-01 2011-09-30 0000354908 2012-06-08 2012-06-09 0000354908 2012-07-01 2012-09-30 0000354908 2012-01-01 2012-09-30 0000354908 flir:UsGovernmentMember 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember country:BE 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember country:GB 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember country:SE 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember flir:FederalMember 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember stpr:CA 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember stpr:MA 2012-01-01 2012-09-30 0000354908 us-gaap:MaximumMember stpr:OR 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember country:BE 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember country:GB 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember country:SE 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember flir:FederalMember 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember stpr:CA 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember stpr:MA 2012-01-01 2012-09-30 0000354908 us-gaap:MinimumMember stpr:OR 2012-01-01 2012-09-30 0000354908 flir:SellingGeneralAndAdministrativeExpenseMember 2012-01-01 2012-09-30 0000354908 us-gaap:CostOfSalesMember 2012-01-01 2012-09-30 0000354908 us-gaap:ResearchAndDevelopmentExpenseMember 2012-01-01 2012-09-30 0000354908 flir:MarketBasedRestrictedStockUnitDomain 2012-01-01 2012-09-30 0000354908 flir:TimeVestedRestrictedStockUnitMember 2012-01-01 2012-09-30 0000354908 us-gaap:EmployeeStockMember 2012-01-01 2012-09-30 0000354908 us-gaap:RestrictedStockUnitsRSUMember 2012-01-01 2012-09-30 0000354908 us-gaap:StockOptionsMember 2012-01-01 2012-09-30 0000354908 flir:DetectionMember 2012-01-01 2012-09-30 0000354908 flir:IntegratedSystemsMember 2012-01-01 2012-09-30 0000354908 flir:RaymarineMember 2012-01-01 2012-09-30 0000354908 flir:SurveillanceMember 2012-01-01 2012-09-30 0000354908 flir:ThermalVisionAndMeasurementMember 2012-01-01 2012-09-30 0000354908 us-gaap:AllOtherSegmentsMember 2012-01-01 2012-09-30 0000354908 us-gaap:IntersegmentEliminationMember 2012-01-01 2012-09-30 0000354908 us-gaap:CommonStockIncludingAdditionalPaidInCapitalMember 2012-01-01 2012-09-30 0000354908 us-gaap:RetainedEarningsMember 2012-01-01 2012-09-30 0000354908 country:US 2012-01-01 2012-09-30 0000354908 us-gaap:SegmentGeographicalGroupsOfCountriesGroupOneMember 2012-01-01 2012-09-30 0000354908 us-gaap:SegmentGeographicalGroupsOfCountriesGroupTwoMember 2012-01-01 2012-09-30 0000354908 flir:UsGovernmentMember 2012-07-01 2012-09-30 0000354908