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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________ 
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year endedDecember 31, 2020
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: 000-21918
_________________________________________________________________
FLIR Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware93-0708501
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
27700 SW Parkway Avenue,97070
Wilsonville,Oregon
(Address of principal executive offices)(Zip code)
Registrant’s telephone number, including area code: (503498-3547
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbols(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueFLIRNASDAQGlobal Select Market
Securities registered pursuant to Section 12(g) of the Act:    None
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes    No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  No  
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  No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      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, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filerSmaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes      No  
As of June 30, 2020, the aggregate market value of the shares of voting and non-voting stock of the registrant held by non-affiliates was $5,279,054,662.
As of February 19, 2021, there were 131,238,445 shares of the registrant’s common stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.



FLIR Systems, Inc.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
 
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16




Forward-Looking Statements

This Annual Report on Form 10-K (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on management’s current expectations, estimates, projections and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in “Risk Factors” section in Part I, Item 1A of this Report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry, economic and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and the Company does 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 the Company updates or corrects one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect to other forward-looking statements.

PART I
ITEM 1.    BUSINESS
RECENT DEVELOPMENTS
On January 4, 2021, Teledyne Technologies Inc. (“Teledyne”) and the Company announced that the companies have entered into a definitive merger agreement (the “Merger Agreement”) among Teledyne, FLIR, Firework Merger Sub I, Inc. (“Merger Sub I”), and Firework Merger Sub II, LLC (“Merger Sub II”) under which Teledyne will acquire FLIR in a cash and stock transaction valued at approximately $8.0 billion. Under the terms of the Merger Agreement, FLIR stockholders will receive $28.00 per share in cash and 0.0718 shares of Teledyne common stock for each FLIR share, which implies a total purchase price of approximately $56.00 per FLIR share based on Teledyne’s 5-day volume weighted average price as of December 31, 2020.
The transaction is expected to close in the middle of 2021 subject to the receipt of required regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, approvals of Teledyne and FLIR stockholders and other customary closing conditions.
GENERAL
FLIR is a world leader in developing technologies that enhance perception and awareness. We design, develop, market, and distribute solutions that detect people, objects and substances that may not be perceived by human senses and improve the way people interact with the world around them. We bring these innovative technologies into daily life in ways that help save lives and livelihoods. FLIR technologies include thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and advanced threat-detection solutions.
Founded in 1978, FLIR is a pioneer in advanced sensors and integrated sensor systems that enable the gathering, measurement, and analysis of critical information through a wide variety of applications in government, industrial and commercial markets worldwide. We offer the broadest range of infrared, also known as thermal, imaging solutions in the world, with products that range from professional-use thermal camera smartphone accessories to highly advanced aircraft-mounted imaging systems for military and search and rescue applications, with products in between serving a multitude of markets, customers, and applications. As the cost of thermal imaging technology has decreased, our opportunities to increase the adoption of thermal technology and create new markets for the technology have expanded. In order to better serve the customers in these markets, we have augmented our thermal product offerings with complementary sensing technologies, such as visible imaging, radar, laser, sonar, chemical sensing, and environmental sensing technologies.
1


Our goal is both to enable our customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for our shareholders. We create value for our customers by improving personal and public safety and security, providing advanced intelligence, surveillance, reconnaissance, and tactical defense capabilities, facilitating air, ground, and maritime-based situational awareness, detecting electrical, mechanical and building envelope problems, displaying process irregularities, detecting volatile organic gas emissions, and enhancing advanced driver-assistance systems ("ADAS") and autonomous driving solutions, as well as a variety of other uses of thermal and other sensing technologies.
Our business model and range of solutions allow FLIR to sell products to various end markets, including industrial, original equipment manufacturing ("OEM"), military, homeland security, enterprise, infrastructure, and environmental. We sell off-the-shelf products and customized solutions in configurations to suit specific customer requirements in an efficient, timely, and affordable manner, and support those customers with training and ongoing support and services. Centered on the design of products for low-cost manufacturing and high-volume distribution, our commercial operating model has been developed over time and provides us with a unique ability to adapt to market changes and meet our customers’ needs. Because we aggregate product demand and production across these markets, we can generate significant volume; this volume drives down cost, which then increases demand, enabling a virtuous cycle of lower prices and higher unit volumes. Our manufacturing and supply processes are vertically integrated, minimizing lead times, facilitating prompt delivery, controlling costs and ensuring that components satisfy our high quality standards.
We have evolved our product suite over time, expanding our reach into markets that are adjacent to thermal imaging, with the intent of expanding the adoption and channel development for thermal imaging technology. Examples of this evolution include our entrance into the visible-image security and surveillance market, the industrial machine vision market, and the traffic monitoring and signal control market. We intend to maintain this evolution as we continue to lower the cost of advanced sensing products. As the cost to own thermal technology continues to decline, the application of these sensors is expanding beyond imaging to areas such as data acquisition where thermal sensors can provide important data that can be used for a wide variety of applications.
We believe that the FLIR brand is known for quality, innovation and trust and that customers are drawn to us for products and solutions that are effective, innovative, easy to use, and sold at competitive market prices. We intend to: continue to reduce the cost of thermal technology through higher volumes and new product and process improvements; innovate new applications and form-factors for our technology based on customer feedback; improve the customer experience through improved user-interface, ease-of-use, and software; increase customer loyalty and trust by providing world-class product warranties and support; and improve operational processes to realign resources to be nimble in response to customers’ needs and market trends.
Industrial Technologies Segment
The Industrial Technologies segment develops and manufactures thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The Industrial Technologies segment also develops and manufactures devices that image, measure, and assess thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications, imaging payloads for Unmanned Aerial Systems ("UAS"), ADAS, autonomous emergency braking, machine vision cameras, people counting and tracking, and thermal imaging solutions for use by consumers in the smartphone and mobile devices markets. Products include thermal imaging cameras, gas detection cameras, firefighting cameras, process automation cameras, and environmental test and measurement devices. These tools are used by professionals in electrical and mechanical, building envelope, manufacturing plant facility maintenance, petrochemical, utilities, heating, ventilation, air conditioning, and refrigeration ("HVAC/R"), firefighting, safety and health, and a variety of other sectors. In addition, the Industrial Technologies segment also develops and manufactures a wide variety of fixed-mounted visible and thermal imaging cameras and related software for perimeter security in critical infrastructure, enterprise, and smart city vertical markets, electronics and imaging instruments for the recreational and commercial maritime market, automatic incident detection sensors and related data analytics for traffic monitoring and control, and handheld thermal imaging systems for use in a variety of first responder and recreational applications. Products include thermal and visible-spectrum security cameras, and related software and accessories, a full suite of networked marine electronic systems including multi-function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and communications equipment for boats of all sizes, traffic cameras, sensors and associated traffic management software, and hand-held thermal imagers. Revenue from the Industrial Technologies segment was $1,156.1 million in 2020, which represented approximately 60.1 percent of consolidated revenue.

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Defense Technologies Segment
The Defense Technologies segment provides enhanced sensing and decision support 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 Defense Technologies segment also develops and manufactures sensors, instruments and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE") threats for military force protection, homeland security, and commercial applications. The Defense Technologies segment, through its 2019 acquisitions of Aeryon Labs and Endeavor Robotics, as well as its operations in Norway, produces advanced multi-mission unmanned air and unmanned ground systems. The Defense Technologies segment has strengths in understanding the nature of sophisticated security threats, the technological potential of advanced detection instruments and systems, and the complex procurement processes of United States and many international government customers. These products and solutions are sold off-the-shelf or can be customized for specific applications and range in price from under $10,000 for certain hand-held and weapon-mounted systems to over $1 million for our most advanced integrated sensing solutions platform. Revenue from the Defense Technologies segment was $767.6 million in 2020, which represented approximately 39.9 percent of consolidated revenue.
For additional information concerning the Company’s operating segments, including revenues from external customers, segment operating income and operating segment assets, see Note 19, "Operating Segments and Related Information," to the Consolidated Financial Statements in Item 8.
Our headquarters are located at 27700 SW Parkway Avenue, Wilsonville, Oregon, 97070, and the telephone number at this location is (503) 498-3547. Information about the Company is available on our website at www.flir.com.
TECHNOLOGY AND CAPABILITIES
Infrared is a portion of the electromagnetic spectrum that is adjacent to the visible spectrum but is invisible to the human eye due to its longer wavelengths. Unlike visible light, infrared radiation (or heat) is emitted directly by all objects above absolute zero in temperature. Thermal imaging systems detect this infrared radiation and convert it into an electronic signal, which is then processed into a video signal and displayed on a video screen. Thermal sensors provide several benefits over ubiquitous visible light-based sensing technologies, including the ability to see in complete darkness, measure temperature remotely and without touching the surface of the object, image through obscurants such as smoke and fog, detect and discriminate living beings in an efficient and reliable way, see over long distances with minimal atmospheric interference, and image many types of otherwise invisible gases. For these reasons we feel the potential of our core technology to grow in prevalence and importance is significant, particularly as the cost to produce the technology continues to decline.
Thermal imaging systems are different than other types of “low light” night vision systems, such as visible light intensification systems used in green or gray sighted night vision goggles, because thermal imaging systems are not adversely affected by the presence of visible light, so they can be used day or night and are not susceptible to rapid changes in visible light levels. Thermal imaging systems are particularly well-suited for security applications involving the early detection of human activity due to the typically large temperature difference found between a human and the surrounding background. Since infrared systems are detecting emitted infrared radiation, they are passive - and thus more covert than certain “active” or “illuminated” infrared systems. Additionally, thermal imaging systems have the ability to measure absolute temperatures remotely, a critical feature for a variety of commercial, industrial, and scientific applications.
An infrared detector, which collects or absorbs infrared radiation and converts it into an electronic signal, is the primary component of thermal imaging systems. The two types of infrared detectors we manufacture and use in our systems are often referred to as “cooled” and “uncooled” detectors. Cooled detectors utilize a mechanical sterling cycle micro-cooler to reduce the operating temperature of the infrared sensor to approximately -200°C. These detectors offer very high sensitivity and spatial resolution for long-range applications or those applications requiring high measurement precision. Cooled detectors, while more sensitive and thus able to see farther, result in a product that is more expensive, heavier, more complex, and uses more power than those using uncooled detectors. Uncooled detectors operate at room temperature and do not require a micro-cooler, resulting in products that are lighter, use less power and are less expensive to produce than those using cooled detectors. The cost of both types of detectors is declining, and we expect to continue reducing costs as volumes rise and the technology advances.
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We have expertise in the calibration and repair of our products and maintain service facilities at many locations worldwide. Each of our service facilities has the capability to perform the complex calibrations required to service thermal imaging systems. We also maintain field service capabilities under the direction of our independent representatives or distributors in certain locations outside the United States.
As our customers have sought, and will continue to seek, new ways to address their needs and requirements in the most cost-effective and efficient manner, we have integrated thermal imaging with complementary technologies such as visible imaging, lasers, radar, and more. The following capabilities and disciplines are integrated into our business and processes:
System Design and Integration

We have developed extensive competencies in the design and integration of numerous capabilities and payloads into integrated systems or sub-systems. Competencies such as stabilization, packaging and systems integration allow us to effectively combine a wide variety of technologies and payloads to suit our customers’ needs. We strive to minimize the size, weight, power consumption, and cost in each of our product designs.
Thermal Radiometry

Our ability to produce thermal imaging systems that can accurately measure temperature remotely is critical in many of our Industrial Technologies segment markets. We have demonstrated know-how in designing and producing systems that can measure temperature to within very precise tolerances while maintaining accuracy and stability over time and over a wide range of ambient temperatures. We believe our skills in this area, known as thermal radiometry, offer an important competitive advantage over many of our competitors.
Mechanical Engineering

The design and production of thermal imaging systems involves highly sophisticated mechanical engineering techniques, particularly in the design and assembly of the supporting structures for system components such as detector arrays, micro-coolers, and optics. We also have expertise in designing stabilized assemblies used in our gimbal-mounted products utilizing precise electro-mechanical control, gyroscopes, electronic stabilization, and specialized optical control mechanisms. Also, through our 2016 acquisition of Prox Dynamics, we develop and manufacture nano-class UAS that are specifically designed to be man-portable and highly covert surveillance and reconnaissance sensors.
Infrared Detector Design Manufacturing

We design and manufacture both cooled and uncooled infrared detector arrays, in high volumes and at low costs. We believe our uncooled vanadium oxide microbolometers and cooled detectors using indium antimonide and indium gallium arsenide are among the highest performing infrared detectors of their type available in the world. We believe the internal design and manufacturing of these detectors provides significant cost and engineering advantages compared with the use of external sources.
Integrated Circuits and Electronic Design

We have significant electronic design capabilities across several specialized areas, including readout-integrated circuit design, signal processing, image processing, and electronics integration. Our design expertise lies in the areas of reliability, low power consumption, and extreme environmental survivability.
Software Development

Software is an increasingly important aspect of our overall engineering and design activity. We offer networking capabilities, video analytics, command and control, and advanced firmware in our camera and other sensing systems. Many of our products are supported by a software eco-system that includes dedicated desktop and mobile platform applications. Our products are typically developed with broad compatibility with common industry standards and protocols.
Optical Design, Fabrication and Coating

We design and manufacture sophisticated infrared optics using materials such as silicon, germanium, and zinc selenide that are required to produce a thermal imaging system. This capability allows us to rapidly develop optics optimized for use with our cameras and avoid costs and delays associated with reliance on third-party optics suppliers.
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We also have the capability to produce silicon wafer-level micro-optics at high volumes and the ability to apply custom multi-layer, vapor-deposited coatings to improve the transmission of the lens materials that are used in infrared systems.
Micro-Coolers

We manufacture some of the industry’s smallest, lightest, and lowest power micro-coolers for use in cooling infrared detectors. Our coolers are especially effective in hand-held applications, where light weight and long battery life are essential.
Lasers and Laser Components

Many of our more sophisticated systems are increasingly being offered with various types of laser payloads, including pointers, illuminators, rangefinders, and designators. We design and manufacture purpose-built laser rangefinders and designators for inclusion in some of our gimbaled multi-sensor systems. We also manufacture certain laser-related materials and components for external customers.
Tactical Platforms

We develop and manufacture comprehensive and integrated solutions for surveillance, assessment, and response. These platform solutions draw from our Defense Technologies segment products, as well as products sourced outside of the Company. These unmanned and manned networkable mobile and vehicle mounted systems can be deployed in nearly any environment and have provided security at borders, at theme parks, for police and military forces, at national monuments, and at high-profile events, both in the United States and internationally.
RESEARCH & DEVELOPMENT
Our success has been, and will continue to be, substantially affected by our ability to innovate new products and technologies that both augment our existing offerings and create new avenues for growth. We strive to differentiate ourselves from our competition with our research and development ("R&D") capabilities. We intend to continue to have significant internal R&D expenses in the future to provide a continuing flow of innovative and high-quality products to maintain and enhance our competitive position in each of our business segments. In addition to these internally funded activities, we engage in R&D projects that are reimbursed by government agencies or prime contractors pursuant to development contracts we undertake.
COMPETITIVE STRENGTHS
With our decades of experience in developing and marketing infrared sensor products, we have built several competitive advantages that are core to our success. We look to leverage these strengths to continue to increase the availability of and uses for advanced sensing technologies and to grow our revenue and profitability:
Commercial Operating Model
A key differentiator of our business model is our commercial approach to technology investment and product strategy. This is characterized by our commercial approach to R&D as described above, as well as our focus on global deployment, innovative marketing communications, superior customer service, rapid product development cycles, innovation of new technologies and unique products, ability to design for large-volume and low-cost production, and control of multiple production inputs through our vertically integrated operations.
Vertically Integrated Manufacturing and Supply
We have built a vertically integrated manufacturing operation that provides control over several key component technologies. Through acquisitions and internal development, we have created an internal supply network that allows for optimized manufacturing throughput, rapid response to changes in customer demand, increased product design flexibility, enhanced product reliability, and independence in designing key components. Further, this integrated approach enables us to lower costs and improve the functionality of critical components so that they work together most efficiently within our products. In comparison to competitors that do not possess a similar level of vertical integration, our model helps us deliver products in a more timely and cost-effective manner as we rely less on third-party suppliers for critical components.
Industry-Leading Market Position

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We are a leading developer of advanced, proprietary sensor systems that are highly reliable, accurate, and effective. We strive to develop products that lead in the areas of Size, Weight, Power and Cost. We believe we have achieved significant penetration into many markets, including the government, industrial, commercial, and consumer markets, by pioneering new applications and being a "first-mover" in these markets. Having a leading position in the markets we serve allows us to secure new and continuing business while also achieving manufacturing economies of scale. Increased unit volumes work to reduce costs throughout our business, which allows us to create new products that feature lower price points. This creates a virtuous cycle whereby we are able to make advanced sensor technologies more affordable to a wide array of end-users while reducing costs. This established presence across multiple markets enhances our competitive position.
Broad Product Lines
We offer a wide array of sensor products, including infrared imaging cameras and systems, detector cores, visible-light cameras, CBRNE threat detectors, test and measurement instruments, radars, maritime electronics, and related products and solutions. Our customers can buy these products off the shelf or request a customized sensor solution. This ability to serve a variety of customers with disparate needs and specifications allows us to facilitate the use of advanced sensors in a broad range of applications. We have the ability to rapidly conceive, design, prototype, and manufacture new products to meet the evolving landscapes of the markets we serve. Our development process incorporates significant customer satisfaction and field-use data and results in the rapid creation of new features that address the changing needs of the end-user. We believe this continual evolution of our products will positively contribute to customer satisfaction and have a long term impact through a high level of customer retention, revenue and income growth.
Internally Funded Innovation
We have expertise in developing sensing instruments that are both highly advanced from a technical standpoint and commercially viable and salable across multiple types of customers. Since the beginning of 2016, we have invested $907.0 million in internally funded research and development of new technologies and products. Utilizing our own funds for R&D provides us with full ownership of the development process and the end product, and also focuses our R&D teams on projects that will result in products that are commercially viable, yield the highest expected financial return and can be marketed to multiple markets for multiple applications.
Diverse Customer Base
We sell our products to thousands of commercial and government customers for use in a variety of applications and markets worldwide. The buyers and users of our products include United States and foreign governments and government agencies, aerospace and defense contractors, electricians and tradesmen, commercial seaports, first responders, critical infrastructure operators, electrical generation and gas processing plants, heating and air conditioning technicians, building inspectors, food processors, automobile parts manufacturers, commercial and residential security providers, research and lab technicians, manufacturing companies, recreational boaters, and general commercial consumers. We believe that the diversity of our customers, end-user markets, and applications helps to mitigate fluctuations in demand from any particular customer or market. The diversity of our customers and of the end-users of sensor technologies provides us with multiple long-term growth opportunities.
Global Distribution Capabilities
Our core infrared imaging products have expanded from high-end products sold primarily to military customers and niche research firms to everyday tools providing valuable information-gathering and assessment capabilities for a multitude of industrial, government, and commercial entities and consumers. With the widening adoption of these technologies, distribution has become a key advantage to our business globally. We believe our sales and distribution organization is among the largest in the industry and effectively covers the world with a combination of direct sales, third-party representatives and distributors, independent dealers, retail outlets, application engineers, and service and training centers. Internationally, we have invested heavily to build a strong presence to sell and service our products, a key advantage in penetrating certain markets, such as foreign governments. Our sales representatives, including third-party distributors, undergo a comprehensive training program on each product’s technical specifications, functions, and applications. We also routinely update our training programs to incorporate technological and competitive shifts and changes. We sell in many distinct markets and have established specific sales channels for each market. We intend to continue to expand this distribution platform through internal growth and external acquisitions.
Investment in Research and Development and Intellectual Property Platform
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We have invested heavily in R&D, resulting in industry-leading innovations and a robust and growing patent portfolio that is focused on our core technologies as well as many of our emerging technologies and businesses. To complement our patent portfolio, we continue to strengthen our key brands by unifying critical design features across product lines, enhancing our worldwide trademark coverage, refining our domain portfolio, and growing brand awareness through social media outlets.
Consistent Generation and Distribution of Cash Flows
Our earnings, combined with our modest capital expenditure requirements, result in the generation of significant cash flows provided by operating activities. In the years ended December 31, 2020 and 2019, our net cash provided by operating activities was $312.4 million and $370.4 million, respectively. Our operating cash flows have exceeded our net earnings in each of the last five years. This ability to consistently convert revenues into net operating cash provides us significant flexibility in making growth and capital deployment decisions, such as consummating strategic acquisitions, undertaking new product and technology development initiatives, expanding our distribution and marketing presence, making capital investments, paying dividends, and repurchasing shares of our common stock in the open market. Since 2016, we have utilized approximately $1,074.5 million of cash for acquisitions and strategic minority investments, $601.1 million for share repurchases, $417.9 million for dividends, and $210.8 million for capital expenditures. Since we began paying dividends in 2011, we have annually increased our dividend at a compound annual growth rate of approximately 12 percent.
STRATEGY
Our task and purpose are to exceed our commitments with integrity and to innovate the World’s Sixth Sense to save lives and livelihoods. Our vision is to do this while revolutionizing human perception. Our mission is to innovate technologies that increase awareness and insight so that professionals can make more informed decisions that save lives and livelihoods. To achieve these objectives, we centered our strategy on three key priorities: Fuel, Feed, Focus, with The FLIR Method as the foundation supporting these priorities.
Fuel
We strive to fuel our business by capturing significant near-term opportunities that help us gain scale and secure leading market positions in attractive markets. Success in these initiatives will give us the ability to make longer-term investments. Examples include winning key business opportunities, which we identify as franchise programs, in each of our operating segments over the next 12 to 36 months. We are strategically dedicating resources and working aggressively to capture these opportunities.
Feed
We seek to feed our business by investing in technologies and market opportunities that are part of our longer-term strategic roadmap. Examples include investments in differentiated technologies and moving to consolidate stronger positions in attractive markets. These efforts will enable longer-term, 3- to 5-year growth trajectories. In many cases, these technologies or markets are nascent or underdeveloped and it will take time, commitment, and investment to fully realize their potential. Our intent is to move from making the world’s best sensors, to sensing, and ultimately to intelligent sensing solutions to help our customers make decisions that save lives and livelihoods.
Focus
We intend to focus our business on areas of strength where we can maximize competitiveness across the Company. Throughout the Company, there are opportunities to focus or refocus parts of the business to fuel and feed other parts. Examples include, but are not limited to, divesting non-core assets, exiting unattractive end markets, and focusing capital structure for inorganic growth. We aim to continuously capture efficiencies across the Company in order to leverage available resources to maximize portfolio return.
The FLIR Method
The FLIR Method ("TFM") forms the foundation of our strategic priorities to fuel, feed, and focus the business. TFM consists of six distinct elements: Talent Development, Lean Management, One FLIR, Acquisition and Integration Discipline, Continuous Improvement, and Customer-Driven Innovation. It is the method in which we will mature into a world-class operating company, and is intended to empower a creative, curious and constantly learning organization. By continuously improving our global operations through TFM, we aim to self-fund many of the investments required over the strategic horizon and maximize the efficiency of our human capital.
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BUSINESS SEGMENTS
Industrial Technologies Segment
The Industrial Technologies segment develops and manufactures thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops, manufactures, and services offerings that image, measure, and analyze thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications, imaging payloads for UAS, and machine vision cameras. Additionally, the segment develops, manufactures, and services fixed-mounted visible and thermal imaging cameras and related analytics software for perimeter security, critical infrastructure, recreational and commercial maritime, traffic monitoring and control, and elevated skin temperature ("EST") solutions. Offerings include thermal imaging cameras, analytics software, gas detection cameras, firefighting cameras, process automation cameras, environmental test and measurement devices, security cameras, marine electronics, and traffic cameras.
The Industrial Technologies segment offers a broad range of cooled and uncooled thermal products, with thermal cameras for laboratory and research and development applications; optical gas imagers for oil, power, and chemical production applications; highly ruggedized cameras for firefighters that are used for fire attack, overhaul, and search-and-rescue operations; fixed and pan-tilt thermal cameras for factory line automation and plant safety monitoring; and multiple lines of professional and mid-level thermal cameras for building analysis, predictive maintenance, and electrical systems analysis.
The Industrial Technologies segment provides a comprehensive line of rugged and reliable test and measurement instruments, such as moisture meters, electrical test clamp meters, power analyzers, and multi-functional meters. These measurement instruments are used to evaluate electrical and environmental factors, including voltage, sound, light, heat index, and water quality. Leveraging our low-cost thermal sensors, we augment and enhance these familiar tools used in many industrial and commercial trades with Infrared Guided Measurement ("IGM"). IGM allows users to more efficiently address issues by first discovering via a thermal image the precise area of over-heating, moisture damage, or air ingress, allowing them to then apply the relevant sensor, such as voltage, current, spot temperature, or moisture probe, at the point of concern.
The Industrial Technologies segment also offers thermal camera cores, an integrated, plug-and-play camera system that includes the infrared or visible spectrum sensor as well as the related image processing electronics and an optical lens. We offer cooled and uncooled thermal cores that are based on long wave infrared, mid-wave infrared, and short wave infrared sensors. Our visible spectrum camera cores are utilized primarily for machine vision and people counting applications and are based on complementary metal-oxide semiconductors and charged-coupled device sensors that are produced by third parties. We also sell to third parties thermal sensors and readout integrated circuit ("ROIC") products, which are used to convert pixel-level information into digital information, essential in the design of infrared, visible, ultra violet, and X-Ray sensors.
Furthermore, the Industrial Technologies segment provides security solutions for a multitude of applications, including enterprise and infrastructure security. It also develops and manufactures a broad range of maritime thermal imaging and electronic products for recreational and commercial customers globally, develops and manufactures software-enabled automotive and pedestrian monitoring and control systems, and develops and sells hand-held and mounted scopes for law enforcement, first responders, and consumers in the outdoors market.
Security solutions include thermal and visible-spectrum cameras, digital and networked video recorders, and related video management systems software and video analytics software accessories that enable the efficient and effective safeguarding of assets at all hours of the day and night and during adverse weather conditions.
Maritime products for recreational and commercial customers include a full suite of electronic systems including multi-function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and communications equipment for boats of all sizes. These products are utilized for general navigation, sport fishing, cruising, and sailing. Our primary product offering is multifunction navigation displays ("MFDs"). Our Axiom MFDs are designed to provide boaters visual navigation data from multiple sensors, including GPS, autopilot, sonar, and radar. We have several lines of MFD products, serving leisure and fishing boats of all sizes, in saltwater or freshwater environments. Our Element product line addresses the MFD needs of the small-boat recreational fishermen, including kayakers and freshwater bass anglers, while our larger MFDs serve large saltwater boat end-users. Through our Lighthouse operating system, we also integrate our MFDs to use and control thermal and visual cameras, onboard entertainment products, engine instruments, and data services like satellite weather. Recognizing the importance of mobile devices to boaters, we offer Wi-Fi enabled MFDs along with mobile apps that give boaters access to the MFD and sensors from anywhere on board the vessel.
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Our marine instrument products are dedicated displays and sensors for monitoring depth, boat speed, and wind information. Our sonar solutions are engineered to serve the needs of both the inland and saltwater fishing customers.
These sonars serve as fishermen’s eyes below the water so they can detect fish, locate underwater structure, and identify the habitat of the fish they are trying to catch. We also offer autopilot solutions that provide precision steering control for open water passages. To keep boaters connected, we offer several communication products, such as VHF marine radios for ship-to-ship and ship-to-shore communications, and our automatic identification system solutions enable the wireless exchange of navigation status between vessels and vessel-monitoring centers. Our maritime thermal camera solutions are designed to enhance a boater’s overall situational awareness in limited visibility and are used primarily to identify other vessels, navigation aids, and hazards. Thermal maritime cameras are also utilized for search and rescue and local law enforcement surveillance operations.
We market our maritime products under both the FLIR and Raymarine brands. FLIR-branded maritime products consist of thermal cameras designed for recreational, commercial, and first-responder vessels. The Raymarine line of marine electronics is designed and marketed primarily to recreational boaters and light-commercial customers.
Our vertically integrated manufacturing capability, built over many years, enables us to provide thermal camera core and component products to other FLIR businesses at low cost, as well as sell cores and components to third party customers. Our cores and components are designed for easy and efficient integration into higher levels of product assembly. Third party OEMs integrate these cores and components into their own branded products. We operate under this model to aggregate the largest amount of volume possible, which lowers our total cost to produce camera cores and components.
The Industrial Technologies segment also houses our emerging markets businesses, which are businesses that are identified as high-potential but do not yet have the scale to represent their own segment. Included in our emerging markets business is our mobile products business, makers of thermal imaging accessories for the smartphone market, and our commercial UAS business, which provides thermal cameras and cores for use on, or integration into, UAS systems, which are often referred to as “drones.”
Markets
OEM
We supply cooled and uncooled thermal and visible spectrum camera cores, sensors, and ROICs on an OEM basis to an array of manufacturers of finished products in both the military and commercial spaces. These customers require a product at a lower level of integration than a fully developed thermal imaging system. Examples of major OEM applications in the Industrial Technologies segment are military defense, automotive advanced driver assistance systems, industrial automation systems, UAS, firefighting, smartphones, medical devices, digital X-ray, and security.
Building and HVAC/R
Thermal imaging cameras are increasingly used by building and home inspectors, roofing specialists, plumbers, general contractors, and real estate firms to evaluate and measure the integrity of buildings by quickly revealing structural problems, such as air leaks and missing insulation, to help ensure efficient use of energy and other resources. HVAC/R and mechanical contractors use thermal cameras and test and measurement equipment to ensure comfort in residences and workplaces by discovering, monitoring, and documenting airflow, leaks, and temperatures in ductwork and other forms of heating/cooling distribution systems. Hand-held test and measurement tools are used to measure airflow, humidity, carbon monoxide levels, light, sound, and other environmental factors.
Electrical
Electricians and mechanical technicians utilize thermal cameras and test and measurement equipment to quickly conduct electrical diagnostics, such as identifying circuit overloads, finding loose wire connections, and measuring currents, all without having to touch dangerous components. From overheating electrical circuits to corroded connections, thermal cameras and test meters provide the diagnostic functions needed to verify correct installations, quickly trace the source of problems, and enable efficient electrical systems. Hand-held test and measurement tools are used to measure currents, voltage, resistance, continuity, and other electrical parameters.
Predictive Maintenance
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Thermal imaging systems are used for monitoring the condition of mechanical and electrical equipment. Such monitoring enables factory and plant maintenance technicians to quickly reveal equipment faults, manifested as hot or cold spots, so they can be repaired before they fail. This increases equipment productivity and avoids catastrophic failures or major damage, which reduces operating expenses by lowering repair costs and reducing downtime. Improved functionality of image analysis software, smaller size and weight, and simplicity of system operation are critical factors for this well-established market segment. Hand-held test and measurement tools are used to measure airflow, humidity, carbon monoxide levels, sound, vibration and other environmental factors.
Machine Vision
Advanced visible imaging cameras and solutions provide imaging-based automatic inspection and analysis for such applications as industrial automation systems, medical diagnostic equipment, people counting systems, intelligent traffic systems, military and defense products, security monitoring, vehicle guidance, and advanced mapping systems. These systems and solutions improve the efficiency, quality, analysis, and safety of a wide range of processes and products.
Oil and Gas Production
Thermal imaging cameras can visualize and pinpoint certain gas leaks. In industrial, utility, and oil and gas refinery settings, optical gas imagers visually reveal plumes of gases such as SF6 (Sulfur Hexafluoride), hydrocarbons, carbon monoxide and carbon dioxide from a safe distance. Optical gas imaging cameras can continuously scan installations in remote areas or in zones that are difficult to access. Continuous monitoring allows the user to be informed when a dangerous or costly gas leak appears. Typical examples are monitoring pipelines, petrochemical industry and offshore operations.
Research and Science
High-end thermal imaging systems provide the unique ability to detect very small differences in temperature. This capability is useful in industrial R&D, where developers study, see, and quantify the heat dissipation, stress tolerance, and thermal characteristics of their materials, components, and products. At colleges and universities, instructors use thermal imagery to help students visualize the theories of heat transfer and thermodynamics, improving student comprehension of key concepts, and for both fundamental and applied research. In the defense sector, cooled thermal imaging cameras are used in the development of firearms, ammunition, guided missiles, and aircraft.
Firefighting
Thermal imaging is a well-known technology in the firefighting market, with firefighters and first responders worldwide utilizing thermal imaging cameras to protect their own lives and saving the lives of others. Thermal imaging technology allows first responders to assess conditions of a space prior to and after entry by providing them the ability to see through most forms of smoke. This also allows them to search for people and animals and identify fire hot spots in burning buildings or smoke filled environments. Providing the ability to measure temperatures in a non-contact mode from a safe distance helps firefighters to protect themselves against dangerous phenomena like roll-overs and flash-overs.
Manufacturing Process Control
Temperature consistency is critical to the quality of many manufactured components, materials, and products, including metals, plastics, paper, and glass. Thermal cameras, both fixed and mobile, help factories ensure product quality and identify other defects in both products and the manufacturing process itself through the continuous monitoring of the production line, resulting in higher output and nearly perfect quality control. Other users of thermal cameras in the manufacturing sectors include worker safety and fire prevention, analysis of welding and fastening effectiveness, food inspection, packaging quality, and electronic and mechanical component manufacturing, ranging in size from small hybrid integrated circuits to jet engines.
Mobile
Leveraging our ability to produce thermal sensors at a low cost and with low size, weight, and power consumption, we created a line of personal thermal imaging cameras that attach to smartphones. The mass adoption of smartphones has driven significant growth in the development of tools that extend the utility of these devices, and our FLIR ONE® products do this by empowering consumers with thermal imaging on their smartphones. We believe that the potential of thermal imaging as a tool for consumers provides this segment with an emerging opportunity for growth.
Recreational Boating
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The recreational boating market consists of fresh and saltwater fishing, sport/cruising, and sailing. Our core MFD products are engineered to address the needs of all three markets. We also develop products specifically for strategic markets and customers, such as Element sonars for freshwater fishermen, wind instruments for sailors, and vessel automation for boat builders.
Utilities
Power plants, electrical substations, and water facilities utilize visible spectrum and thermal imaging cameras to provide continuous surveillance day or night. Our cameras are integrated with video analytics to provide automated alarm notification. At electrical substations, our thermal products provide protection against materials theft and acts of sabotage, and provide notifications when connections switchgear and transformers reach dangerous operating temperatures.
Nuclear Power
The United States Nuclear Regulatory Commission requires nuclear facilities to provide continuous 24-hour surveillance, observation, and monitoring of their perimeter and control areas. Our thermal security cameras are well-suited for this requirement, providing true 24/7 monitoring capability even during most adverse weather conditions.
Petrochemical
Our thermal security cameras and advanced analytic capabilities help petrochemical facilities meet the United States Department of Homeland Security's Chemical Facility Anti-Terrorism Standards. Thermal security cameras are highly effective in meeting the standards' requirements for monitoring a facility's perimeter, securing applicable assets, and solidifying a deter, detect, and delay strategy.
Ports and Borders
Our long range thermal and visible security cameras as well as ground radar systems provide "beyond the fence" situational awareness and advanced warning capabilities. Airport and border authorities around the world utilize our thermal security cameras to help keep people and equipment safe, operating day and night, in nearly all weather or lighting conditions.
Commercial and Residential
FLIR’s full-spectrum security solutions offer a comprehensive line of thermal and visible cameras to protect commercial facilities. Our products are also used in a wide range of home applications that may include the use of thermal, visible or image-intensified cameras as well as network video recorders and other peripheral equipment.
Commercial and First Responder Maritime
The commercial and first responder maritime market consists of light commercial, heavy commercial, and light defense segments. We address these commercial markets with both our thermal maritime cameras and our marine electronics systems.
Intelligent Transportation
Visible and thermal imaging helps transportation departments all over the world monitor vehicles and pedestrians in urban environments, detect incidents on highways and in tunnels, collect and visualize traffic data, control traffic signals, and ensure safety on public roads and railways. These systems are able to detect vehicles and use the information to control traffic lights to improve traffic flow. While road-embedded magnetic loops have historically been the primary technology for analyzing intersections and roadways, visible and thermal imaging are increasingly being used for this application. Thermal imaging technology has proven to be highly effective at detecting the presence of vehicles as it is not impeded by darkness, colors, shadows, direct sunlight, light from oncoming traffic, or weather effects. We believe that the value of these solutions in terms of improved traffic flow, fuel conservation, and public safety is significant.
Personal Vision
FLIR’s premium lightweight personal vision thermal and image-intensified products, such as hand-held monoculars and mounted scopes provide professionals and consumers the ability to see during day and night and stay safe in various settings. They are used by law enforcement for surveillance and tactical operations and by outdoorsmen to track animals and to navigate during deteriorated weather conditions. We believe the personal vision systems market is very large and becoming increasingly accessible as we reduce the price of advanced thermal imaging products.
Customers
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Industrial Technologies segment customers are found around the world in commercial, government, trades, educational, research, agricultural, and non-professional/consumer segments. They include utility companies, electrical contractors, building inspectors, damage restoration contractors, first responders, universities, numerous commercial enterprises, makers of military aircraft and vehicles, automotive safety equipment, firefighting equipment, manufacturing automation systems, security cameras, hunting equipment, smartphones, UAS, and maritime equipment. Our Industrial Technologies segment sales personnel maintain direct relationships with many of our customers.
Given the high-value nature of many of our thermography-related instruments, our thermography products’ revenues tend to be correlated with seasonal trends, in particular capital spending trends. In general, customers in markets like predictive maintenance and R&D are sensitive to the broad economy because our cameras are viewed as capital expenditure items. We expect revenue outside the United States to continue to account for more than half of our Industrial Technologies segment revenue.
In addition, our visible-spectrum security solutions are purchased by high-end critical infrastructure users, security hardware distributors, systems integrators, and contractors. Thermal security cameras are currently sold in all global regions, with most customers falling into the high-end critical infrastructure category. However, recent volume production of our thermal camera cores has allowed us to drop the cost of thermal security cameras to a point where it is an affordable option for many commercial security networks.
Our FLIR maritime thermal cameras are supplied to an array of commercial customers including tugboats, work boats, and passenger vessels. Both FLIR and Raymarine maritime-branded thermal cameras are supplied to recreational sport fishing and cruising powerboat customers. Raymarine’s primary end consumers include freshwater and saltwater fishing boat owners, cruising power boats, and sailboat owners. In the fishing segment, Raymarine customers include kayakers, bass boat owners, bay boats, center consoles, and offshore sport fish boat owners. The cruising segment includes owners of sport boats, cruisers, and trawlers. Sailing customers include owners of day sailors, racers, cruising yachts and multi-hull sailboats.
Our Maritime segment also supplies thermal cameras to maritime first responders and maritime law enforcement organizations around the globe, including the United States Coast Guard. Our cameras are used by marine divisions of city fire and police departments along with local fish and wildlife enforcement organizations.
Customers for our Intelligent Traffic products are traffic and public transportation authorities in cities and municipalities all over the world who deploy visual and thermal imaging cameras and other equipment in urban areas, on highways, in tunnels, and on bridges.
Competition
The Industrial Technologies segment operates in highly competitive markets. The primary competitive factors include brand reputation, technical innovation, product breadth, functionality, quality, reliability, and price. We believe we compete successfully in these markets with our innovative products, multi-function capabilities, high value-to-price ratio, and service and support functions.
While we maintain substantial market share in the OEM cores and components markets based on independent industry research, we view the thermal OEM market as highly competitive. We believe the key drivers of success in these markets are: technological proficiency in imaging sensors, product quality, product cost, and scalability of operations. We believe we are well positioned to operate in this competitive environment given our demonstrated ability to innovate high-quality sensors at low cost due to our vertically-integrated operating model, our advanced R&D capabilities, and our broad product offering.
Many of our competitors in the security solutions business are well-established brands. Key competitive factors include technical innovation, analytics, video monitoring, system integration and compatibility, price, and ability to deliver. Our competitive advantages include our broad line of thermal camera offerings that offer both high- and low-end solutions to our customers.
Like consumer electronics, delivering innovative features and lower price points is critical to the success of our marine electronics products. Consumers typically purchase marine electronics as a system of products from one brand, so it is critical that we deliver a competitive offering in each of our product lines.
In the Intelligent Transportation market, we succeed by offering multi-spectrum imaging sensors, including visible and thermal spectrums, coupled with reliable algorithms that automatically detect vehicles, bicycles, and pedestrians so that intersections, tunnels, and bridges are controlled more efficiently and safely.
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Sales and Distribution
Our Industrial Technologies segment has a direct sales staff and a network of distributors, dealers and retailers covering major markets worldwide, including technical and customer support staff in the United States and internationally who provide application development, technical training, and operational assistance to direct and indirect sales personnel as well as to customers. The majority of our Mobile market sales are generated through wholesale channels, which include national and regional consumer electronics chains, large online retailers, and specialty retailers. We also sell our Mobile products directly to consumers through our own network of e-commerce websites. In addition, we sell our products to independent distributors in various countries where we generally do not have direct sales operations, and through licensees. With our OEM boat builders, we differentiate ourselves by providing full system solutions. We also add value to our boat-building partners through technical installation training of the OEM factory staff. In the United States, we devote special teams to the retail maritime channel so we can address the dynamic and unique merchandising and promotional needs. Our sales team is supported by technical support teams and applications engineers. The technical teams provide customer support and conduct regular training sessions with our technical dealer and OEM customers. A dedicated staff of business development managers for the Intelligent Traffic products assists the distribution channel, made up of traffic control systems integrators and engineering consultants, with application development, technical training, and operational assistance.

At December 31, 2020, the Industrial Technologies segment had a total backlog of $284.8 million compared to $268.6 million at December 31, 2019. Total backlog represents orders that have been received for products, contract research and development, or other services for which a contractual agreement is in place, delivery or performance is expected to occur and no revenue has been recognized.
Defense Technologies Segment
The Defense Technologies segment develops and manufactures enhanced imaging and recognition solutions for a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. The segment also develops and manufactures sensor instruments and integrated platform solutions for the detection, identification, and suppression of CBRNE threats for military force protection, homeland security, and commercial applications. Offerings include airborne, land, maritime, and man-portable, multi-spectrum imaging systems, radars, lasers, imaging components, integrated multi-sensor system platforms, CBRNE detectors, nano-class UAS solutions, and services related to these systems. The segment also produces advanced multi-mission unmanned air and ground based systems serving U.S. Department of Defense and Federal government agencies, public safety, and governmental customers in international markets.
Our solutions are used to protect borders, surveil a scene, conduct search and rescue missions, gather intelligence, and protect critical infrastructure by providing the capability to see over long distances, day or night, through adverse weather conditions, through many obscurants, and from a wide variety of vehicle, man-portable, and fixed-installation platforms.
Infrared imaging systems used for surveillance typically employ cooled infrared detector and numerous other imaging technologies to identify and track objects from long distances and at high resolution. The Defense Technologies segment also utilizes uncooled thermal technology to enable markets where size, weight, power consumption, and cost are important considerations. Uncooled products include hand-held and tripod-mount monoculars and binoculars, weapon sights, man-portable UAS, and military-vehicle vision systems. We also design and manufacture lasers and laser components, such as rangefinders, illuminators, and target markers.
Our customers require systems that operate in demanding environments such as extreme climatic conditions, battlefield and military environments, or maritime conditions. Systems are often installed onto larger platforms and must be able to integrate with other systems such as aircraft avionics, radars, remote weapon systems, laser systems, command and control centers, and large, broad-based security networks.
Our solutions also can combine multi-threat detection and identification technologies into single hand-held or desktop instruments. Product lines include hand-held and fixed radiation detectors, hand-held and desktop explosives trace detectors, desktop and portable mass spectrometers, and continuous air monitoring devices for aerosolized biological threats and disclosure sprays. The segment also manufactures integrated systems of multiple pieces of equipment to create turn-key solutions used by first responders for the detection, identification, sample collection, decontamination, marking, and hazard reporting of CBRNE threats.
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Our detection and identification products utilize mission-based user interfaces to expedite decision-making for field operators and advanced technicians. Our advanced CBRNE detection instruments provide lab-quality confidence in a field-proven, highly reliable, and ruggedized package. Customers around the world use our products for forensic analysis, military reconnaissance, force protection, public security, law enforcement, emergency response, environmental monitoring, building and event security, teaching, and research.
Our detection and identification products leverage an established technical R&D organization that enables us to offer smart, simple, and reliable products that meet the evolving needs of government and commercial security providers. With many years of experience working in collaboration with multiple government agencies, the Defense Technologies segment has developed relationships with various government decision-makers and has substantial knowledge of the governmental procurement process.
The unmanned systems and integrated solutions offerings are multi-mission systems designed to perform in complex operational environments. Manned and unmanned platforms, for both air and ground based operations, use a wide variety of sensing and decision support software including visual and infrared imaging sensors, radar, and advanced software processing algorithms to enhance mission utility and provide time critical decision support capabilities.
We offer a portfolio of small unmanned airborne systems ("sUAS") solutions along with a range of modular mission payloads designed to enhance mission effectiveness. These include nano size UAS systems for short range ISR missions as well as multi-rotor vertical take-off and landing ("VTOL") systems with longer range and duration that are capable of missions including ISR, target tracking, search & recovery, and logistics support. Our payload solutions are designed to optimize size, weight, and power and integrate a variety of electro-optic, both thermal and visual, sensors.
Our unmanned ground systems encompass a family of robots that range from man portable systems under 5 lbs to large robots over 450 lbs. Systems are designed to provide a wide range of mission utility in dangerous environments including situational awareness, persistent observation, CBRNE detection and HazMat handling operations, and standoff capabilities to detect, confirm, identify and dispose of hazards including IEDs.
Our integrated solutions span a set of fixed, deployable, and mobile systems designed to provide advanced surveillance and security capabilities, enhance timely decision making, and improve mission command and control. They support areas including border surveillance, perimeter security, and force protection.
Markets
Surveillance and Reconnaissance
High-definition thermal imaging systems are used in surveillance and reconnaissance applications for the precise positioning of objects or people from substantial distances and for enhanced situational awareness, particularly at night or in conditions of reduced or obscured visibility. We also offer high-resolution, frequency-modulated, continuous-wave radars that enable wide-area surveillance capable of detecting potential threats before they cross a perimeter. These systems can be installed on fixed platforms, manned-mobile platforms, and UAS. With our 2019 acquisitions of Aeryon Labs and Endeavor Robotics, and building off the acquisition of Prox Dynamics in 2016, we develop and sell a variety of sUAS and ground based robotic systems that are multi-mission, highly portable and rapidly deployable real-time solutions. These integrate a range of sensors including visual and thermal imaging systems.
Force Protection
In instances where military or other personnel are deployed in hostile areas, thermal imaging systems and radars mounted on towers or other platforms are deployed to detect, identify, and defeat potential threats at an early stage. Our unmanned systems coupled with our fixed, deployable, and mobile integrated solutions provide enhanced capabilities by using FLIR technology, sensors and command and controls software, in rapidly deployable multi-mission platforms. Our systems are deployed for this purpose by the United States Army, United States Marine Corps, and other allied nations worldwide.
Border and Maritime Patrol
Our systems and platforms are used in airborne, shipborne, land-based, hand-held and fixed-installation applications for border and maritime surveillance, particularly at night, to enforce borders and monitor coastal waters, to support national fishing boundaries and to prevent smuggling. Our integrated platforms and sensor solutions are currently deployed along numerous borders worldwide, including in the United States, Europe, and the Middle East.
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Critical Infrastructure Protection
The Defense Technologies segment provides an extensive set of integrated solutions designed to provide advanced surveillance and security capabilities designed for critical infrastructure and perimeter protection applications. By coupling advanced imaging sensors, radar, and command and control software, FLIR solutions provide operators with persistent surveillance of fixed sites. Typical sites include military bases, government buildings, air and maritime ports, and power petro-chemical facilities.
Search and Rescue
Thermal imaging systems are used in airborne, shipborne, and land-based missions to rescue individuals in danger, distress, or who are wounded or lost in adverse conditions. These systems are used today by organizations such as the United States Army, United States Air Force, United States Coast Guard, United States Marine Corps, United States Air National Guard, and many international customers.
Detection
Government and private sector entities continue to seek new ways to address increasingly sophisticated terrorist threats and to respond to other security risks, natural disasters, and unintentional incidents that threaten public safety. Our multi-purpose products meet the requirements for a broad range of end-users and end uses.
We offer biological air monitors that are used by various governmental agencies for security at facilities and events. Our explosives detection products are used to identify military-grade explosives and homemade explosive devices in a wide array of military and public safety applications, such as screening high-risk individuals at checkpoints and identifying IED makers, and our radiation products protect the public by warning of radionuclide exposure.
Targeting
We offer several products that provide precise target location and designation capabilities in applications ranging from man-portable devices to high-definition, multi-spectral, stabilized airborne laser designator systems.
Airborne Law Enforcement
We are a leader in the supply of stabilized airborne thermal imaging systems for federal, state, and local law enforcement agencies. This type of equipment gives those agencies the ability to track suspects, locate lost persons, and provide situational awareness to officers on the ground.
Drug Interdiction
Thermal imaging systems enable government agencies to expand their drug interdiction and support activities by allowing 24/7 wide-area surveillance and detection capabilities. Our systems are used by the United States Customs Service, United States Drug Enforcement Agency and United States Federal Bureau of Investigation, as well as by similar foreign government agencies.
Customers
Defense Technologies segment customers generally consist of United States and foreign government agencies, including civilian, military, paramilitary, and police forces, as well as defense contractors, aircraft manufacturers and private sector businesses and commercial ports both in the United States and internationally. United States government customers include the Departments of Homeland Security, Defense, and Energy, the Transportation Security Administration, the Federal Bureau of Investigation, NASA, the Secret Service, and the Coast Guard. A substantial portion of Defense Technologies segment consolidated revenue is derived from sales to United States and foreign government agencies, and our business will continue to be substantially dependent upon such sales. We expect revenue outside the United States to continue to account for a significant portion of our Defense Technologies segment’s revenue. The Defense Technologies segment is susceptible to some seasonality in its orders primarily based on the United States government budget year end. The result is that the third quarter tends to exhibit the largest amount of orders for our United States government customers. However, fiscal policy trends, increased revenue from outside the United States, budget delays, and general economic trends can overshadow this seasonality in any given year.
Competition
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The Defense Technologies segment operates in highly competitive markets, and success in these markets depends on our ability to develop new technologies to meet rapidly evolving customer needs, reduce production and development costs, integrate with third-party devices and systems, establish and foster relationships with key government and commercial customers, and recruit highly technical personnel. Many of our competitors in the government sector are well-established contractors for various governments and have more financial and other resources than we possess. The principal competitive factors in the government markets include technical innovation, agency relationships, product quality and reliability, price, and ability to deliver. We believe we compete successfully in these markets with our best-in-class technologies, our products’ abilities to outperform customer requirements and competitors’ products, our lower-priced solutions, and our service and support functions that exist in the field and near the customer.
Sales and Distribution
Our Defense Technologies segment has a direct sales staff and a network of independent representatives and distributors covering major government markets worldwide. Included in this organization are technical and customer support staff in the United States, Europe, the Middle East, and Asia Pacific regions who provide application development, technical training, and operational assistance to direct and indirect sales personnel as well as to customers. We also utilize third-party sales representatives, value-added resellers, and systems integrators. With a centralized sales organization and specialized sales teams that serve specific detection markets, we have been successful at building and leveraging strong relationships with key decision-makers at various government agencies and commercial entities. Some detection market products are designed as components or sub-systems that are incorporated into third-party products or systems.
The Defense Technologies segment derives a portion of its revenue, approximately 5.8 percent in 2020, from agencies of the United States government pursuant to research projects. The revenue recognized under these contracts represents reimbursement by the customer for time periods ranging from several months to several years. Our participation in these and other development programs has culminated in the development of a number of commercial products. In general, our contracts with the United States government permit us to retain all rights to patents emerging from the funded R&D efforts.
The Defense Technologies segment typically has the highest backlog of our operating segments relative to revenue and in absolute terms. At December 31, 2020, the Defense Technologies segment had a total backlog of $524.8 million compared to $538.3 million at December 31, 2019. Total backlog represents orders that have been received for products, contract research and development, or other services for which a contractual agreement is in place, delivery or performance is expected to occur and no revenue has been recognized.
SALES, MARKETING, CUSTOMER SUPPORT, AND TRAINING
Our sales and distribution organization covers the world with a combination of direct sales, third-party representatives and distributors, system integrators, independent dealers, retail outlets, application engineers, and service and training centers. Internationally, we have invested heavily to build a strong presence to sell and service our products, a key advantage in penetrating certain markets, such as foreign governments. Our sales representatives, including third-party distributors, undergo a comprehensive training program on each product’s technical specifications, functions, and applications. We also continuously update our training programs to incorporate technological and competitive shifts and changes. We sell in many distinct markets and have established specific sales channels for each market.
Our primary marketing activities include online advertising, participating in trade shows, partner sponsorships, search engine optimization, press releases about new products and company developments, social media outreach, and cooperative advertising.
We offer a strong product warranty coupled with responsive support accessible via phone, web, and e-mail, and our localized support locations for high-end systems helps us stand out in our markets.
Our Infrared Training Center ("ITC") offers training, certification, and re-certification in all aspects of thermography, including specialized instruction in building diagnostics, roofing, electrical, mechanical, research and science, and optical gas imaging. Online courses cover the basics of thermal camera operation and reporting software. The ITC is also the premier sponsor of InfraMation, a leading thermal imaging user conference which is typically held annually.
MANUFACTURING
We manufacture many of the critical components for our products, including infrared detectors, gimbals, pan-tilts, optics and coatings, laser sub-systems, and micro-coolers, and develop much of the software and middleware for our systems.
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This vertical integration minimizes lead times, facilitates prompt delivery of our products, controls costs, and ensures that these components satisfy our quality standards. We purchase other parts pre-assembled, including certain detectors, coolers and optics, circuit boards, cables, and wire harnesses. These purchased and manufactured components are then assembled into finished systems and tested at one of our primary production facilities located in the United States, Sweden, Norway, Estonia, and Canada. Certain components and finished goods, including some of our visible-spectrum cameras, test and measurement products and maritime electronics, are produced by contract manufacturers.
Our manufacturing operations are, from time to time, audited by certain customers, which include several major aircraft manufacturers, and have been certified as meeting their quality standards. Substantially all of our manufacturing locations are either ISO 9001:2000 or :2008 certified with certain locations having higher certifications.
INTELLECTUAL PROPERTY
To support our focus on being an innovation leader in our key markets and protect our proprietary information, we rely on a combination of patent, trademark, copyright, and trade secret rights, a strong internet domain presence, confidentiality agreements, joint development agreements, and contractual provisions. Over the past several years we have intensified our efforts to protect our innovations through increased United States and international patent filings, and to strengthen our core brands through thoughtful trademark procurement and domain portfolio refinement. We will continue to actively develop our intellectual property and intend to emphasize initiatives that will further promote innovation and leadership in marketable technologies. We cannot, however, guarantee that we can secure patent or trademark protection on all our innovations, maintain our competitive advantage or that competitors will not develop similar or superior capabilities.
GOVERNMENT REGULATION
Thermal technology is controlled for export, re-export and retransfer by the United States government. Depending on the technology, the export of infrared products may be controlled by the United States Department of State under the International Traffic and Arms Regulation (“ITAR”) or the United States Department of Commerce Bureau of Industry and Security under the Export Administration Regulations (“EAR”). In general, the more sophisticated the technology and the higher the performance of the product, the more restrictive are the licensing requirements. Licensing requirements differ from country to country, and end user to end user, and differ with product performance and field of intended use. The export of some of our products requires a license from the United States Department of State under the ITAR and the export of some of our products requires an export license from the United States Department of Commerce under the EAR.
As a United States government supplier, we must comply with specific procurement regulations and other requirements and are subject to routine audits and investigations by United States government agencies. If we fail to comply with these rules and regulations, the results could include: reductions in the value of contracts; contract modifications or termination; the assessment of penalties and fines; and/or suspension or debarment from United States government contracting or subcontracting for a period of time or permanently. For more information regarding the current estimates of the amounts that we believe are required to comply with these rules and regulations to the extent that they are probable and estimable, see Note 14, "Contingencies" - Matters Involving the United States Department of State and Department of Commerce, to the Consolidated Financial Statements in Item 8.
ENVIRONMENTAL MATTERS
Our operations are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal and remediation of certain materials, substances, and wastes used in our operations. We continually assess our obligations and compliance with respect to these requirements. We have also assessed the risk for environmental contamination for our various manufacturing facilities, including our acquired businesses and facilities and, where appropriate, have obtained indemnification from the sellers of those businesses and facilities.
We believe that our current operations are substantially in compliance with all existing applicable environmental laws and permits. Operating and maintenance costs associated with environmental compliance are a normal, recurring part of our operations. Historically, these costs have not been material.
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HUMAN CAPITAL MANAGEMENT
FLIR’s approach to human capital management is guided by The FLIR Method, which establishes the foundation of our strategic priorities to fuel, feed, and focus the business. TFM consists of the following six elements: Talent Development, Lean Management, One FLIR, Acquisition and Integration Discipline, Continuous Improvement, and Customer-Driven Innovation. By continuously improving our global operations through TFM, we aim to self-fund many of the investments required over our strategic horizon and maximize the efficiency of our human capital. We generally have been successful in attracting highly skilled technical, marketing, and management personnel.
Our employees are further guided by the Company’s Code of Ethical Business Conduct, which sets forth our commitment to the principles of honesty, respect, trust and responsibility in all our activities. In their everyday work, employees embody FLIR’s core values to:
Be Bold: To be creative and innovative.
Be Brave: To do the right thing, even when it’s hard.
Be Ready: To be nimble and decisive.
Be Ambitious: To succeed and exceed expectations.
While we seek to foster shared values and a One FLIR culture, our employees are located all over the world, appreciate different perspectives and embrace opportunities to work with those of diverse backgrounds. We are dedicated to a culture that values and respects differences in race, gender, age, religion and identity. As of December 31, 2020, we had 4,179 employees, of which 2,231 were located in the United States and 1,948 were located outside of the United States. No employees in the United States are represented by a union or other bargaining group. Certain employees in Europe are represented by a union whose contract is subject to periodic renegotiations. We also recognize works councils in certain European countries. We believe our relationships with our employees, unions and works councils are strong.
We both value our employees’ feedback and invest in their training. In 2020, 73 percent of employees participated in our annual employee survey, which seeks employee feedback to better understand and improve the employee experience and identify opportunities to strengthen our culture. In addition, in 2020, 50 percent of employees participated in learning and development activities which aim to promote FLIR values, reinforce knowledge of key compliance areas, and foster employees’ career development.
We also believe that the physical health, financial wellbeing, life balance and mental health of our employees is vital to FLIR’s success. FLIR invests in onsite fitness centers, provides a health club reimbursement through our fitness subsidy program and offers its employees various incentives and opportunities to participate in certain health-focused activities. In 2020, over 300 employees received flu shots sponsored by FLIR and 59 percent of eligible employees participated in the U.S. Employee Wellness Incentive Program and earned a total of approximately $0.1 million in incentives to offset their medical premiums in 2021. FLIR also provided its employees with various opportunities to participate in wellness events in 2020, such as the FLIR Wellness Amazing Race Step Challenge in the fourth quarter, with approximately 550 participants on 101 teams taking over a collective 142 million steps, and the FLIR Runs Wild 5K event in the second quarter in which over 330 employees participated globally to raise $13,300 for the World Wildlife Fund. In response to the devastation of the wildfires in Oregon in 2020, FLIR matched contributions of $25,000 for a GoFundMe campaign for employees who were adversely impacted. Of course, maintaining the health and safety of our employees across the globe has been a key focus since the onset of the COVID-19 pandemic. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our safety protocols and other measures adopted to protect our employees’ health and safety while continuing to meet and exceed customers’ expectations.
AVAILABLE INFORMATION
Our internet website address is www.flir.com. This Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and other required filings are available through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our internet website and the information contained therein or connected thereto are not intended to be incorporated into this Report. The Securities and Exchange Commission maintains a website (www.sec.gov) where our reports can be accessed.
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ITEM 1A.    RISK FACTORS
The following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. If we are unable to adequately respond to these risks and uncertainties, our business, financial condition and results of operations could be materially adversely affected. Additionally, we cannot guarantee that any actions taken to reduce known risks and uncertainties will be effective.
Risks Related to Our Pending Acquisition
On January 4, 2021, Teledyne Technologies Inc. (“Teledyne”) and the Company announced that the companies have entered into a definitive merger agreement (the “Merger Agreement”) under which Teledyne will acquire FLIR in a cash and stock transaction. In connection with the proposed acquisition, the Company is subject to certain risks including, but not limited to, those set forth below
FLIR and Teledyne may be unable to satisfy the conditions required to complete the Mergers. Any delay in completing the Mergers could diminish the anticipated benefits of the Mergers, and failure to complete the Mergers could adversely impact the market price of our stock as well as our business and operating results.
Under the Merger Agreement, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub I will merge with and into FLIR, with FLIR surviving the merger as a wholly owned subsidiary of Teledyne (the “First Merger”) and immediately thereafter, FLIR will merge with and into Merger Sub II, with Merger Sub II surviving the subsequent merger (the “Second Merger”, and, together with the First Merger, the “Mergers”). The consummation of the Mergers is subject to a number of conditions, including (1) the adoption by FLIR’s stockholders of the Merger Agreement and the transactions contemplated thereby, (2) the approval by Teledyne’s stockholders of the issuance of shares of Teledyne common stock as consideration in the Mergers, (3) the expiration or termination of any applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act, and (4) obtaining authorizations, consents or approvals required under certain other laws, or terminations or expirations of applicable waiting periods, and (5) other customary closing conditions.
While FLIR and Teledyne intend to seek the required stockholder approvals and pursue vigorously all required governmental clearances, each such requirement could delay the Mergers or result in an inability to complete them. Any delay in the completion of the Mergers could diminish anticipated benefits of the Mergers, including realization of expected synergies and operating efficiencies, or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the Mergers. We cannot guarantee that the Mergers will be consummated on the terms or timeline currently contemplated or at all. If the Mergers are not completed for any reason, FLIR’s ongoing business may be adversely affected, and FLIR would be subject to several risks, including:
negative reactions from the financial markets (including negative impacts on our stock price), employees, customers, vendors and industry contracts;
an obligation to pay costs relating to the Mergers whether or not the Mergers are completed;
substantial commitment of time and resources by management on matters relating to the Mergers (including integration planning), which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to FLIR as an independent company; and
an obligation to pay a termination fee of $250 million to Teledyne in certain circumstances specified in the Merger Agreement.
If the Mergers are not completed, these risks may materialize and may adversely affect FLIR’s businesses, financial condition, results of operations and stock price.
The pendency of the Mergers could adversely affect our business and operations.
Whether or not the Mergers are ultimately consummated, the pendency of the Mergers could have several negative effects on our current business, including potentially disrupting our regular operations, diverting the attention of our workforce and management team, or increasing workforce turnover. The completion of the Mergers, including, for example, efforts to obtain regulatory clearances, will require significant time and attention from our management and may divert attention from the day-to-day operations of our business.
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Parties with which we have business relationships, either contractual or operational, may experience uncertainty as to the future or desirability of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties. Additionally, we have contracts with certain customers, suppliers, vendors, distributors and other business partners, and these contracts may require us to obtain consent from these other parties in connection with the Mergers. Obtaining such consents may be difficult and could impose costs on us, including renegotiating such contracts on terms less favorable to us, which in turn may result in us suffering a loss of potential future revenue, incurring contractual liabilities or losing rights that are material to our business.
The Merger Agreement subjects us to restrictions on our business activities and obligates us to generally operate our business in the ordinary course of business in all material respects prior to completion of the Mergers. These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Mergers and are outside the ordinary course of business, or otherwise have an adverse effect on our results of operations, cash flows and financial position.
In connection with the pending Mergers, current and prospective employees of the Company may experience uncertainty about their future roles with the Company (and Teledyne) following the consummation of the Mergers, which may materially adversely affect the ability of the Company to attract, retain and motivate key personnel while the Mergers are pending. Despite the Company’s retention planning and programs that the Company has and will implement, key employees may depart because of issues relating to the uncertainty and difficulty of integration with Teledyne or a desire not to remain with the Company (and Teledyne) following the consummation of the Mergers. Accordingly, no assurance can be given that the Company will be able to attract and retain key employees to the same extent that the Company has been able to in the past.
The pursuit of the proposed Mergers and the preparation for the integration with Teledyne may place a significant burden on the Company’s management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect the Company’s financial results.
The Company has incurred and expects to continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Mergers. The substantial majority of these costs will be non-recurring expenses relating to the Mergers. Many of these costs are payable regardless of whether or not the Mergers are consummated. The Company may be subject to litigation related to the proposed Mergers, which could result in significant costs and expenses. Even if the proposed Mergers are not consummated, these risks may materialize and may adversely affect the Company's businesses, financial condition, financial results and stock price.
The merger consideration is fixed and will not be adjusted. Because the market price of Teledyne’s common stock may fluctuate, FLIR stockholders cannot be sure of the market value of the stock consideration they will receive in exchange for their FLIR shares in connection with the Mergers.
Pursuant to the Merger Agreement, our stockholders will receive a fixed number of shares of Teledyne common stock in the Mergers rather than a number of shares with a fixed market value. Upon completion of the Mergers, our stockholders will receive, in exchange for each share of our common stock held immediately prior to the Mergers, (i) $28.00 in cash and (ii) 0.0718 shares of Teledyne common stock. The market prices of shares of Teledyne common stock and FLIR common stock have fluctuated since the date of the announcement of the Merger Agreement and will continue to fluctuate until the Mergers are completed. The market values of Teledyne common stock and FLIR common stock at the time of the Mergers may vary significantly from their prices on the date of the Merger Agreement or the date hereof. Such changes in market prices may result from a variety of factors that are beyond our control, including changes in businesses, operations, and prospects, regulatory considerations, governmental actions, and legal proceedings and developments. Because the merger consideration exchange ratio will not be adjusted to reflect any changes in the market prices of Teledyne common stock or our common stock, the market value of the Teledyne common stock issued in the Mergers and our common stock surrendered in the Mergers may be higher or lower than the values of such stock on earlier dates.
Risks, Uncertainties and Other Factors Related to Our Business
We depend on the United States government for a material portion of our business and changes in government spending could adversely affect our business.
We derive significant revenue from contracts or subcontracts funded by United States government agencies.
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A significant reduction in the purchase of our products by these agencies or contractors for these agencies would have a material adverse effect on our business. For the fiscal years ended December 31, 2020, 2019 and 2018, approximately 31 percent, 32 percent and 29 percent, respectively, of our revenues were derived directly or indirectly from sales to the United States government and its agencies. The funding of contracts awarded to us depends on the overall United States government budget and appropriations process, which is beyond our control. A failure to pass budget appropriations, adopt continuing funding resolutions or other budgetary decisions limiting or delaying federal government spending, could reduce government spending on our products and services and have a material adverse effect on our business and our operating results.
In addition, at its discretion, the United States government may change its spending priorities and/or terminate, reduce or modify contracts. Substantial uncertainty exists in the spending levels and priorities of the United States government, particularly with respect to military expenditures. Continued and further reductions in military spending could have a material adverse effect on our results from operations.
Considerable uncertainty exists regarding how future budget and program decisions will unfold, including the defense spending priorities of the United States government agencies. Any failure by the United States government to timely enact annual appropriations bills could restrict new contract or program starts, presenting resource allocation challenges and placing limitations on some planned program budgets. We may also face another United States government shutdown of unknown duration. If a prolonged government shutdown of the Department of Defense were to occur, it could result in program cancellations, disruptions and/or stop work orders and could limit the United States government’s ability effectively to progress programs and to make timely payments, limit our ability to obtain necessary export licenses to ship internationally, and limit our ability to perform on our United States government contracts and successfully compete for new work. Consequently, significant delays or reductions in appropriations; long-term funding under a continuing resolution; an extended debt ceiling breach or government shutdown; and/or future budget and program decisions, among other items, may negatively impact our business and could have a material adverse effect on our financial condition and results of operations.
As a United States government supplier, we are subject to a number of procurement rules and regulations.
As a government contractor, we must comply with specific procurement regulations and other requirements and we have been, and expect to continue to be, subject to routine and non-routine audits and investigations by United States government agencies. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business. U.S. government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its business systems. Adverse findings in these investigations, audits, or reviews can lead to criminal, civil or administrative proceedings, and the Company could face disallowance of previously billed costs, penalties, fines, compensatory damages and suspension or debarment from doing business with governmental agencies. Due to the Company’s reliance on government contracts, adverse findings could also have a material impact on the Company’s business, including its financial position, results of operations and cash flows.
In addition, violations of these regulations or other unrelated laws and statutes can lead to debarment and other penalties as well as have a material adverse effect on our ability to compete for future contracts and orders. If we fail to comply with procurement rules and regulations and other laws and statutes, the results could include: reductions in the value of contracts; contract modifications or termination; the assessment of penalties and fines; and/or suspension or debarment from United States government contracting or subcontracting for a period of time or permanently. An adverse action by the United States government could also result in lost sales to non-governmental customers who might disqualify us as a result of such adverse action. The impairment or loss of our government contracts could have a material adverse effect on our business.
Operating margins may be negatively impacted by reduction in sales or by a change in the mix of products sold.
Our expense levels are based, in part, on our expectations regarding future sales and these expenses are largely fixed in the short term. Some expenses, such as those related to research and development activities, would likely be maintained in the event of a sales downturn in order to maintain and enhance our long-term competitiveness. We maintain inventories of finished goods, components and raw materials at levels we believe are necessary to meet anticipated sales. Accordingly, we may not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted and actual sales. Any significant shortfall of sales may result in us carrying higher levels of inventories of finished goods, components and raw materials thereby increasing our risk of inventory obsolescence and corresponding inventory write-downs and write-offs.
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Our fixed costs, including facilities and information technology costs, compliance and public company costs, and depreciation and amortization related to previous acquisitions and capital expenditures, are significant and are difficult to reduce in the short term. Our operating margins vary by product and substantial changes in the mix of products sold could also have a negative impact on our operating margins.
We may experience impairment in the value of our tangible and intangible assets.
Our industry is subject to rapid changes in technology, which may result in unexpected obsolescence or impairment of our assets. Our intangible assets, including goodwill, represent a significant portion of our total assets. Most of these intangibles are the result of acquisitions in which the purchase price exceeded the value of the tangible assets acquired. We amortize certain of these intangibles over their anticipated useful life and review goodwill and indefinite-lived intangible assets for impairment annually or more frequently if warranted by events. We have previously experienced impairments and may experience additional impairments in the future. In addition, certain of our tangible assets such as inventory and machinery and equipment may experience impairment in their value as a result of events such as the introduction of new products, changes in technology or changes in customer demand patterns. We depreciate our machinery and equipment at levels we believe are adequate, but future impairments may materially impact our business, financial condition and results of operations.
Unfavorable results of legal proceedings could materially adversely affect us.
We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and could cause significant expense and diversion of management attention. From time to time, we are involved in lawsuits concerning intellectual property, torts, contracts, shareholder litigation, administrative and regulatory proceedings and other matters, as well as governmental inquiries and investigations, the outcomes of which may be significant to our results of operations and may limit our ability to engage in our business activities. In recognition of these considerations, we have and may in the future enter into material settlements to avoid ongoing costs and efforts in defending or pursuing a matter. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that could adversely affect our business, financial condition, operating results and cash flows. While we have insurance related to our business operations, it may not apply to or fully cover liabilities we incur as a result of these lawsuits. We record accruals for liabilities where we believe a loss to be probable and reasonably estimable. However, our actual costs may differ materially from these estimated liabilities.
We face risks from international sales and business activities.
We market and sell our products worldwide and international sales have accounted for, and are expected to continue to account for, a significant portion of our revenue. For the years ended December 31, 2020, 2019 and 2018, international sales accounted for 46 percent, 45 percent and 47 percent, respectively, of our total revenue. We also manufacture certain products and subassemblies in Europe and we have several contract manufacturing agreements with third parties in Europe and in Asia. Certain of these products, particularly our thermal and infrared products, are subject to substantial government regulation and licensing and end use restrictions throughout the world. Our international business activities are subject to a number of risks, including:
the imposition of and changes to governmental licensing restrictions and controls impacting our technology and products;
restrictions and prohibitions on the export of technology and products, including any applicable changes in regulation prohibiting the sale of certain of our products to certain end users without a license;
international trade restrictions, such as imposition of bans on sales of goods or services to one or more of our significant foreign customers;
difficulty in collecting receivables and governmental restrictions with respect to currency;
inadequate protection of intellectual property;
labor union activities;
changes in tariffs and taxes;
restrictions on repatriation of prior earnings;
restriction on the importation and exportation of goods and services;
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risks, costs, impacts and obligations associated with the United States Foreign Corrupt Practices Act ("FCPA"), and other anti-bribery and anti-corruption laws applicable to us, and laws applicable to global trade and United States exports and costs and penalties from violations of such laws and related regulations, including the costs associated with required remedial and other increased compliance activity;
difficulties in staffing and managing international operations;
instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the exit of the United Kingdom (the "U.K.") from the European Union (the "EU"), colloquially referred to as "Brexit"; and
complications due to natural, nuclear or other disasters, such as outbreak of coronavirus.
These factors may have an adverse impact on our sales and operations, increase our cost of doing business or subject our business or operations to additional rules, policies and procedures.
The effects of the COVID-19 outbreak could adversely affect our business, results of operations, and financial condition.
Throughout 2020 and continuing into 2021, the outbreak of the coronavirus disease 2019 (“COVID-19”) and efforts to contain its spread have resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the U.S. and global economy and financial environments. The ultimate impact of the COVID-19 pandemic on our business, results of operations and financial condition is uncertain and difficult to predict, but the COVID-19 pandemic could cause sudden, significant disruptions in our business operations, including the following:
We have experienced and may continue to experience disruptions in our supply chain from the actions of governments or businesses intended to contain or slow the spread of the virus, such as closing factories or other operations that produce components necessary for our products, quarantining individuals around major commercial hubs, and/or restricting the transportation of goods and services.
We may experience significant workplace disruptions as a result of employees in our production facilities becoming sick or are quarantined as a result of exposure to COVID-19, which could necessitate closing such facilities or significantly reducing their output for an extended period.
Delays in inspection, acceptance and payment by our customers, many of whom are working remotely, could also affect our sales and cash flows. Limitations on government operations can also impact regulatory approvals such as export licenses that are needed for international sales and deliveries. In addition, we could experience delays in international orders, many of which require lines of credit from local banks whose operations may be impacted by the COVID-19 pandemic. The Defense Technologies segment has and may continue to experience delays in orders from United States and foreign government agencies, and the Industrial Technologies segment has and may continue to experience a decline in demand for industrial and consumer products that are deemed non-essential. As a result of the COVID-19 crisis, there may be changes in our customers’ priorities and practices, as our customers confront competing budget priorities and more limited resources. These changes may impact current and future programs, government payments and other practices, procurements, and funding decisions.
Pursuant to government closure orders intended to contain or slow the spread of the virus, we have been required to close certain of our facilities that perform work that is deemed non-essential. One or more additional facilities could become subject to similar orders, which could further disrupt our operations if the work performed at such facilities cannot be conducted remotely, which may necessitate the furloughing of some of our employees or a permanent reduction in our workforce.
If we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate, we could suffer damage to our reputation and our brands, which could adversely affect our business.
Deterioration of worldwide credit and financial markets could adversely affect our ability to obtain financing on favorable terms and continue to meet our liquidity needs.
In addition, across the globe, the response to the pandemic generally has involved a dramatic, rapid reduction in social and economic activity, which has led to a global recession which could be protracted. The global economic downturn caused by the pandemic could continue to reduce demand for certain other products and services, particularly those with industrial or consumer applications. Furthermore, the resumption of our normal business operations after COVID-19-related interruptions may be delayed or constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers.
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We continue to monitor the evolving situation related to COVID-19. The effects described above, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure, or financial condition. A further sustained or prolonged outbreak could exacerbate the adverse impact of such effects. The extent to which COVID-19 impacts our operations or financial results will further depend on future developments, which are highly uncertain and cannot be predicted, including additional actions taken by governments, businesses and individuals to contain the virus or address its impact, new information which may emerge concerning the severity or treatability of the virus, the successful rollout of vaccines, new strains of the virus and the extent of the economic downturn resulting from the response to the virus, among other factors.
We are subject to numerous regulatory requirements for the export and sale of our products and operations worldwide that could adversely affect our business.
Compliance with complex foreign and United States laws and regulations that apply to our international operations increases our cost of doing business both in the United States and in international jurisdictions. These regulations include import and export laws, anti-competition laws, anti-corruption laws, such as the FCPA and the U.K. Bribery Act, and other local laws prohibiting corrupt payments to governmental officials, data privacy requirements, tax laws, and accounting, internal control and disclosure requirements. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our reputation, business and results of operations. In certain foreign jurisdictions, there is a higher risk of fraud or corruption and greater difficulty in maintaining effective internal controls and compliance programs. Further, although we have implemented and continue to implement policies and procedures designed to promote compliance with applicable laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies or applicable laws and regulations.
On April 24, 2018, we entered into a Consent Agreement with the United States Department of State’s Directorate of Defense Trade Controls (“DDTC”) to resolve allegations regarding the unauthorized export of technical data and defense services to dual and third country nationals in certain of our facilities, the failure to properly use and manage export licenses and export authorizations, and failures to report certain payments under 22 CFR Part 130 in potential violation of ITAR. The Consent Agreement has a four-year term and provides for: (i) a civil penalty of $30 million with $15 million of this amount suspended on the condition that the funds have or will be used for Department-approved Consent Agreement remedial compliance measures, (ii) the appointment of an external Special Compliance Official to oversee compliance with the Consent Agreement and the ITAR; (iii) two external audits of our ITAR compliance program; and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures, and training. Adverse findings in the audits of our ITAR compliance program could materially affect our competitive position and cause incurrence of additional expenses in connection with implementation of remedial measures and result in a substantial adjustment to our revenue and net income. During the three-month period ended March 31, 2018, we recorded a $15.0 million charge for the portion of the penalty that is not subject to suspension. As of December 31, 2020, the remaining amounts payable of $3.5 million and $3.5 million have been recorded in other current liabilities and other long-term liabilities, respectively. Our investments to date in remedial compliance measures have been sufficient to cover the $15.0 million suspension amount.
As part of the Consent Agreement, DDTC acknowledged that we voluntarily disclosed certain of the alleged Arms Export Control Act and ITAR violations (which were resolved pursuant to the Consent Agreement), cooperated in DDTC’s review, and instituted a number of compliance program improvements.
In addition, our international contracts may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other financial obligations, known as offset obligations, and may provide for penalties if we fail to meet such requirements. The impact of these factors is difficult to predict, but one or more of them could have a material adverse effect on our financial position, results of operations, or cash flows.
We may not be successful in obtaining and maintaining the necessary export licenses to conduct operations abroad and the United States government may prevent proposed sales to foreign governments and customers.
Export licenses and other authorizations may be required from United States government agencies under the ITAR, the EAR, the Office of Foreign Assets Control Regulations, the Trading with the Enemy Act of 1917, the International Emergency Economic Powers Act, the Arms Export Control Act of 1976, and other similar laws and regulations for the sale, use and export of many of our products and related data and services.
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Thermal and infrared products and technical data have been subject to the ITAR and EAR, historically under United States Munitions List ("USML") Category XII and Commerce Control List ("CCL") Category 6. The United States government’s export reform effort resulted in the transition of various Company products from the USML to the CCL, shifting the licensing requirements and restrictions for products regulated by the Department of Commerce under the EAR. This transition has increased the licensing requirements and restrictions on some products and reduced the requirements and restrictions on others. We may not be successful in obtaining the necessary licenses from the United States Department of State or Department of Commerce required to conduct our business as presently or historically conducted.
The United States export licensing environment has been affected by a number of factors, including the aftermath of 9/11, the rise of terrorism and the changing geopolitical environment, heightened tensions with other countries (which shift and evolve over time), and the United States' reliance on night-time warfare. Some of these factors have affected the thermal imaging and infrared technology industry overall while others have impacted us directly. In addition, the Consent Agreement and related submissions and other communications concerning our licensing posture overall have led to heightened scrutiny of export licenses for products in our markets and, in some cases, highlight DDTC’s focus on the manner in which we handle exports of our products, technical data and services subject to the ITAR.
In addition, concerns with respect to potential diversion of certain of our products to prohibited end users and countries subject to economic and other sanctions implemented by the United States government has caused the United States Department of Commerce Bureau of Industry and Security to restrict our ability to sell 9hz thermal products without a license to customers in China not identified on a list maintained by the United States Department of Commerce.
Although we have taken actions and continue to take additional actions necessary to implement policies and procedures to promote an improved compliance culture and programs, during the normal course of our business, we have experienced and we expect to continue to experience violations of ITAR and EAR, none of which has been material to the Company to date. Material violations of these legal requirements can be punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts, seizure and forfeiture of unlawful attempted exports, and/or denial of export privileges, as well as other remedial measures. We have established policies and procedures designed to assist us, our personnel and our agents to comply with applicable U.S. and international laws and regulations. However, our policies and procedures may not effectively prevent us, our employees and our agents from violating these regulations in every transaction in which we may engage, and violations, allegations or investigations of such violations could materially adversely affect our reputation, business, financial condition and results of operations. Government agencies might view our actions and programs with heightened scrutiny, including as a result of events outside of our control. As a result, we may receive more restrictive provisions or limitations on new license requests, wholesale denials of our license requests, suspensions or terminations of our existing licenses, or delays in receiving new licenses resulting from requests for follow-up information, due diligence requests or additional limitations on our sale to third parties. We may be unsuccessful in obtaining necessary licenses required to facilitate our international business. Failures to obtain or delays in obtaining licenses may prevent or limit our ability to market, sell, export, or transfer our products outside the United States and has had and could continue to have a material adverse effect on our business and our operating results.
We face risks from Brexit.
Brexit has created uncertainty about the future relationship between the U.K. and the EU. The U.K. formally exited the EU on January 31, 2020. On December 24, 2020, the U.K. and EU announced they had entered into a post-Brexit deal on certain aspects of trade and other strategic and political issues, which relationship became effective on December 31, 2020.
We have significant operations and a substantial workforce in Europe, a portion of which reside in the U.K. and therefore enjoyed certain benefits based on the U.K.’s membership in the EU. We are currently evaluating the potential financial, trade, regulatory and legal implications of the new U.K.-EU trade deal, for our U.K. and European business operations, the operations of our customers, as well as for global economic conditions and the stability of global financial markets. Additionally, any development that has the effect of devaluing the European euro or British pound sterling could meaningfully reduce the value of our assets and reduce the usefulness of liquidity alternatives denominated in that currency, such as our multicurrency credit facility. While we have adopted certain operational and financial measures to reduce the risks of doing business internationally, such measures may not allow us to operate without disruption or adverse impact to our business and financial results in the affected regions. The long-term effects of Brexit will depend on the efficacy of the new U.K.-EU agreement and continuing resolution of future arrangements between the EU and the U.K., including the U.K.’s access to EU markets.
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Our earnings and profitability depend, in part, on subcontractor and supplier performance and financial viability as well as raw material and component availability and pricing.
We rely on other parties to provide raw materials, and components and subsystems for our products and to produce certain products or parts, provide information about the parts or products they supply to us, and perform some of the services we provide to our customers, and to do so in compliance with all applicable laws, regulations and contract terms. Disruptions or performance problems caused by our subcontractors and suppliers, or a misalignment between our contractual obligations to our customers and our agreement with our subcontractors and suppliers, could have various impacts on the company, including on our ability to meet our commitments to customers.
Our ability to perform our obligations on time could be adversely affected if one or more of our subcontractors or suppliers were unable to provide the agreed-upon products, materials or information, or perform the agreed-upon services in a timely, compliant and cost-effective manner or otherwise to meet the requirements of the contract. Changes in political or economic conditions, including changes in defense budgets or credit availability or sanctions, or other changes impacting a subcontractor or supplier (including changes in ownership or operations), as well as their ability to retain talent and other resources, and requirements or changes in requirements imposed on them by other customers, could adversely affect the financial stability of our subcontractors and suppliers and/or their ability to perform. The inability of our suppliers to perform, or their inability to perform adequately, could also result in the need for us to transition to alternate suppliers, which could result in significant incremental cost and delay or the need for us to provide other resources to support our existing suppliers. This risk may increase as the demands grow for our subcontractors and suppliers to meet extensive government-related cyber and other requirements.
In connection with our U.S. government contracts, we are required to procure certain materials, components and parts from supply sources approved by the customer. We also are facing increased and changing regulatory requirements, both domestically and internationally, many of which apply to our subcontractors and suppliers. In some cases, there may be only one supplier, or one domestic supplier, for certain components. If a supplier cannot appropriately meet our needs, experiences disruptions to production or is otherwise unavailable or not fully available, we may be unable to find a suitable alternative.
Our procurement practices are intended to reduce the likelihood of our procurement of counterfeit, unauthorized or otherwise non-compliant parts or materials. We rely on our subcontractors and suppliers to comply with applicable laws, regulations and contract terms, including regarding the parts or materials we procure from them; in some circumstances, we rely on certifications provided by our subcontractors and suppliers regarding their compliance. We also rely on our subcontractors and suppliers effectively to mitigate the risk of cyber and security threats or other disruptions with respect to the products, components and services they deliver to us and the information entrusted to them by us or our customers and to comply with applicable contractual terms and laws and regulations, including cybersecurity requirements.
If our subcontractors or suppliers fail to perform or we are unable to procure, or experience significant delays in deliveries of, needed products, materials or services, or if they do not comply with all applicable laws, regulations, requirements and contract terms, including if what we receive is counterfeit or otherwise improper, our financial position, results of operations and/or cash flows could be materially adversely affected.
We face risks from currency fluctuations.
Historically, currency fluctuations have affected our operating results. Changes in the value of foreign currencies in which our sales or costs incurred are denominated have in the past caused, and could in the future cause, fluctuations in our operating results. We seek to reduce our exposure to currency fluctuations by denominating, where possible, our international sales in United States dollars, by balancing expenses and revenues in various currencies and by undertaking limited hedging of forecasted currency exposures. With respect to international sales denominated in United States dollars, a decrease in the value of foreign currencies relative to the United States dollar could make our products less price competitive.
General economic conditions may adversely affect our business, operating results and financial condition.
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of capital investment and consumer spending. Economic factors that could adversely influence demand for our products include uncertainty about global economic conditions leading to reduced levels of investment, changes in government spending levels and/or priorities, the size and availability of government budgets, customers’ and suppliers’ access to credit, consumer confidence and other macroeconomic factors affecting government, industrial or consumer spending behavior.
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In recent years, our performance has been negatively impacted by reduced spending by United States government agencies, global economic weakness, and the Eurozone crisis. Continuation of the conditions that led to reduced spending and potential further reductions in spending globally by either consumers or government agencies could have a material adverse effect on our business, financial condition and results of operations.
Our primary markets are volatile and unpredictable.
Our business depends on the demand for our products and solutions in a variety of commercial, industrial and government markets. In the past, the demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control, including:
the timing, number and size of orders from, and shipments to, our customers, as well as the relative mix of those orders;
variations in the volume of orders for a particular product or product line in a particular fiscal quarter;
the size and timing of new contract awards;
the timing of the release of government funds for procurement of our products; and
the timing of orders and shipments within a given fiscal quarter.
Seasonal fluctuations in our operating results are an outcome of:
the seasonal pattern of contracting by the United States government and certain foreign governments;
the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations; and
the tendency of commercial enterprises to utilize fully annual capital budgets prior to expiration.
Competition in our markets is intense and our failure to compete effectively could adversely affect our business.
Competition in the diverse markets for our products is intense. The speed with which companies can identify new applications for thermal imaging, develop products to meet those needs and supply commercial quantities at low prices to the market are important competitive factors. We believe the principal competitive factors in our markets are product performance, price, customer service and training, product reputation, and effective marketing and sales efforts. Many of our competitors have greater financial, technical, research and development, and marketing resources than we do. All of these factors, as well as the potential for increased competition from new market entrants, require us to continue to invest in, and focus on, research and development and new product innovation. We may be unable to compete effectively in the future and a failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Our products may suffer from defects or errors leading to substantial product liability, damage or warranty claims.
We include complex system designs and components in our products that may contain errors or defects, particularly when we incorporate new technology into our products or release new versions. If any of our products are defective, we might be required to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses including expenses arising from product liability and warranty claims. It also could disrupt sales and affect our reputation and that of our products, which could have a material adverse effect on our business, financial condition and results of operations. As we expand our presence into new markets, we may face increased exposure to product liability claims. We maintain product liability insurance, but it may be insufficient or become unavailable on acceptable terms.
Amounts included in our backlog may not result in actual revenues or translate into profits.

Many contracts are subject to cancellation or suspension on short notice at the discretion of the customer, and the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contract. We have historically experienced variances in the components of backlog related to delivery delays or cancellations resulting from customer-specific circumstances, external market factors and economic factors beyond our control, and we may experience more delays or cancellations in the future. Accordingly, our backlog may not actually be realized. If our backlog fails to materialize, we could experience a reduction in revenues and a decline in profitability, which could result in a deterioration of our financial position and liquidity.
Significant tariffs, restrictions on imports or other trade barriers between the United States and various countries, most significantly China, may impact our revenue and results of operations.
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General trade tensions between the U.S. and China began escalating in 2018, with multiple rounds of U.S. tariffs on Chinese-made goods taking effect. These tariffs currently affect some of the components of our products we import from China, and we may raise our prices on those products due to the tariffs or share the cost of such tariffs with our customers, which could harm our operating performance or cause our customers to seek alternative suppliers. While we continue to monitor and evaluate the potential impact of the effective and proposed tariffs as well as other recent changes in foreign trade policy on our supply chain, costs, sales and profitability and are considering strategies to mitigate such impact, including reviewing sourcing options and working with our vendors and merchants, it is possible that further tariffs may be imposed on our other imports, or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our operations, any of which could materially harm our revenue or operating results. In addition, we may seek to shift some of our manufacturing supply chain to other countries, which could result in disruption to our operations.
Risks, Uncertainties and Other Factors Related to Our Technology and Intellectual Property
Our inability to protect our intellectual property and proprietary rights and avoid infringing the rights of others could harm our competitive position and our business.

Our ability to compete successfully and achieve future revenue growth depends, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others. To accomplish this, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements and contractual provisions to protect our proprietary rights. Many of our proprietary rights are held in confidence as trade secrets and are not covered by patents, making them more difficult to protect. Although we currently hold worldwide patents covering certain aspects of our technologies and products, and we are actively pursuing additional patents, we cannot be certain that we will obtain additional patents or trademarks on our technology, products and trade names. Furthermore, we cannot be certain that our patents or trademarks will not be challenged or circumvented by our competitors or that measures taken by us to protect our proprietary rights will adequately deter their misappropriation or disclosure. Despite our efforts to protect our intellectual property, it is possible that competitors or other unauthorized third parties may obtain or disclose our confidential information, reverse engineer or copy our technologies, products or processes, or otherwise misappropriate our intellectual property. Any failure by us to protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Moreover, because intellectual property does not necessarily prevent our competitors from entering the markets we serve, we may be unable to maintain our competitive advantage and our competitors might develop capabilities equal or superior to ours.
Litigation over patents and other intellectual property is common in our industry. During the normal course of business, we engage in litigation related to our patents and other intellectual property and cannot be sure that we will not be subject to such litigation in the future. Similarly, we may assert claims in litigation to protect our intellectual property. Lawsuits defending or prosecuting intellectual property claims and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort of our personnel. An adverse determination in a patent suit or in any other proceeding in which we are a party could subject us to significant liabilities, result in the loss of intellectual property rights we claim or impact our competitive position. Additionally, an adverse determination could require us to seek licenses from third parties. If such licenses are not available on commercially reasonable terms or at all, our business, financial condition and results of operations could be adversely affected, leading to a potential reduction in client base.
Our business could be negatively impacted by cybersecurity threats and other security threats and technology disruptions.

We face certain security threats and technology disruptions, including threats to our information technology infrastructure, attempts to gain access to our or our customers’ proprietary or classified information, including intellectual property and technology, threats to the physical security of our facilities and employees, threats of terrorism events, and failures of our technology tools and systems. We are subject to laws and rules issued by various agencies concerning safeguarding and maintaining infrastructure and physical security and information confidentiality. Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. We are also involved with information technology systems for certain customers and other third parties, for which we face similar security threats as for our own. In particular, cybersecurity threats, such as computer viruses, spyware and malware, attempts to access information, denial of service attacks and other electronic security breaches-, are persistent and evolve quickly. Such threats have increased in frequency, scope and potential impact in recent years.
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Further, a variety of technological tools and systems, including both company-owned information technology and technological services provided by outside parties, support our critical functions. These technologies, as well as our products, are subject to failure and the user’s inability to have such technologies properly supported, updated, expanded or integrated into other technologies and may contain open source and third party software which unbeknownst to us may contain defects or viruses that pose unintended risks to our customers. If not effectively mitigated or controlled, these risks could materially harm our business or reputation. While we believe that we have implemented appropriate measures, controls, and risk transfer mechanisms designed to protect customer information and prevent data breaches, such actions may not prevent disruptions to critical systems, unauthorized release of confidential information, corruption of data, or financial loss.
We require user names and passwords in order to access our information technology systems. We use encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to our data or accounts. These security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities. For example, third parties may attempt to induce by fraud employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. These security systems cannot provide absolute security. A material breach of our systems where we were unable to protect sensitive data could materially damage business partner and customer relationships, and curtail or otherwise impact the use of our information technology systems. Moreover, a security breach of our information technology system that affects our computer systems or results in the release of personally identifiable or other sensitive information of customers, business partners, employees and other third parties, could materially damage our reputation and brand, result in a decrease of the use of our products and services, and expose us to a risk of loss, litigation and potential liability.
Cybersecurity or other security threats and technology disruptions could disrupt our operations and customer and other third party information technology systems. They also could require significant management attention and resources, negatively impact our reputation among our customers and the public and challenge our eligibility for future work on sensitive or classified systems, which could have a material adverse effect on our business, financial condition and results of operations.
Our future success will depend on our ability to respond to the rapid technological change in the markets in which we compete, our ability to introduce new or enhanced products and enter into new markets.
The markets in which we compete are characterized by rapid technological developments and frequent new product introductions, enhancements and modifications. Our ability to develop new products and technologies that anticipate changing customer requirements, reduce costs and otherwise retain or enhance our competitive position in existing and new markets will be an important factor in our future results from operations. We will continue to make substantial capital expenditures and incur significant research and development costs to improve our manufacturing capability, reduce costs, and develop and introduce new products and enhancements. If we fail to develop and introduce new products and technologies in a timely manner, our business, financial condition and results of operations would be adversely affected. In addition, our new products and technologies may not be successful and our customers may not accept our new products.
Risks, Uncertainties and Other Factors Related to Our Corporate Structure and Organization
We may be unable to successfully manage recent or future acquisitions or integrate them into our operations, thereby disrupting our business and harming our financial condition and results of operations.

If we do not close our pending transaction with Teledyne, our ongoing business model includes a certain level of ongoing acquisition, investment and divestiture activities. We must be able to successfully manage the impacts of these activities, while at the same time delivering against our business objectives.
Our financial results could be adversely impacted by the dilutive impacts from the loss of earnings associated with divestitures or increased expenses associated with acquisitions or divestitures. Furthermore, our ability to achieve the benefits we anticipate from any acquisitions we make will depend in large part upon whether we are able to leverage the capabilities of the acquired companies to grow revenue across our combined organization, manage the acquired company’s business, execute our strategy in an efficient and effective manner and realize anticipated cost synergies. In addition, private companies recently acquired which were previously not subject to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), may lack certain internal controls, which could ultimately affect our ability to ensure compliance with the requirements of SOX.
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The integration of businesses, personnel, product lines and technologies can be difficult, time consuming and subject to significant risks. For example, we could lose key personnel from companies that we acquire, incur unanticipated costs, lose major sources of revenue, fail to integrate critical technologies, suffer business disruptions, fail to capture anticipated synergies, fail to establish satisfactory internal controls, or incur unanticipated liabilities. Any of these difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and decrease our revenue.
Any future acquisitions and divestitures are subject to the risks described above. Furthermore, we might assume or incur additional debt or issue additional equity securities to pay for future acquisitions or divestitures. Additional debt may negatively impact our results and increase our financial risk, and the issuance of any additional equity securities could dilute our then existing shareholders’ ownership. We may not realize anticipated benefits of any future acquisitions or divestitures, and any such acquisition or divestiture could have a material adverse effect on our business, financial condition and results of operations.
Our strategic restructuring has consolidated our operating segments and further concentrated our product mix, which could increase risks related to the financial conditions of a more concentrated customer base and may not result in all of the intended benefits.

We have implemented a strategy-driven restructuring plan to simplify our product portfolio, improve operational efficiency, and drive long-term growth. Restructuring efforts included consolidation of our operating segments, targeted workforce reductions, and facility optimization initiatives. These shifts could expose the Company to a more concentrated customer base. The concentration of the Company’s customer base could increase its risks related to the financial conditions of its customers. In addition, changes in the market demand for the Company’s product mix could significantly affect our margins and could adversely affect our profitability and future growth. Our restructuring plan might not capture all of the intended benefits or result in the expected cost savings. Further, the restructuring may yield unintended consequences such as attrition beyond our targeted workforce reduction. These risks may impact the Company’s business, financial condition, results of operations and cash flows.
We have indebtedness as a result of the issuance of senior unsecured notes (the “Notes”) and borrowings against our unsecured credit facility, and we are subject to certain restrictive covenants under our unsecured credit facility and the indenture governing the Notes, and changes in the rate at which we can obtain indebtedness, any of which may limit our operational and financial flexibility.

Our ability to meet our debt service obligations and comply with the financial covenants under our credit facility will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Our inability to meet our debt service obligations or comply with the required covenants could result in a default under the credit facility or indenture. In the event of any such default, under the credit facility, the lenders thereunder could elect to declare all outstanding debt, accrued interest and fees under the facility to be due and immediately payable. In the event of any such default under our indenture, either the trustee or the holders of at least 25 percent of the outstanding principal amount of the Notes could declare the principal amount of all of the Notes to be due and payable immediately. Certain of our indebtedness is intrinsically linked to benchmark rates that are the subject of global benchmark rate reform. On December 4, 2020 the ICE Benchmark Administration ("IBA") published its consultation on its intent to cease publication of certain USD LIBOR tenors along with all tenors of EUR, CHF, GBP and JPY LIBOR after December 31, 2021. Pursuant to this consultation, a complete phase out of all tenors of USD LIBOR is expected on or around June 30, 2023. Market participants were eligible to provide feedback through January 25, 2021. While we believe our exposure to market risk associated with the discontinuation of LIBOR is limited because our Notes carry a fixed-rate coupon and our unsecured credit facility agreement includes provisions for a successor rate, the consequences of these developments cannot be entirely predicted or reasonably estimated. If LIBOR is no longer available or if our lenders have increased costs due to changes in LIBOR, it could adversely impact our interest expense, results of operations and cash flows.
We may not be able to refinance our indebtedness on favorable terms, if at all, which could materially and adversely affect our liquidity and our ongoing results of operations.
Our ability to refinance indebtedness, including the Notes, will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our indebtedness, including the Notes, could also require us to comply with more onerous covenants and further restrict our business operations.
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Our inability to refinance our indebtedness or to do so upon favorable terms could materially and adversely affect our business, results of operations, financial condition and cash flows, and make us vulnerable to adverse industry and general economic conditions.
We may not be adequately insured against many potential liabilities.

Although we maintain insurance policies with respect to a broad range of risks, including automobile liability, general liability, workers’ compensation and employee group health, these policies do not cover all possible claims and certain of the policies are subject to large deductibles. Accordingly, we are effectively self-insured for a substantial number of actual and potential claims. In addition, if any of our insurance carriers defaulted on its obligations to provide insurance coverage by reason of its insolvency or for other reasons, our exposure to claims would increase and our profits would be adversely affected. Our estimates for unpaid claims and expenses are based on known facts, historical trends and industry averages, utilizing the assistance of actuarial services. The determination of such estimated liabilities and their appropriateness are reviewed and updated at least quarterly. However, these liabilities are difficult to assess and estimate due to many relevant factors, the effects of which are often unknown, including the severity of an injury or damage, the determination of liability in proportion to other parties, the timeliness of reported claims, the effectiveness of our risk management and safety programs and the terms and conditions of our insurance policies. Our accruals are based upon known facts, historical trends and our reasonable estimate of future expenses, and we believe such accruals are adequate. However, unknown or changing trends, risks or circumstances, such as increases in claims, a weakening economy, increases in medical costs, changes in case law or legislation or changes in the nature of the work we perform, could render our current estimates and accruals inadequate. In such case, adjustments to our balance sheet may be required and these increased liabilities would be recorded in the period that the experience becomes known. Insurance carriers may be unwilling, in the future, to provide our current levels of coverage without a significant increase in insurance premiums and/or collateral requirements to cover our obligations to them. Increased collateral requirements may be in the form of additional letters of credit and/or cash, and an increase in collateral requirements could significantly reduce our liquidity. If insurance premiums increase, and/or if insurance claims are higher than our estimates, our profitability could be adversely affected.
Changes in our effective income tax rate may have an adverse effect on our results of operations.
We are subject to taxes in the United States and numerous foreign jurisdictions, including Sweden, Belgium and the United Kingdom, where a number of our subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our future effective tax rate could be affected by changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in the enforcement environment, and changes in tax laws or their interpretations, in the United States and in foreign jurisdictions.
Our future effective tax rate may be adversely affected by a number of additional factors including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the valuation of our deferred tax assets and liabilities;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in share-based compensation expense;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles;
changes in foreign tax rates or agreed upon foreign taxable base; and/or
the repatriation of earnings from outside the United States for which we have not previously provided for United States taxes.
Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the United States Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our financial condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor. For example, during the fourth quarter of 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of the Company's non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $365.7 million (Swedish kroner 3.0 billion).
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While we believe the STA’s assertions in the reassessment are not in accordance with Swedish tax regulations, if the STA is successful in its claim either in the short or long-term, the tax assessment could materially affect our results of operation, cash flow and financial position.
In addition, during 2019, the European Commission announced the opening of a separate review to assess whether an excess profit tax ruling granted by Belgium to one of our international subsidiaries is in breach of European Union state aid rules. We believe we have paid all taxes assessed by Belgium, yet an adverse opinion from the European Commission regarding the applicability of state aid rules could be cause for material accrual of tax in a future period which could affect our results of operations, cash flow and financial position.
State of Delaware law and our governing documents contain provisions that could discourage or prevent a potential takeover, even if the transaction would benefit our shareholders.
Other companies may seek to acquire or merge with us. An acquisition or merger of our Company could result in benefits to our shareholders, including an increase in the value of our common stock. Some provisions of our Certificate of Incorporation and Bylaws, including our ability to issue preferred stock without further action by our shareholders, as well as provisions of the General Corporation Law of the State of Delaware (the “DGCL”), may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable.
Our Bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our Bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be, to the fullest extent permitted by law, the sole and exclusive forum for any shareholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or shareholder of the corporation to the corporation or the corporation's shareholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or as to which the DGCL, our Certificate of Incorporation or the Bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a shareholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees and agents. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction.

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

ITEM 2.    PROPERTIES
At December 31, 2020, properties used primarily by our Industrial Technologies segment consist of Company-owned office buildings in Nashua, New Hampshire; Goleta (Santa Barbara), California; Tallinn, Estonia; Täby (Stockholm), Sweden; Fareham (Portsmouth), United Kingdom; and leased office space in Charlotte, North Carolina; Marlborough, Massachusetts; Meer (Antwerp), Belgium; Richmond (Vancouver) British Columbia, Canada. Our Industrial Technologies segment also owns and leases smaller offices located in certain other United States locations as well as other countries, primarily in Europe.
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At December 31, 2020, properties used primarily by our Defense Technologies segment consist of Company-owned office buildings in Wilsonville (Portland), Oregon; North Billerica (Boston), Massachusetts; Orlando, Florida; Freeport, Pennsylvania; and leased office space in Elkridge (Baltimore), Maryland; Arlington, Virginia; Stillwater, Oklahoma; West Lafayette, Indiana; Bozeman, Montana; Chelmsford, Massachusetts; Oak Ridge, Tennessee; Ventura, California; Waterloo (Ontario), Canada; Havlstad, Norway; Dubai, United Arab Emirates. Our Defense Technologies segment also owns and leases smaller offices located in certain other United States locations as well as other countries.
We conduct manufacturing, research and development, and sales and administration in such facilities worldwide. The total amount of space used by us for all of our operations is approximately 1.9 million square feet, of which 1.0 million square feet is for owned facilities and 0.9 million square feet is for leased facilities.
We believe all of our properties are suitable for their intended use, adequate to meet our current and near-term business needs, and in good condition. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

ITEM 3.    LEGAL PROCEEDINGS
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of its business. The information required with respect to this item can be found under Note 14, "Contingencies" of the Notes to the Consolidated Financial Statements in Item 8, which is incorporated by reference into this Item 3.

ITEM 4.    MINE SAFETY DISCLOSURES
Not Applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company has been traded on the NASDAQ Global Market since June 22, 1993, under the symbol “FLIR.” At December 31, 2020, there were approximately 170 holders of record of our common stock and 131,153,141 common shares outstanding. We began paying cash dividends in 2011 and currently intend to continue to pay cash dividends to holders of our common stock for the foreseeable future, subject to covenants set forth in the Merger Agreement with Teledyne, but such payment remains at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, and other factors our Board of Directors deems relevant.
The graph below shows a comparison of the five-year cumulative total shareholder return for the Company’s common stock with the cumulative total returns on the Standard & Poor’s (“S&P”) 500 Index and the S&P 500 Electronic Equipment & Instruments Index for the same five-year period. The data used for this graph assumes that $100 was invested in the Company and in each index on December 31, 2015, and that all dividends were reinvested.
The information contained in this comparative performance graph section shall not be deemed to be filed as part of this Annual Report on Form 10-K and does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate the graph by reference.
flir-20201231_g1.jpg
The stock performance graph was plotted using the following data:
201520162017201820192020
FLIR Systems, Inc.$100.00 $130.91 $171.24 $161.92 $196.26 $168.07 
S&P 500 Index100.00 111.96 136.40 130.42 171.49 203.04 
S&P 500 Electronic Equipment Instruments &
Components Index
100.00 124.37 168.39 147.35 190.10 234.56 
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During the three months ended December 31, 2020, we repurchased the following shares:
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced  Plans or Programs(1)Maximum Number of Shares that May Yet Be Purchased at December 31, 2020 Under the Plans or Programs(1)
November 1 to November 30, 2020450,000 $36.25 450,000 
Total450,000 $36.25 450,000 7,886,970 
(1) All share repurchases were subject to applicable securities laws and were at times and in amounts as management deemed appropriate. The repurchases were conducted through open market transactions under the authorization by the Board of Directors on February 7, 2019 to repurchase of up to 15.0 million shares of the Company's outstanding common stock. This authorization expired on February 7, 2021.

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ITEM 6.    SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.” The financial information below reflects the results or impact of our acquisitions since the date the entities were purchased.
 Year Ended December 31,
 20202019201820172016
 (in thousands, except per share amounts)
Consolidated Statements of Income Data:
Revenue$1,923,689 $1,887,026 (3)$1,775,686 $1,800,434 $1,662,167 
Cost of goods sold976,676 957,640 (4)874,463 941,658 895,046 
Gross profit947,013 929,386 901,223 858,776 767,121 
Operating expenses:
Research and development210,166 203,611 174,962 170,735 147,537 
Selling, general and administrative389,130 (1)442,416 (5)389,093 (6)373,867 322,435 
Restructuring expenses30,475 10,099 4,854 625 1,431 
Loss on sale of business— — 13,708 23,588 — 
Total operating expenses629,771 656,126 582,617 568,815 471,403 
Earnings from operations317,242 273,260 318,606 289,961 295,718 
Interest expense27,240 27,711 16,147 16,804 18,071 
Interest income(608)(2,651)(3,901)(1,764)(1,402)
Loss on debt extinguishment9,126 (2)— — — — 
Other (income) expense, net(3,520)6,284 (743)(4,144)3,092 
Earnings before income taxes285,004 241,916 307,103 279,065 275,957 
Income tax provision72,420 70,319 24,678 (7)171,842 (8)109,331 (9)
Net earnings$212,584 $171,597 $282,425 $107,223 $166,626 
Net earnings per share:
Basic earnings per share$1.61 $1.27 $2.05 $0.78 $1.22 
Diluted earnings per share$1.60 $1.26 $2.01 $0.77 $1.20 
(1) The 2020 selling, general and administrative expenses include $9.4 million separation, transaction and integration related expenses and $22.6 million Consent Agreement related costs. See Note 14, "Contingencies," of the Notes to the Consolidated Financial Statements in Item 8 for additional information.
(2) During 2020 we recorded a $9.1 million loss on debt extinguishment due to the redemption of our 2021 Notes. See Note 11, "Debt" of the Notes to the Consolidated Financial Statements in Item 8 for additional information.
(3) The 2019 revenue includes contributions from the acquisitions made during 2019. See “Consolidated Operating Results” of the Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
(4) The 2019 cost of goods sold include $5.9 million inventory write downs associated with the OTS restructuring. See Note 6, "Inventories" and Note 21, "Restructuring" of the Notes to the Consolidated Financial Statements in Item 8 for additional information.
(5) The 2019 selling, general and administrative expenses include $17.0 million separation, transaction and integration related expenses, $22.3 million Consent Agreement related costs and $7.8 million goodwill and intangible asset impairment charges associated with the OTS restructuring. See Note 9, "Goodwill," Note 10, "Intangible Assets" and Note 21, "Restructuring" of the Notes to the Consolidated Financial Statements in Item 8 for additional information.
(6) The 2018 selling, general and administrative expenses include $15.0 million for the costs of a regulatory settlement, pursuant to the Consent Agreement. See Note 14, "Contingencies," of the Notes to the Consolidated Financial Statements in Item 8 for additional information.
(7) The 2018 tax provision includes a discrete tax benefit of $33.1 million for the cancellation of Belgium tax assessments issued as part of the European Commission's decision regarding state aid.
(8) The 2017 tax provision includes an estimated tax expense of $94.4 million resulting from the effects of the Tax Cuts and Jobs Act (the “Tax Act”) and our subsequent decision to end permanent reinvestment of all previously unremitted foreign earnings.
(9) The 2016 tax provision includes a discrete tax charge for certain tax legislation in Belgium of $39.6 million.
 December 31,
 20202019201820172016
 (in thousands, except per share amounts)
Consolidated Balance Sheets Data:
Working capital$790,101 $695,679 $976,633 $992,286 $802,945 
Total assets3,252,348 3,137,541 2,781,242 2,810,026 2,619,706 
Short-term debt13,473 28,444 — 11 15,025 
Long-term debt, excluding current portion724,919 648,419 421,948 420,684 501,921 
Total shareholders’ equity1,883,374 1,871,433 1,876,786 1,834,558 1,678,326 
Other Financial Data:
Cash dividends declared per common share$0.68 $0.68 $0.64 $0.60 $0.48 
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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Acquisition by Teledyne
On January 4, 2021, Teledyne and the Company announced that the companies have entered into a Merger Agreement under which Teledyne will acquire FLIR in a cash and stock transaction valued at approximately $8.0 billion. Under the terms of the Merger Agreement, FLIR stockholders will receive $28.00 per share in cash and 0.0718 shares of Teledyne common stock for each FLIR share, which implies a total purchase price of approximately $56.00 per FLIR share based on Teledyne’s 5-day volume weighted average price as of December 31, 2020. The transaction is expected to close in the middle of 2021 subject to the receipt of required regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, approvals of Teledyne and FLIR stockholders and other customary closing conditions. We cannot guarantee that the Mergers contemplated by the Merger Agreement will be completed or that, if completed, it will be exactly on the terms as set forth in the Merger Agreement. Should the Mergers not be completed, the Company may receive or pay a breakup fee, as provided for in the Merger Agreement.
Impact of COVID-19
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak as a global health emergency. On March 11, 2020, the World Health Organization raised the COVID-19 outbreak to “pandemic” status. Transmission of COVID-19 and efforts to contain its spread resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the U.S. and global economy and financial environments. In addition, as cases have resurged in parts of the U.S., including areas in which we maintain large facilities, we have seen governments slow or reverse efforts to reopen or shift into later phases of recovery, with increased risks to our operations.
The health and safety of our employees across the globe remain our top priority during this crisis. We have enacted stringent safety protocols to protect our employees and ensure we can continue to service our customers. We initiated a site entry restriction policy for external visitors to our facilities. We have also developed contingency plans for staggered work schedules designed to reduce the number of employees working at a given time. We are regularly deep cleaning our facilities, advising all employees to follow safe hygiene practices, and requiring employees to stay home if they have any of the known symptoms or have come into contact with people who have tested positive for COVID-19. We have also implemented global employee travel restrictions and allowed employees to work remotely if they are able to do so.
In aggregate, the outbreak did not have a material impact on our consolidated financial results in 2020. While the Industrial Technologies segment experienced an increase in demand for its EST cameras during 2020 as a result of the COVID-19 pandemic, which are being deployed to help prevent the spread of the virus, this increase has been partially offset by lower volume in certain commercial end markets. The Defense Technologies segment has experienced administrative processing delays impacting the timing of bookings and revenue. These trends are likely to affect the segment’s results in subsequent quarters, although it is not yet possible to estimate the longer-term effects of the pandemic.
We continue to monitor the evolving situation related to COVID-19. The extent to which COVID-19 impacts our operations or financial results will further depend on future developments, which are highly uncertain and cannot be predicted, including the status of state and local government reopening plans and any resurgence of illness and the reimposition of certain restrictions in connection therewith, additional actions taken by governments, businesses and individuals to contain the virus or address its impact, new information which may emerge concerning the severity or treatability of the virus, the successful rollout of vaccines, new strains of the virus, and the extent of the economic downturn resulting from the response to the virus, among others.
Overview
We are a world leader in sensor systems that enhance perception and awareness. We were founded in 1978 and have since become a premier designer, manufacturer, and marketer of thermal imaging and other sensing products and systems. Our advanced sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications in government, industrial and commercial markets worldwide.
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Our goal is to both enable our customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for our shareholders. We create value for our customers by improving personal and public safety and security, providing advanced intelligence, surveillance, reconnaissance, and tactical defense capabilities, facilitating air, ground, and maritime-based situational awareness, detecting electrical, mechanical and building envelope problems, displaying process irregularities, detecting volatile organic gas emissions, and enhancing advanced driver-assistance systems and autonomous driving solutions, as well as a variety of other uses of thermal and other sensing technologies. Our business model and range of solutions allow us to sell products to various end markets, including industrial, original equipment manufacturing, military, homeland security, enterprise, infrastructure, and environmental end markets. We sell off-the-shelf products and customized solutions in configurations to suit specific customer requirements in an efficient, timely, and affordable manner, and support those customers with training and ongoing support and services. Centered on the design of products for low-cost manufacturing and high-volume distribution, our commercial operating model has been developed over time and provides us with a unique ability to adapt to market changes and meet our customers’ needs.
International revenue accounted for approximately 46 percent, 45 percent and 47 percent of our revenue in 2020, 2019 and 2018, respectively. We anticipate that international sales will continue to account for a significant percentage of revenue in the future. We have exposure to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations in the value of the United States dollar relative to other currencies. Factors contributing to this variability include significant manufacturing activity in Europe, significant sales denominated in currencies other than the United States dollar, and cross currency fluctuations between such currencies as the United States dollar, European euro, Swedish kronor and British pound sterling. The impact of those fluctuations is reflected throughout our consolidated financial statements, but in the aggregate, did not have a material impact on our results of operations in 2020.
We experience fluctuations in orders and sales due to seasonal variations and customer sales cycles, such as the seasonal pattern of contracting by the United States and certain foreign governments, the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations, and the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration. Such events have resulted and could continue to result in fluctuations in quarterly results in the future. As a result of such quarterly fluctuations in operating results, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance.
We expect that macroeconomic factors, including fluctuations in spending by United States government agencies, rates of GDP growth in certain geographic markets, and fluctuations in foreign currency exchange rates, will continue to impact our financial results and may render predictions regarding future performance difficult to make. In addition, in 2019 we successfully concluded a few large multi-year programs that provided revenue contributions over the past several years. While we have successfully won new programs, these new programs require investments in research and development and compliance to be successful, and investments in these programs will not translate into significant corresponding revenue until 2021 and beyond.
Historically we have selectively pursued the acquisition of businesses and investments at attractive valuations that would expand or complement our current portfolio and allow access to new customers or technologies, and also have explored the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization. In pursuing our business strategy, we routinely have conducted discussions, evaluated targets and entered into agreements regarding possible acquisitions, divestitures, ventures and equity investments.
We continue to build upon our strong market position, meeting the needs of our wide range of customers and are investing for long-term growth through the execution of our strategic priorities. To better position us to deliver long-term growth we launched a strategy-driven restructuring plan ("Project Be Ready") in February 2020. This initiative simplified our product portfolio and better aligned resources with higher growth opportunities while reducing costs. We discontinued certain non-core consumer centric product lines within the Outdoor and Tactical Systems business. In addition, we consolidated from three business units to two reportable segments (Industrial Technologies and Defense Technologies) by integrating the remaining businesses within the former Commercial business unit into the Industrial Technologies segment beginning in the first quarter of 2020.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
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We evaluate our critical estimates on an on-going basis and base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and differences could be material to our consolidated financial statements. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. We believe the following critical accounting policies and the related judgments and estimates are the most significant to the presentation of our consolidated financial statements and require the most difficult, subjective and complex judgments:
Revenue recognition. We record revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. We design, market and sell products primarily as commercial, off-the-shelf products. Certain customers request different system configurations, based on standard options or accessories that we offer. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We regularly enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In such situations, contract values are allocated to each performance obligation based on its relative estimated standalone selling price. The vast majority of our revenues are recognized at a point in time when goods are transferred to a customer. However, for certain contracts that include highly customized components, if performance does not create an asset with an alternative use and termination for convenience clauses provide an enforceable right to payment for performance completed to date, revenue is recognized over time as the performance obligation is satisfied.
Revenue includes certain shipping and handling costs and is stated net of third-party agency fees. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold. Revenue is recognized net of allowances for returns and net of taxes collected from customers which are subsequently remitted to governmental authorities. Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our products over a specified period of time, generally twelve to twenty-four months, at no cost to our customers. Warranty liabilities are established at the time that revenue is recognized at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements. Provisions for estimated losses on sales or related receivables are recorded when identified. Service revenue is deferred and recognized over the contract period, as is the case for extended warranty contracts, or recognized as services are provided.
Inventory. Our policy is to record inventory write-downs when conditions exist that indicate that our inventories are likely to be in excess of anticipated demand or are obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate the ability to realize the value of our inventories based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Purchasing requirements and alternative usages are evaluated within these processes to mitigate inventory exposure. When recorded, our write-downs are intended to reduce the carrying value of our inventories to their net realizable value and establish a new cost basis. As of December 31, 2020, our inventories of $472.2 million are stated net of prior inventory write-downs. If actual demand for our products deteriorates or market conditions are less favorable than those that we project, additional inventory write-downs may be required in the future.
Intangible Assets. We allocate the purchase price of acquired businesses to the underlying tangible and intangible assets acquired and liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. Such fair value assessments require judgments and estimates that can be affected by contract performance and other factors over time, which may cause final amounts to differ materially from original estimates. Adjustments to the fair value of purchased assets and liabilities after the initial measurement period are recognized in net earnings.
We recognize purchased intangible assets in connection with our business acquisitions at fair value on the acquisition date. The most significant purchased intangible assets recognized from our acquisitions are generally identifiable intangible assets. We determine the fair value of those intangible assets based on estimates and judgments, including, but not limited to, the amount and timing of expected future cash flows, growth rates and discount rates.
Intangible assets are amortized using the method that best reflects how their economic benefits are utilized, or, if a pattern of economic benefits cannot be reliably determined, are amortized using a straight-line methodology over their estimated useful lives. Intangible assets with indefinite useful lives are evaluated annually for impairment, or more frequently if required when circumstances indicate that the carrying amounts may not be recoverable. Impairment exists when the carrying value is greater than the expected undiscounted future cash flows expected to be provided by the asset group. If impairment exists, the asset group is written down to its fair value. The Company did not recognize any impairment charges on intangible assets during the year ended December 31, 2020.
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Goodwill. Effective January 1, 2019, we adopted the requirements of ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Goodwill represents the excess purchase price of an acquired enterprise over the estimated fair value of identifiable net assets acquired. We assess goodwill for potential impairment at the reporting unit level during the third quarter of each year, or whenever events or circumstances indicate that the carrying value of these assets may exceed their fair value.
We elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments and entity specific factors such as strategies and financial performance and other events relevant to the entity or reporting unit under evaluation. If, based on our review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, (of if we elected to bypass assessing the qualitative factors) we would perform a quantitative impairment test to identify goodwill impairment and measure the amount of goodwill impairment loss to be recognized (if any) by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
During the first quarter of 2020, as a result of a deterioration in macroeconomic conditions driven by COVID-19 as well as Company-specific events which combined resulted in declines to our stock price and market capitalization, the Company determined it was more likely than not that these factors had a significant adverse impact on its reporting units. An interim quantitative goodwill impairment analysis was performed as of March 31, 2020 and the Company determined that the fair values of its reporting units were greater than their carrying values. During the third quarter of 2020, the Company performed its annual goodwill impairment analysis. The Company performed a qualitative analysis for all reporting units and determined that it was more likely than not that the fair values of the reporting units were in excess of the individual reporting units carrying values, and as a result, a quantitative step one analysis was not necessary. The Company did not recognize any impairment charges on goodwill during the year ended December 31, 2020.
Contingencies. We are subject to the possibility of loss contingencies arising in the normal course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals and disclosures should be adjusted.
Income taxes.  We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities measured using the enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets are not more likely than not to be realized in the future. In making that determination, on a jurisdiction by jurisdiction basis, we estimate our future taxable income based upon historical operating results and external market data. Future levels of taxable income are dependent upon, but not limited to, general economic conditions, competitive pressures and other factors beyond our control. As of December 31, 2020, we have determined that a valuation allowance against our deferred tax assets of $4.4 million is required. If we should determine that we may be unable to realize our deferred tax assets to the extent reported, an adjustment to the deferred tax assets would be recorded in the period such determination is made.
We are subject to income taxes in the United States and in numerous foreign jurisdictions, and in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. We record a benefit on a tax position when we determine that it is more likely than not that the position is sustainable upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions that are more likely than not to be sustained, we measure the tax position at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is effectively settled, using information that is available at the balance sheet date.  We review our tax positions as circumstances warrant and update our liability for additional taxes as changes in available facts arise.
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Consolidated Operating Results
The following discussion provides an overview of our operating results by addressing key elements in our Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations for 2020, 2019 and 2018. Given the nature of our business, we believe revenue and earnings from operations, or operating income (including operating margin percentage), are most relevant to an understanding of our performance at a segment level. Additionally, at the segment level we disclose backlog, which represents orders received for products or services for which a sales agreement is in place and no revenue has been recognized. Backlog is not an absolute indicator of future revenue because a portion of the orders in backlog could be delayed or canceled at the customer's discretion. Further, due to the COVID-19 pandemic, as described above within “Impact of COVID-19,” we are unsure how future results will compare to historic trends in the conversion of backlog to revenue.
The following table summarizes our consolidated operating results for the periods presented (in thousands, except percentages):
 Year Ended2020 to 20192019 to 2018
December 31,December 31,December 31,DollarPercentDollarPercent
 202020192018ChangeChangeChangeChange
Revenue$1,923,689 $1,887,026 $1,775,686 $36,663 1.9 %$111,340 6.3 %
Cost of goods sold976,676 957,640 874,463 19,036 2.0 %83,177 9.5 %
Gross profit947,013 929,386 901,223 17,627 1.9 %28,163 3.1 %
Gross margin49.2 %49.3 %50.8 %
Research and development210,166 203,611 174,962 6,555 3.2 %28,649 16.4 %
Selling, general and administrative389,130 442,416 389,093 (53,286)(12.0)%53,323 13.7 %
Restructuring expenses30,475 10,099 4,854 20,376 201.8 %5,245 108.1 %
Loss on sale of business— — 13,708 — NM(13,708)NM
Earnings from operations317,242 273,260 318,606 43,982 16.1 %(45,346)(14.2)%
Interest expense27,240 27,711 16,147 (471)(1.7)%11,564 71.6 %
Interest income(608)(2,651)(3,901)2,043 (77.1)%1,250 (32.0)%
Loss on debt extinguishment9,126 — — 9,126 NM— NM
Other (income) expense, net(3,520)6,284 (743)(9,804)(156.0)7,027 (945.8)%
Earnings before income taxes285,004 241,916 307,103 43,088 17.8 %(65,187)(21.2)%
Income tax provision72,420 70,319 24,678 2,101 3.0 %45,641 184.9 %
Net earnings$212,584 $171,597 $282,425 $40,987 23.9 %$(110,828)(39.2)%
NM - Not meaningful
Revenue. The increase for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily associated with increased demand for EST solutions in Industrial Technologies as a result of the COVID-19 pandemic and contributions of unmanned revenues from the Aeryon Labs, Inc. ("Aeryon") and Endeavor Robotics Holdings Inc. ("Endeavor") acquisitions in Defense Technologies. The increase was partially offset by lower volume in certain commercial end markets in Industrial Technologies and the completion of certain contracts that contributed to revenue in the prior year in Defense Technologies.
The increase for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily due the acquisitions of Aeryon and Endeavor during the first quarter of 2019, coupled with volume increases of unmanned solutions and surveillance systems in Defense Technologies. These were all partially offset by volume declines in the Outdoor and Tactical Systems ("OTS") business and the Maritime product lines during 2019 in Industrial Technologies. Further contributing to this decline was our divestiture of the Consumer and Small and Medium-sized ("SMB") Security business announced during the first quarter of 2018.
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International revenue in 2020 totaled $894.4 million, representing 46.4 percent of revenue. This compares with international revenue in 2019 which totaled $849.8 million, representing 45.0 percent of revenue, and $841.2 million in 2018, representing 47.4 percent of revenue. While the sales mix between United States and international sales may fluctuate from year to year, we expect revenue from customers outside the United States to continue to comprise a significant portion of our total revenue on a long-term basis.
Cost of goods sold. The increase for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to increased revenue volume, partially offset by a favorable product mix in Industrial Technologies and inventory write downs associated with the OTS restructuring taken in 2019 that did not repeat in 2020.
The increase for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily attributable to the acquisitions of Aeryon and Endeavor during the first quarter of 2019, coupled with volume increases of unmanned solutions and surveillance systems in Defense Technologies. The increase was partially offset by volume declines in the OTS business (including $5.9 million of inventory write downs associated with the OTS restructuring) and in the Maritime product lines during 2019 as well as the divestiture of the Consumer and SMB Security businesses during the first quarter of 2018 in Industrial Technologies.
Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs.
Research and development. Research and development expenses represented 10.9 percent of revenue in 2020, compared to 10.8 percent of revenue in 2019 and 9.9 percent of revenue in 2018. The change in research and development expenses in 2020 as compared to 2019 was relatively flat. The increase in research and development expenses in 2019 as compared to 2018 was primarily related to the inclusion of companies acquired in 2019 and our commitment to research and development. We intend to continue to have significant research and development expenses in the future to provide a continuing flow of innovative and high-quality products that maintain and enhance our competitive position in each of our business segments. We believe that future cash flow generation will be sufficient to support the development of new products that fuel the growth of the business.
Selling, general and administrative expenses. The decrease for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to operating expense reductions from Project Be Ready, decreases in travel and marketing costs, reduced intangible asset amortization, lower asset impairment charges related to restructuring actions and a decrease in separation, transaction, and integration costs.
The increase for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily attributed to acquisition related expenses for acquisitions occurring in the first half of 2019, Consent Agreement related costs and goodwill and intangible asset impairment charges related to restructuring actions.
Restructuring expenses. We had various active restructuring programs focused on reorganization and discontinuation of certain businesses, targeted workforce reductions, and facility consolidation actions. In the first quarter of 2020, we initiated a strategy-driven restructuring plan, Project Be Ready, to simplify our product portfolio and better align resources with higher growth opportunities while reducing costs. Project Be Ready included an organizational realignment, targeted workforce reductions, and facility optimization initiatives. All previously approved ongoing restructuring activities that were in process as of January 1, 2020 were consolidated into Project Be Ready. The net pre-tax restructuring charges recorded for these programs during the year ended December 31, 2020 primarily represent employee separation costs and third party and other costs. During the years ended December 31, 2019 and 2018 we also recorded net pre-tax restructuring charges in connection with other restructuring activities. Refer to Note 21, "Restructuring" of the Notes to the Consolidated Financial Statements in Item 8 for further discussion.
Loss on sale of business. During the year ended December 31, 2018, as a result of the divestiture of our Consumer and SMB Security business, net working capital adjustments, and subsequent negotiations with the buyer, we recognized an additional pre-tax loss of $13.7 million.
Interest expense. Interest expense for the year ended December 31, 2020 was associated with our previous 3.125 percent senior unsecured notes (the “2021 Notes”) in aggregate principal amount of $425.0 million and our 2.500 percent senior unsecured notes (the “2030 Notes”) in aggregate principal amount of $500.0 million that were issued and sold on August 3, 2020, as well as interest on amounts drawn under our credit facility. The 2021 Notes were redeemed in full in connection with the August 2020 issuance of the 2030 Notes in a public offering.
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Interest expense for the year ended December 31, 2019 was associated with our 2021 Notes as well as interest on amounts drawn under our credit facility. Interest expense for the year ended December 31, 2018 was primarily associated with the 2021 Notes.
Loss on debt extinguishment. During the year ended December 31, 2020 we recorded a $9.1 million loss on debt extinguishment due to the redemption of our 2021 Notes, which consisted of a $8.5 million payment of redemption premium and $0.6 million for the unamortized portion of the original issue discount and previously incurred issuance costs.
Other (income) expense, net. The change in other (income) expense, net for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to increased gains on currency exchange rate fluctuations and increased gains on certain deferred compensation arrangements.
The change in other (income) expense, net for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily attributable to impairments associated with our equity investments as well as minority investments losses.
Income taxes. Our income tax provisions for the years ended December 31, 2020, 2019 and 2018 represented effective tax rates of 25.4 percent, 29.1 percent and 8.0 percent, respectively. Our effective tax rate in 2020 was higher than the United States Federal tax rate of 21.0 percent mainly due to state taxes, non-deductible expenses, accruals for unrecognized tax benefits and settlements with taxing authorities, and higher tax rates on income earned in foreign jurisdictions. These amounts were partially offset by tax credits generated in the United States and foreign jurisdictions. Our effective tax rate in 2019 was higher than the United States Federal tax rate of 21.0 percent mainly due to accruals for settlements with various taxing authorities, state taxes, additional withholding tax due on future distributions of foreign earnings included in the transition tax levied by the Tax Act, and higher tax rates on income earned in foreign jurisdictions. These amounts were offset by tax credits generated in the United States and foreign jurisdictions as well as excess tax benefits from stock compensation. Our effective tax rate in 2018 was lower than the United States Federal tax rate of 21.0 percent mainly due to recognition of previously unrecognized tax benefits relating to the European Union state aid recovery, excess tax benefits from stock compensation and a reduction in the accrual for the United States transition tax, offset partially by state taxes, higher tax rates applied to income earned in certain foreign jurisdictions, and other discrete items.
At December 31, 2020, we had United States tax net operating loss carry-forwards totaling approximately $42.0 million which expire between 2032 and 2040 and are subject to annual limitation under Section 382 of the US Internal Revenue Code. In addition, we have various foreign net operating loss carry-forwards totaling approximately $29.3 million, a portion of which expire between 2021 and 2040 and a portion of which have an indefinite carry-forward period. Tax benefits as described above are recorded as assets when the benefits are more likely than not to be recognized. To the extent that we assess the realization of such assets to not be more likely than not, a valuation allowance is required to be recorded. As of December 31, 2020, we have determined that a valuation allowance against our deferred tax assets of $4.4 million is required, primarily related to foreign net operating losses and capital losses carried forward. A review of all available positive and negative evidence is considered, including past and future performance, the market environment in which we operate, utilization of tax attributes in the past, length of carry-back and carry-forward periods, and evaluation of potential tax planning strategies, when evaluating whether the deferred tax assets will be realized.
During the fourth quarter of 2018, the STA issued a reassessment of tax for the year ending December 31, 2012 to one of our non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $365.7 million (Swedish kroner 3.0 billion). On March 26, 2020, we received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA's reassessment. We do not agree with the Court’s ruling, continue to believe the STA's arguments in the reassessment are not in accordance with Swedish tax regulations or the treaty for the avoidance of double taxation between Sweden and Belgium, and have appealed the decision to the Administrative Court of Appeal in Stockholm. Consequently, no adjustment to the unrecognized tax benefits has been recorded in relation to this matter. We received a respite from paying the reassessment until after a decision by the Administrative Court of Appeal by putting in place a bank guarantee to secure possible future payment of the tax and interest. There can be no assurance that the appeal will be successful.
During the third quarter of 2019, the European Commission announced the opening of a separate review to assess whether an excess profit tax ruling granted by Belgium to one of our international subsidiaries is in breach of European Union state aid rules. We believe all taxes assessed by Belgium have been paid and have not adjusted unrecognized tax benefits in relation to this matter.
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On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the bipartisan $2.0 trillion economic relief package aimed at helping American workers and businesses impacted by the coronavirus pandemic. Through December 31, 2020 the CARES Act has not materially affected our income tax provision or deferred tax assets or liabilities. We will continue to monitor the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.
Segment Operating Results
In the first quarter of 2020, we completed a business reorganization as part of our "Project Be Ready" restructuring program, which resulted in identification of two reportable segments (Industrial Technologies and Defense Technologies). We commenced operating and reporting under the new organization structure effective January 1, 2020. See Note 19, “Operating Segments and Related Information” of the Notes to the Consolidated Financial Statements in Item 8 for a description of each operating segment, including the types of products and services from which each operating segment derives its revenues. See Note 21, "Restructuring" of the Notes to the Consolidated Financial Statements in Item 8 for further information on Project Be Ready.
Industrial Technologies Segment
Industrial Technologies operating results are as follows (in thousands, except percentages):
 Year Ended2020 to 20192019 to 2018
December 31,December 31,December 31,DollarPercentDollarPercent
 202020192018ChangeChangeChangeChange
Revenue$1,156,058 $1,092,085 $1,112,250 $63,973 5.9 %$(20,165)(1.8)%
Segment operating income344,376 276,167 268,472 68,209 24.7 %7,695 2.9 %
Segment operating margin29.8 %25.3 %24.1 %
Total backlog, end of period284,842 268,625 211,173 16,217 6.0 %57,452 27.2 %
The increase in revenue for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to increased demand for EST solutions as a result of the COVID-19 pandemic, partially offset by lower volume in commercial end markets. The increase in segment operating margin for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to the aforementioned higher revenue and associated gross profit, favorable product mix, operating expense reductions from Project Be Ready and decreases in marketing and travel costs. The increase in total backlog at December 31, 2020 as compared to the year ended December 31, 2019 was primarily the result of award timing on long-term orders and an increased volume of orders for maritime products during the fourth quarter of 2020.
The decrease in revenue for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was predominantly attributable to declines in the Integrated Imaging Systems ("IIS") businesses and volume declines in the OTS business and Maritime product lines during 2019, partially offset by strong growth across the cooled cores product lines. The increase in segment operating margin for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was predominantly attributable to favorable product mix led by the OEM business and productivity initiatives to improve manufacturing efficiency and decrease product costs across all businesses. The increase in total backlog at December 31, 2019 as compared to the year ended December 31, 2018 was primarily attributable to a substantial award from a large aerospace and defense customer.
Defense Technologies Segment
Defense Technologies operating results are as follows (in thousands, except percentages):
 Year Ended2020 to 20192019 to 2018
December 31,December 31,December 31,DollarPercentDollarPercent
 202020192018ChangeChangeChangeChange
Revenue$767,631 $794,941 $663,436 $(27,310)(3.4)%$131,505 19.8 %
Segment operating income168,469 196,592 194,009 (28,123)(14.3)%2,583 1.3 %
Segment operating margin21.9 %24.7 %29.2 %
Total backlog, end of period524,825 538,343 391,120 (13,518)(2.5)%147,223 37.6 %
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The decrease in revenue for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to the completion of certain contracts that contributed to revenue in the prior year period, partially offset by increased volumes for unmanned revenues from the Aeryon and Endeavor acquisitions. The decrease in segment operating margin for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to the lower revenue and associated gross profit and the ramp up of lower margin programs, partially offset by decreases in marketing and travel costs. The decrease in total backlog at December 31, 2020 as compared to the year ended December 31, 2019 was primarily a result of order volume and subsequent deployment timing.
The increase in both revenue and segment operating income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily driven by the Aeryon and Endeavor acquisitions during the first quarter of 2019 and increased volumes of unmanned solutions and surveillance systems. The decrease in segment operating margin for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily due to the inclusion of the operating losses from the same acquisitions noted above. The increase in total backlog at December 31, 2019 as compared to the year ended December 31, 2018 was primarily driven by the first quarter of 2019 acquisitions as noted above in addition to the timing of orders and subsequent timing of deployment of major programs.
Liquidity and Capital Resources
Overview
At December 31, 2020, we had a total of $297.8 million in cash and cash equivalents, $88.8 million of which was in the United States and $209.0 million at our foreign subsidiaries.
At December 31, 2020 and December 31, 2019, we had outstanding debt of $738.4 million and $676.9 million, respectively, which consists of unsecured term loans and borrowings under the revolving credit facility that we entered into during 2019 (collectively referred to as the "Credit Agreement") and senior unsecured notes. On August 3, 2020, we issued and sold our 2030 Notes in an underwritten public offering. The aggregate net proceeds from the offering were approximately $494.2 million after deducting underwriting fees, debt discount and transaction issuance costs. Interest on the 2030 Notes is payable semiannually in arrears on February 1 and August 1 of each year beginning on February 1, 2021. The net proceeds from the sale of the 2030 Notes were used to redeem the 2021 Notes, and for general corporate purposes, which may include funding for working capital, investments in our subsidiaries, capital expenditures, acquisitions, and stock repurchases. In connection with the redemption of the 2021 Notes, during the third quarter of 2020, we recorded a $9.1 million loss on debt extinguishment on the Consolidated Statements of Income. The Credit Agreement contains one financial covenant that requires maintenance of a consolidated total leverage ratio with which we complied at December 31, 2020. We had $14.1 million of letters of credit outstanding under the Credit Agreement at December 31, 2020, which reduced the total availability under the revolving commitments under the Credit Agreement. See Note 11, "Debt" of the Notes to the Consolidated Financial Statements in Item 8 for more details.
On January 11, 2019, a standby letter of credit not to exceed Swedish kronor 2.2 billion, was issued under a new bilateral letter of credit reimbursement agreement ("L/C Agreement") to secure a payment guarantee required by the Swedish Tax Authority in order to grant the original respite from paying the tax reassessment described in Note 15, "Income Taxes" of the Notes to the Consolidated Financial Statements in Item 8. The outstanding amount of the L/C Agreement was equivalent to approximately $270.5 million at December 31, 2020. While outstanding amounts under the L/C Agreement do not reduce the available revolving credit from the Credit Agreement, they are considered indebtedness and influence the incremental debt capacity governed by our Credit Agreement covenants. The standby letter of credit was further amended on April 24, 2020 to reflect the new respite.
We have repurchased shares of our common stock from time to time after considering market conditions and in accordance with repurchase limits authorized by our Board of Directors. Recent repurchases were conducted through open market transactions under the authorization by the Board of Directors on February 7, 2019 to repurchase of up to 15.0 million shares of the Company's outstanding common stock. This authorization expired on February 7, 2021. During the year ended December 31, 2020, approximately 4.6 million shares were repurchased for total cash payments of approximately $166.3 million. During the year ended December 31, 2020, we retired 4.1 million shares and had classified 0.5 million shares in treasury stock.
We paid dividends of $89.5 million, $91.7 million and $88.1 million during the years ended December 31, 2020, 2019 and 2018, respectively.
We have entered into the Merger Agreement with Teledyne and have agreed to pay a termination fee of $250.0 million to Teledyne if the Merger Agreement is terminated under any of the following circumstances:
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the Company’s Board makes a change in recommendation;
the Company enters into a definitive agreement to effect a superior proposal; or
the Company’s stockholders do not approve the proposed transaction and an alternative proposal for the Company has been publicly disclosed and not withdrawn, the Company materially breaches the Merger Agreement and an alternative proposal for the Company has been publicly disclosed and not withdrawn or the Company willfully and materially breaches the non-solicitation covenant, in each case, only if within twelve months of such termination, the Company enters into a definitive agreement with respect to an alternative proposal that is subsequently consummated.
Pursuant to the terms of the Merger Agreement, Teledyne would be required to pay the Company a termination fee of $250.0 million if the Merger Agreement is terminated under any of the following circumstances:
Teledyne’s Board makes a change in recommendation; or
Teledyne’s stockholders do not approve the proposed transaction and an alternative proposal for Teledyne has been publicly disclosed and not withdrawn or Teledyne materially breaches the Merger Agreement and an alternative proposal for Teledyne has been publicly disclosed and not withdrawn, in each case, only if within twelve months of such termination, Teledyne enters into a definitive agreement with respect to an alternative proposal that is subsequently consummated.
In addition, the Company has incurred and expects to continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Mergers. The substantial majority of these costs will be non-recurring expenses relating to the Mergers. Many of these costs are payable regardless of whether or not the Mergers are consummated.
For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through existing cash on hand, cash generated from operations and, if needed, amounts available on our existing credit facilities or financing available from other sources. However, as the impact of the COVID-19 pandemic on the global economy and our operations evolve, we will continue to assess our liquidity needs. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition, and could materially adversely impact our customers or suppliers. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
Summary of Cash Flows
The following table summarizes cash flow information for the periods presented (in thousands):
 Year Ended December 31,
 202020192018
Net cash provided by operating activities$312,363 $370,372 $374,157 
Net cash used in investing activities(83,455)(651,386)(44,100)
Net cash (used in) provided by financing activities(223,102)54,040 (318,944)
Net cash provided by operating activities decreased $58.0 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to less favorable timing of working capital changes.
Net cash provided by operating activities decreased $3.8 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to lower net earnings after adding back non-cash adjustments which were partially offset by more favorable changes in working capital.
Net cash used in investing activities decreased $567.9 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to cash paid for business acquisitions during 2019.
Net cash used in investing activities increased $607.3 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to cash paid for business acquisitions during 2019, partially offset by $25.9 million generated from the sale of our Consumer and SMB Security businesses during 2018.
Net cash (used in) provided by financing activities change of $277.1 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019, was primarily due to lower net proceeds of $222.8 million from our Credit Agreement and senior unsecured notes, which included the 2030 Notes proceeds that were issued and sold on August 3, 2020, an increase of $41.3 million in repurchases of common stock and lower proceeds of $16.4 million from shares issued.
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Net cash (used in) provided by financing activities change of $373.0 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018, was primarily due to $254.8 million of additional net proceeds from our revolving credit facility and long-term debt under our Credit Agreement and a decrease of $118.7 million in repurchases of common stock.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any off-balance sheet arrangements that have or are likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
As of December 31, 2020, our contractual obligations were as follows (in thousands):
 Payments Due by Period
TotalLess than
1 Year
1 – 3
Years
3 – 5
Years
More than
5 Years
Long-term debt, including interest$864,677 $29,788 $63,207 $222,724 $548,958 
Operating leases41,077 11,699 12,256 6,410 10,712 
Post-retirement obligations2,508 302 576 550 1,080 
Other obligations3,522 2,499 274 274 475 
$911,784 $44,288 $76,313 $229,958 $561,225 
Principal and interest on long-term debt, operating leases and licensing rights obligations are based upon contractual terms. Actual payments may differ in terms of both timing and amounts. We did not include approximately $288.6 million of standby letters of credit and performance bonds due to the unlikely event of payment, if any, of amounts under those arrangements.
The Company cannot make a reasonably reliable estimate of the period of potential cash settlement of its remaining unrecognized tax benefits of $25.7 million and, therefore, has not included the related unrecognized tax benefits in the table of contractual obligations as of December 31, 2020. For further detail on unrecognized tax benefits, see Note 15, "Income Taxes," to the Consolidated Financial Statements in Item 8.
Recent Accounting Pronouncements
See Note 1, "Nature of Business and Significant Accounting Policies," to the Consolidated Financial Statements in Item 8 for a discussion of recent accounting pronouncements.
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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
We have assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates. Similarly, certain revenues from products sold in countries outside the United States and costs associated with non-United States operations are denominated in foreign currencies. For more information on our foreign currency translation, see Note 1, "Nature of Business and Significant Accounting Policies," to the Consolidated Financial Statements in Item 8. Assets and liabilities located outside the United States are primarily located in Europe. Our investments in subsidiaries outside the United States with functional currencies other than the United States dollar are considered long-term. We currently engage in forward currency exchange contracts and other similar hedging activities to reduce our economic exposure to changes in exchange rates. At December 31, 2020 and 2019, exchange contracts with a notional amount of approximately $297.0 million and $444.8 million, respectively, were outstanding. Because we market, sell and license our products throughout the world, we could be adversely affected by weak economic conditions in international markets that could reduce demand for our products.
Our net investment in subsidiaries outside the United States, translated into United States dollars using the period-end exchange rates, was approximately $960.8 million at December 31, 2020. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in foreign exchange rates would be approximately $96.1 million at December 31, 2020. The potential loss in fair value is primarily due to the increase in the net investment of subsidiaries outside the United States. We have no plans to liquidate any of our subsidiaries outside the United States, and therefore, foreign exchange rate gains or losses on our international investments are reflected as a cumulative translation adjustment and do not increase or reduce our reported net earnings.
Interest Rate Risk
The Company’s exposure to changes in market interest rates relates primarily to interest paid on the Company’s outstanding floating rate debt. The Company’s outstanding floating rate debt consists of amounts borrowed under our revolving loan facility as well as outstanding term loans. These borrowings bear interest at the respective Eurocurrency rate (e.g., LIBOR) plus a scheduled spread. Fluctuations in market interest rates will cause interest expense increases or decreases on such outstanding debt.
As our risk management objectives include mitigating the risk of changes in cash flows attributable to changes in the designated three-month Eurocurrency rate on the Company’s Swedish kronor term loan, the Company entered into a floored interest rate swap for the aggregate notional amount borrowed; changes in the cash flows of the interest rate swap is expected to exactly offset the changes in cash flows attributable to fluctuations in the three-month Eurocurrency-based interest payments. The net effect of the swap is to convert the floating interest rate basis to a fixed rate of 0.59 percent.
On December 4, 2020 the ICE Benchmark Administration ("IBA") published its consultation on its intent to cease publication of certain USD LIBOR tenors along with all tenors of EUR, CHF, GBP and JPY LIBOR after December 31, 2021. Pursuant to this consultation, a complete phase out of all tenors of USD LIBOR is expected on or around June 30, 2023. Market participants were eligible to provide feedback through January 25, 2021. While management believes that the Company exposure to market risk associated with the discontinuation of LIBOR is limited because the Notes carry a fixed-rate coupon and the unsecured credit facility agreement includes provisions for a successor rate, the consequences of these developments cannot be entirely predicted or reasonably estimated.
See Liquidity and Capital Resources in Item 7, Note 4, "Derivative Financial Instruments" and Note 11, "Debt" to the Consolidated Financial Statements in Item 8 for additional information on the Company's debt and interest rate risk.
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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This item includes the following financial information:

StatementPage

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
FLIR Systems, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of FLIR Systems, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
    Contingencies associated with compliance matters
As discussed in Note 14 to the consolidated financial statements, the Company is involved in various ongoing compliance matters, including compliance with export laws and regulations. Such matters required judgment to determine the likelihood of potential loss in consideration of whether a contingent liability and/or disclosure was necessary.
We identified the evaluation of contingencies associated with compliance matters as a critical audit matter. Evaluation of the Company’s judgments regarding a compliance matter, including any required recognition of a liability and/or associated disclosure involved a high degree of subjective auditor judgment. In particular, subjective auditor judgment was required related to evaluating communication with relevant government agencies and precedent in similar matters, which impact the expected outcome.
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The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of a certain internal control related to the Company’s evaluation of contingencies and related disclosures, and specifically uncertainties impacting the assessment of the expected outcome of a compliance matter. We evaluated amounts recorded and disclosures made by:
inquiring of members of the Company’s legal department and external counsel for updates on ongoing matters
obtaining and reading letters directly from the Company’s external legal counsel that described the nature of outstanding compliance matters.
inspecting relevant correspondence between the Company and the governmental agencies related to compliance matters
analyzing relevant publicly available information about the Company, its competitors, and the industry regarding compliance matters of a similar nature to identify precedence in the evaluation of the expected outcome.
Uncertain tax positions in certain foreign taxing jurisdictions
As discussed in Notes 1 and 15 of the consolidated financial statements, the Company operates in multiple foreign tax jurisdictions. In the ordinary course of business there are many transactions and calculations where the ultimate tax determination is uncertain. A tax position is recorded when a determination is made that it is more likely than not the position is sustainable upon examination based on the technical merits of the position.
We identified the Company’s identification and assessment of uncertain tax positions in certain foreign taxing jurisdictions as a critical audit matter. This critical audit matter required challenging auditor judgment due to the nature and subjectivity of the applicable tax rules and/or their interpretation in each foreign jurisdiction.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of controls related to the determination of meeting the more likely than not threshold on potential uncertain tax positions. To evaluate the tax positions, we:
inspected external information and correspondence from foreign tax authorities on open tax examinations and tax assessments issued
inquired with external counsel through confirmations to understand matters, status, and facts relevant to tax positions.
We also involved international tax professionals with specialized skills and knowledge in foreign tax law, who assisted in:
inspecting management prepared tax positions and external tax opinion documentation and comparing to interpretation of tax law
inspecting other relevant cases and evaluating the impact to the Company’s positions
performing independent evaluation of tax positions and assumptions and comparing the results to the Company’s position, challenging the need for an uncertain tax position liability and disclosure
inquiring of external counsel through confirmations and meetings to update current status and facts of matters relevant to the probability of the outcome of uncertain tax positions.


/s/ KPMG LLP

We have served as the Company’s auditor since 2002.
Portland, Oregon
February 25, 2021
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FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

 Year Ended December 31,
 202020192018
Revenue$1,923,689 $1,887,026 $1,775,686 
Cost of goods sold976,676 957,640 874,463 
Gross profit947,013 929,386 901,223 
Operating expenses:
Research and development210,166 203,611 174,962 
Selling, general and administrative389,130 442,416 389,093 
Restructuring expenses30,475 10,099 4,854 
Loss on sale of business  13,708 
Total operating expenses629,771 656,126 582,617 
Earnings from operations317,242 273,260 318,606 
Interest expense27,240 27,711 16,147 
Interest income(608)(2,651)(3,901)
Loss on debt extinguishment9,126   
Other (income) expense, net(3,520)6,284 (743)
Earnings before income taxes285,004 241,916 307,103 
Income tax provision72,420 70,319 24,678 
Net earnings$212,584 $171,597 $282,425 
Net earnings per share:
Basic earnings per share$1.61 $1.27 $2.05 
Diluted earnings per share$1.60 $1.26 $2.01 



















The accompanying notes are an integral part of these consolidated financial statements.
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FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

 Year Ended December 31,
 202020192018
Net earnings$212,584 $171,597 $282,425 
Other comprehensive income (loss), net of tax:
Change in minimum liability for pension plans (1)
(192)(58)(338)
Fair value adjustment on derivative instruments designated as hedges (2)
2,177 (796) 
Unrealized gain on available-for-sale investments 4  
Foreign currency translation adjustments5,974 (16,003)(35,394)
Total other comprehensive income (loss)7,959 (16,853)(35,732)
Comprehensive income$220,543 $154,744 $246,693 
(1) The tax effects on the change in minimum liability for pension plans for the years ended December 31, 2020, and 2019 were immaterial and for 2018 were $0.1 million.
(2) The tax effects on interest rate swap contracts for the years ended December 31, 2020, 2019 and 2018 were $0.3 million, $0.3 million and $0.0 million, respectively.






























The accompanying notes are an integral part of these consolidated financial statements.
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FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
 December 31,
 20202019
ASSETS
Current assets:
Cash and cash equivalents$297,795 $284,592 
Accounts receivable, net353,561 318,652 
Inventories472,237 388,762 
Prepaid expenses and other current assets104,646 116,728 
Total current assets1,228,239 1,108,734 
Property and equipment, net267,682 255,905 
Deferred income taxes, net36,210 39,983 
Goodwill1,394,364 1,364,596 
Intangible assets, net209,636 247,514 
Other assets116,217 120,809 
          Total assets$3,252,348 $3,137,541 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$157,592 $158,033 
Deferred revenue25,862 28,587 
Accrued payroll and related liabilities98,911 72,476 
Accrued product warranties17,019 14,611 
Advance payments from customers10,940 28,005 
Accrued expenses41,347 40,815 
Accrued income taxes28,941 14,735 
Other current liabilities44,053 27,349 
Credit facility 16,000 
Long-term debt, current portion13,473 12,444 
Total current liabilities438,138