10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
______________________________________
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from             to             
Commission file number 0-21918
______________________________________ 
FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)
______________________________________
Oregon
 
93-0708501
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
27700 SW Parkway Avenue,
Wilsonville, Oregon
 
97070
(Address of principal executive offices)
 
(Zip Code)
(503) 498-3547
(Registrant’s telephone number, including area code)
______________________________________ 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
  x
 
Accelerated filer
  ¨
Non-accelerated filer
  ¨
 
Smaller reporting company
  ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
At October 30, 2015, there were 138,134,165 shares of the Registrant’s common stock, $0.01 par value, outstanding.




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



PART 1. FINANCIAL INFORMATION 
Item 1.
Financial Statements

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
381,928

 
$
375,366

 
$
1,119,420

 
$
1,096,288

Cost of goods sold
201,189

 
190,980

 
573,169

 
560,652

Gross profit
180,739

 
184,386

 
546,251

 
535,636

Operating expenses:
 
 
 
 
 
 
 
Research and development
31,050

 
34,022

 
100,898

 
106,655

Selling, general and administrative
73,380

 
76,295

 
231,991

 
241,737

Restructuring expenses
327

 
4,060

 
1,095

 
15,420

Total operating expenses
104,757

 
114,377

 
333,984

 
363,812

 
 
 
 
 
 
 
 
Earnings from operations
75,982

 
70,009

 
212,267

 
171,824

 
 
 
 
 
 
 
 
Interest expense
3,670

 
3,663

 
10,689

 
11,000

Interest income
(319
)
 
(398
)
 
(861
)
 
(934
)
Other expense (income), net
1,455

 
(3,719
)
 
1,775

 
(4,987
)
Earnings before income taxes
71,176

 
70,463

 
200,664

 
166,745

Income tax (benefit) provision
(1,896
)
 
17,606

 
29,182

 
39,236

Net earnings
$
73,072

 
$
52,857

 
$
171,482

 
$
127,509

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.37

 
$
1.23

 
$
0.90

Diluted
$
0.52

 
$
0.37

 
$
1.21

 
$
0.89

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
139,596

 
141,433

 
139,808

 
141,315

Diluted
140,525

 
143,413

 
141,262

 
143,756





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


FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net earnings
$
73,072

 
$
52,857

 
$
171,482

 
$
127,509

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Pension Plans
—

 
163

 
—

 
163

Cash flow hedges
(599
)
 
359

 
(1,009
)
 
(362
)
Foreign currency translation adjustments
(16,672
)
 
(48,994
)
 
(52,138
)
 
(57,800
)
    Total other comprehensive loss
(17,271
)
 
(48,472
)
 
(53,147
)
 
(57,999
)
Comprehensive income
$
55,801

 
$
4,385

 
$
118,335

 
$
69,510

























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


FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
 
September 30,
2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
525,376

 
$
531,374

Accounts receivable, net
304,270

 
354,658

Inventories
387,113

 
320,605

Prepaid expenses and other current assets
90,957

 
93,691

Deferred income taxes, net
38,484

 
38,873

Total current assets
1,346,200

 
1,339,201

Property and equipment, net
269,724

 
247,094

Deferred income taxes, net
20,521

 
19,941

Goodwill
541,971

 
553,335

Intangible assets, net
118,418

 
133,212

Other assets
57,969

 
61,240

    Total assets
$
2,354,803

 
$
2,354,023

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
125,739

 
$
98,173

Deferred revenue
27,394

 
27,878

Accrued payroll and related liabilities
55,713

 
62,065

Accrued product warranties
13,213

 
13,538

Advance payments from customers
33,270

 
28,276

Accrued expenses
38,516

 
51,810

Accrued income taxes
—

 
4,586

Other current liabilities
5,038

 
8,231

Current portion, long term debt
15,000

 
15,000

Total current liabilities
313,883

 
309,557

Long-term debt
347,080

 
357,986

Deferred income taxes
1,012

 
13,905

Accrued income taxes
11,255

 
11,096

Other long-term liabilities
56,715

 
51,706

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at September 30, 2015, and December 31 2014
—

 
—

Common stock, $0.01 par value, 500,000 shares authorized, 138,128 and 139,579 shares issued at September 30, 2015, and December 31 2014, respectively, and additional paid-in capital
1,381

 
1,396

Retained earnings
1,740,033

 
1,671,786

Accumulated other comprehensive loss
(116,556
)
 
(63,409
)
Total shareholders’ equity
1,624,858

 
1,609,773

    Total liabilities and shareholders' equity
$
2,354,803

 
$
2,354,023



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


FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
2015
 
2014
CASH PROVIDED BY OPERATING ACTIVITIES:
 
 
 
Net earnings
$
171,482

 
$
127,509

Income items not affecting cash:
 
 
 
Depreciation and amortization
36,465

 
44,278

Deferred income taxes
(17,238
)
 
971

Stock-based compensation arrangements
19,449

 
24,006

Gain on sale of certain optics assets
—

 
(4,129
)
Other non-cash items
4,346

 
3,241

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable, net
43,295

 
(17,422
)
Increase in inventories
(72,531
)
 
(7,196
)
Decrease in prepaid expenses and other current assets
1,784

 
10,248

Increase in other assets
(1,775
)
 
(26,609
)
Increase in accounts payable
29,011

 
6,362

Decrease in deferred revenue
(106
)
 
(2,194
)
(Decrease) increase in accrued payroll and other current liabilities
(21,055
)
 
5,795

Decrease in accrued income taxes
(957
)
 
(2,571
)
Increase in other long-term liabilities
5,309

 
1,111

Cash provided by operating activities
197,479

 
163,400

CASH USED BY INVESTING ACTIVITIES:
 
 
 
Additions to property and equipment, net
(50,116
)
 
(40,928
)
Proceeds from sale of certain optics assets
—

 
12,000

Cash used by investing activities
(50,116
)
 
(28,928
)
CASH USED BY FINANCING ACTIVITIES:
 
 
 
Repayments of long term debt, net
(11,250
)
 
(11,250
)
Repurchase of common stock
(93,381
)
 
(76,624
)
Dividends paid
(46,193
)
 
(42,410
)
Proceeds from shares issued pursuant to stock-based compensation plans
21,188

 
34,168

Excess tax benefit of stock options exercised
4,216

 
7,705

Other financing activities
(10
)
 
(36
)
Cash used by financing activities
(125,430
)
 
(88,447
)
Effect of exchange rate changes on cash
(27,931
)
 
(23,128
)
Net (decrease) increase in cash and cash equivalents
(5,998
)
 
22,897

Cash and cash equivalents, beginning of period
531,374

 
542,476

Cash and cash equivalents, end of period
$
525,376

 
$
565,373








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

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



Note 1.
Basis of Presentation
The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2015.


Note 2.
Stock-based Compensation

Stock Incentive Plans

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

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

Employee Stock Purchase Plan

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


5

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

Note 2.
Stock-based Compensation - (Continued)

Stock-based Compensation Expense
Stock-based compensation expense recognized in the Consolidated Statements of Income are as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Cost of goods sold
$
799

 
$
679

 
$
2,283

 
$
1,974

Research and development
1,259

 
1,371

 
3,584

 
3,951

Selling, general and administrative
4,454

 
4,752

 
13,582

 
15,486

Restructuring expenses
—

 
—

 
—

 
2,595

Stock-based compensation expense
$
6,512

 
$
6,802

 
$
19,449

 
$
24,006

Stock-based compensation costs capitalized in inventory are as follows (in thousands):
 
 
September 30,
 
2015
 
2014
Capitalized in inventory
$
667

 
$
665

As of September 30, 2015, the Company had $42.5 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.1 years. 


Note 3.
Net Earnings Per Share
The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Numerator for earnings per share:
 
 
 
 
 
 
 
Net earnings for basic and diluted earnings per share
$
73,072

 
$
52,857

 
$
171,482

 
$
127,509

 
 
 
 
 
 
 
 
Denominator for earnings per share:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
139,596

 
141,433

 
139,808

 
141,315

Assumed exercises of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method
929

 
1,980

 
1,454

 
2,441

Weighted average diluted shares outstanding
140,525

 
143,413

 
141,262

 
143,756


The effect of outstanding stock-based compensation awards for the three and nine months ended September 30, 2015, which in the aggregate consisted of 457,000 and 316,000 shares, respectively, and for the three and nine months ended September 30, 2014, which in the aggregate consisted of 142,000 and 85,000 shares, respectively, have been excluded for purposes of calculating diluted earnings per share since their inclusion would have had an anti-dilutive effect.



6

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

Note 4.
Fair Value of Financial Instruments
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories in accordance with FASB ASC Topic 820, “Fair Value Measurement”:
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors and methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Company had $28.7 million and $29.8 million of cash equivalents at September 30, 2015 and December 31, 2014, respectively, which were primarily investments in money market funds. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets. The fair values of the Company’s foreign currency forward contracts and interest rate swap contracts as of September 30, 2015 and December 31, 2014 are disclosed in Note 5, "Derivative Financial Instruments," of the Notes to the Consolidated Financial Statements below and are based on Level 2 inputs. The fair value of the Company’s senior unsecured notes as described in Note 13, "Long-Term Debt," of the Notes to the Consolidated Financial Statements is approximately $255.6 million based upon Level 2 inputs at September 30, 2015. The fair value of the Company's term loan, also described in Note 13, approximates the carrying value due to the variable market rate used to calculate interest payments. The Company does not have any other significant financial assets or liabilities that are measured at fair value.

Note 5.
Derivative Financial Instruments
Foreign Currency Exchange Rate Contracts
In general, the gains and losses related to the Company's foreign currency exchange rate contracts recorded in other expense (income), net are offset by the reciprocal gains and losses from the underlying assets or liabilities which originally gave rise to the exposure. The net losses for the three and nine months ended September 30, 2015 were $8.9 million and $7.0 million, respectively. The net losses for the three and nine months ended September 30, 2014 were $2.8 million and $5.7 million, respectively.

The following table provides volume information about the Company's foreign currency exchange rate contracts. The table below presents the net notional amounts of the Company's outstanding foreign currency forward contracts in United States dollar equivalent amounts (in thousands):
 
September 30,
2015
 
December 31,
2014
Swedish kronor
$
71,088

 
$
67,809

British pound sterling
41,396

 
14,928

Canadian dollar
20,852

 
17,446

Brazilian real
6,240

 
2,449

Australian dollar
3,830

 
6,566

Japanese yen
3,765

 
3,718

Euro
1,441

 
5,391

Other
176

 
701

 
$
148,788

 
$
119,008

At September 30, 2015, the Company’s foreign currency forward contracts, in general, had maturities of three months or less.

7

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

Note 5.
Derivative Financial Instruments - (Continued)
Foreign Currency Exchange Rate Contracts - (Continued)
The carrying amount of the foreign currency forward contracts included in the Consolidated Balance Sheets are as follows (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Other current assets
 
Other current liabilities
 
Other current assets
 
Other current liabilities
Foreign currency forward contracts
$
429

 
$
2,080

 
$
112

 
$
3,247


Interest Rate Swap Contracts
At September 30, 2015, the effective interest rate on the Company's term loan was 2.49 percent. As of September 30, 2015, the following interest rate swaps were outstanding:
Contract Date
 
Notional Amount
(in millions)
 
Fixed Rate
 
Effective Date
 
Maturity Date
March 15, 2013
 
$
56.3

 
1.02
%
 
April 5, 2013
 
March 31, 2019
March 29, 2013
 
$
56.3

 
0.97
%
 
April 5, 2013
 
March 31, 2019
The net fair value carrying amount of the Company's interest rate swaps was a liability of $0.3 million, of which $0.3 million and $0.6 million have been recorded to other assets and other current liabilities, respectively, in the Consolidated Balance Sheet as of September 30, 2015.

Note 6.
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $8.0 million at both September 30, 2015 and December 31, 2014.


Note 7.
Inventories
Inventories consist of the following (in thousands):
 
 
September 30,
2015
 
December 31,
2014
Raw material and subassemblies
$
201,777

 
$
181,618

Work-in-progress
49,712

 
37,139

Finished goods
135,624

 
101,848

 
$
387,113

 
$
320,605



Note 8.
Property and Equipment
Property and equipment are net of accumulated depreciation of $256.6 million and $248.2 million at September 30, 2015 and December 31, 2014, respectively. Property and equipment, net, as of September 30, 2015, includes land and a building valued at approximately $2.2 million that are held for sale.



8

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

Note 9.
Goodwill
During the third quarter of 2015, the Company completed its annual review of goodwill and determined there had been no impairment on its recorded goodwill. The carrying value of goodwill and the activity for the nine months ended September 30, 2015 are as follows (in thousands):
Balance, December 31, 2014
$
553,335

Currency translation adjustments
(11,364
)
Balance, September 30, 2015
$
541,971


See Note 17, "Operating Segments and Related Information - Operating Segments," of the Notes to the Consolidated Financial Statements for additional information on the carrying value of goodwill by operating segment at September 30, 2015.

    
Note 10.
Intangible Assets
Intangible assets are net of accumulated amortization of $86.7 million and $75.1 million at September 30, 2015 and December 31, 2014, respectively.


Note 11.
Credit Agreement
At September 30, 2015, the Company had no borrowings outstanding under its revolving credit facility pursuant to the Credit Agreement, dated February 8, 2011, with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders, as amended, and had $42.7 million of letters of credit outstanding, which reduced the available credit under the revolving credit facility to $157.3 million.


Note 12.
Accrued Product Warranties
The following table summarizes the Company’s accrued product warranties and activity (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Accrued product warranties, beginning of period
$
16,023

 
$
15,989

 
$
16,175

 
$
17,732

Amounts paid for warranty services
(1,907
)
 
(2,368
)
 
(5,678
)
 
(7,131
)
Warranty provisions for products sold
1,745

 
2,254

 
5,529

 
5,546

Currency translation adjustments and other
(25
)
 
(343
)
 
(190
)
 
(615
)
Accrued product warranties, end of period
$
15,836

 
$
15,532

 
$
15,836

 
$
15,532

Current accrued product warranties, end of period
 
 
 
 
$
13,213


$
12,881

Long-term accrued product warranties, end of period
 
 
 
 
$
2,623


$
2,651




9

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

Note 13.
Long-Term Debt
Long-term debt consists of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Unsecured notes
$
250,000

 
$
250,000

Term loan
112,500

 
123,750

Unamortized discounts and issuance costs of unsecured notes
(420
)
 
(764
)
 
$
362,080

 
$
372,986

Current portion, long-term debt
$
15,000

 
$
15,000

Long-term debt
$
347,080

 
$
357,986


In August 2011, the Company issued $250 million aggregate principal amount of its 3.75 percent senior unsecured notes due September 1, 2016 (the “Notes”). The net proceeds from the issuance of the Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the Notes is payable semiannually in arrears on March 1 and September 1. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock.
The Credit Agreement discussed in Note 11, "Credit Agreement," of the Notes to the Consolidated Financial Statements above, incorporates a $150 million term loan facility that matures on April 5, 2019. On April 5, 2013 the Company drew down $150 million under the term loan facility. Interest is accrued at the one-month LIBOR rate plus the scheduled spread and paid monthly. Quarterly principal payments of $3.75 million commenced on June 30, 2013 and will continue through December 31, 2018 with the final maturity payment including any accrued interest due on April 5, 2019. See Note 5, "Derivative Financial Instruments - Interest Rate Swap Contracts," of the Notes to the Consolidated Financial Statements for additional information on the effective interest rate on the term loan at September 30, 2015.


Note 14.
Shareholders’ Equity
The following table summarizes the common stock and additional paid-in capital activity during the nine months ended September 30, 2015 (in thousands):
 
Common stock and additional paid-in capital, December 31, 2014
$
1,396

Income tax benefit of common stock options exercised
3,487

Common stock issued pursuant to stock-based compensation plans, net
13,475

Stock-based compensation arrangements
19,362

Repurchase of common stock
(36,339
)
Common stock and additional paid-in capital, September 30, 2015
$
1,381

On February 5, 2015, the Company's Board of Directors authorized the repurchase of up to 15.0 million shares of the Company's outstanding common stock in the open market or through privately negotiated transactions. The authorization will expire on February 5, 2017. During the nine months ended September 30, 2015, the Company repurchased 3.2 million shares through open market transactions for a total of $93.4 million, of which $36.3 million reduced common stock and additional paid in capital and $57.0 million reduced retained earnings.
On September 4, 2015, the Company paid a dividend of $0.11 per share on its outstanding common stock to the shareholders of record as of the close of business on August 21, 2015. The total cash payments for dividends during the nine months ended September 30, 2015 were $46.2 million.


10

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

Note 15.
Contingencies

FLIR Systems, Inc. and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.) (together, the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007 in the United States District Court for the Eastern District of Texas. Raytheon's complaint, as amended, asserted claims for tortious interference, patent infringement, trade secret misappropriation, unfair competition, breach of contract and fraudulent concealment. The FLIR Parties filed an answer to the complaint on September 2, 2008, in which they denied all material allegations. On October 27, 2010, the FLIR Parties and Raytheon entered into a settlement agreement that resolved the patent infringement claims (the "Patent Claims") pursuant to which the FLIR Parties paid $3 million to Raytheon and entitles the FLIR Parties to certain license rights in the patents that were the subject of the Patent Claims.  On October 28, 2014, a four-week trial began with respect to Raytheon's remaining claims of misappropriations of trade secrets and claims related to 31 alleged trade secrets. On November 24, 2014, a jury in the United States District Court for the Eastern District of Texas rejected Raytheon’s claims and determined that 27 of the alleged trade secrets were not in fact trade secrets and that neither Indigo, prior to its acquisition by FLIR Systems, Inc., nor FLIR Systems, Inc. infringed any of the trade secrets claimed and awarded Raytheon no damages.  The court has yet to rule on any post-trial motion seeking to modify the jury verdict or on the FLIR Parties' motion for an award of attorney’s fees in the amount of $28 million as a prevailing party under the Texas Theft Liability Act.  The matter remains ongoing and is subject to appeal and the Company is unable to estimate the amount or range of potential loss or recovery, if any, which might result if the final determination of this matter is favorable or unfavorable, but an adverse ruling on the merits of the original claims against the FLIR Parties, while remote, could be material.

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


Note 16.
Income Taxes
The provision for income taxes was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Income tax (benefit) provision
$
(1,896
)
 
$
17,606

 
$
29,182

 
$
39,236

Effective tax rate
(2.7
)%
 
25.0
%
 
14.5
%
 
23.5
%

The effective tax rates are lower than the US Federal tax rate of 35 percent because of the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits and discrete adjustments. The effective tax rate for the three and nine months ended September 30, 2015 included a discrete tax benefit from the recognition of a valuation allowance release of $17.4 million.
As of September 30, 2015, the Company had approximately $11.3 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates an immaterial portion of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of the applicable statute of limitations.
The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2015, the Company had approximately $1.1 million of net accrued interest and penalties related to uncertain tax positions.

11

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

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


Note 17.
Operating Segments and Related Information
Operating Segments
The operating segments of the Company are as follows:
Surveillance
The Surveillance segment develops and manufactures enhanced imaging and recognition solutions for a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. Offerings include airborne, land, maritime, and man-portable multi-spectrum imaging systems, radars, lasers, imaging components, integrated multi-sensor system platforms, and services related to these systems. Effective January 1, 2015, the Personal Vision Systems product line was transferred from the OEM and Emerging Markets segment to the Surveillance segment. This product line includes hand-held and weapon-mounted thermal imaging systems for use by consumers. Accordingly, segment financial information in the tables below has been reclassified for the applicable prior periods for comparative purposes.
Instruments
The Instruments segment develops and manufactures devices that image, measure, and assess thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications. Products include thermal imaging cameras, gas detection cameras, firefighting cameras, process automation cameras, and environmental test and measurement devices.
OEM and Emerging Markets
The OEM and Emerging Markets segment develops and manufactures thermal imaging camera cores and components that are utilized by third parties to create thermal and other types of imaging systems. The segment also develops and manufactures intelligent traffic monitoring and signal control systems and imaging solutions for the smartphone and mobile devices market.
Maritime
The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market. The segment provides a full suite of networked electronic systems including multi-function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and communications equipment for boats of all sizes.
Security
The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home security applications. Products include thermal and visible-spectrum cameras, digital and networked video recorders, and related software and accessories that enable the efficient and effective safeguarding of assets at all hours of the day and through adverse weather conditions.

12

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

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

 Operating segment information is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(as reclassified)
 
 
 
(as reclassified)
Revenue – External Customers:
 
 
 
 
 
 
 
Surveillance
$
131,598

 
$
125,343

 
$
352,312

 
$
362,073

Instruments
74,796

 
82,561

 
248,877

 
250,583

OEM and Emerging Markets
51,448

 
49,888

 
137,568

 
148,927

Maritime
38,920

 
44,728

 
141,922

 
152,533

Security
59,331

 
48,648

 
158,185

 
122,692

Detection
25,835

 
24,198

 
80,556

 
59,480

 
$
381,928

 
$
375,366

 
$
1,119,420

 
$
1,096,288

Revenue – Intersegments:
 
 
 
 
 
 
 
Surveillance
$
2,653

 
$
2,659

 
$
8,400

 
$
6,642

Instruments
777

 
74

 
2,687

 
548

OEM and Emerging Markets
8,020

 
4,721

 
25,778

 
15,277

Maritime
85

 
804

 
1,667

 
2,308

Security
2,386

 
2,971

 
10,393

 
7,361

Detection
—

 
4

 
—

 
64

Elimination
(13,921
)
 
(11,233
)
 
(48,925
)
 
(32,200
)
 
$
—

 
$
—

 
$
—

 
$
—

Earnings (loss) from operations:
 
 
 
 
 
 
 
Surveillance
$
39,918

 
$
33,393

 
$
96,464

 
$
79,293

Instruments
21,555

 
23,191

 
77,959

 
64,678

OEM and Emerging Markets
14,233

 
12,798

 
33,507

 
35,518

Maritime
1,848

 
4,614

 
13,058

 
23,159

Security
7,222

 
6,988

 
18,911

 
14,560

Detection
5,290

 
4,167

 
17,349

 
5,519

Other
(14,084
)
 
(15,142
)
 
(44,981
)
 
(50,903
)
 
$
75,982

 
$
70,009

 
$
212,267

 
$
171,824


 

13

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

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

 
September 30,
2015
 
December 31,
2014
 
 
 
(as reclassified)
Segment assets (accounts receivable, net and inventories):
 
 
 
Surveillance
$
284,147

 
$
309,473

Instruments
121,995

 
119,629

OEM and Emerging Markets
91,582

 
79,053

Maritime
72,802

 
67,775

Security
90,271

 
59,182

Detection
30,586

 
40,151

 
$
691,383

 
$
675,263


 
September 30,
2015
 
December 31,
2014
 
 
 
(as reclassified)
Segment goodwill:
 
 
 
Surveillance
$
120,358

 
$
121,268

Instruments
150,803

 
155,527

OEM and Emerging Markets
70,470

 
72,687

Maritime
107,883

 
109,980

Security
44,322

 
45,710

Detection
48,135

 
48,163

 
$
541,971

 
$
553,335

Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
United States
216,237

 
192,495

 
587,637

 
559,058

Canada/Latin America
23,825

 
20,870

 
60,224

 
69,349

Europe
66,207

 
82,253

 
255,331

 
256,908

Middle East/Africa
37,253

 
42,287

 
89,830

 
91,506

Asia
38,406

 
37,461

 
126,398

 
119,467

 
$
381,928

 
$
375,366

 
$
1,119,420

 
$
1,096,288







14

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

Note 17.        Operating Segments and Related Information - (Continued)
Long-lived assets by significant geographic locations are as follows (in thousands):
 
 
September 30,
2015
 
December 31,
2014
United States
$
636,965

 
$
623,522

Europe
338,670

 
319,661

Other international
12,447

 
51,698

 
$
988,082

 
$
994,881


Major Customers
Revenue derived from major customers is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
US Government
$
79,297

 
$
77,496

 
$
208,742

 
$
227,715


Note 18.
Restructuring Costs
In 2013, the Company initiated a realignment plan that includes closing six sites in the United States and Europe and transferring those operations to the Company's larger facilities. The Company also consolidated its optics and laser manufacturing businesses to better realize the benefits of vertical integration in these areas. As of September 30, 2015, most of the restructuring activities have been completed, with remaining costs and accrued expenses primarily related to the closure of a European facility. During the three and nine months ended September 30, 2015, the Company recorded net pre-tax restructuring expenses totaling $0.3 million and $1.1 million, respectively. During the three and nine months ended September 30, 2014, the Company recorded net pre-tax restructuring expenses totaling $4.1 million and $16.0 million, respectively. The Company recorded the restructuring expenses in the segments as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015

2014
 
2015
 
2014
Surveillance
$
148

 
$
358

 
$
225

 
$
5,082

Instruments
223

 
3,674

 
907

 
9,868

OEM and Emerging Markets
(24
)
 
—

 
(22
)
 
278

Maritime
—

 
28

 
—

 
(97
)
Detection
(19
)
 
—

 
(15
)
 
759

Other
—

 
—

 
—

 
120

 
$
328

 
$
4,060

 
$
1,095

 
$
16,010


Restructuring expenses were recorded in the Consolidated Statements of Income as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Cost of goods sold
$
—

 
$
—

 
$
—

 
$
590

Restructuring expenses
328

 
4,060

 
1,095

 
15,420

 
$
328

 
$
4,060

 
$
1,095

 
$
16,010



15

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

Note 18.
Restructuring Costs - (Continued)

The following table summarizes the activity by cost type (in thousands):
 
 Severance and personnel costs
 
Facilities Exit, Lease Terminations & Other
 
Total
Balance, December 31, 2014
$
10,941

 
$
1,485

 
$
12,426

Additional costs
277

 
37

 
314

Utilization
(3,524
)
 
(1,040
)
 
(4,564
)
Balance, March 31, 2015
$
7,694

 
$
482

 
$
8,176

Additional costs
82

 
371

 
453

Utilization
(2,394
)
 
(371
)
 
(2,765
)
Balance, June 30, 2015
$
5,382

 
$
482

 
$
5,864

Additional costs
269

 
59

 
328

Utilization
(1,593
)
 
(148
)
 
(1,741
)
Balance, September 30, 2015
$
4,058

 
$
393

 
$
4,451



Note 19.
Subsequent Events
On October 22, 2015, the Company’s Board of Directors declared a quarterly dividend of $0.11 per share on its common stock, payable on December 4, 2015, to shareholders of record as of the close of business on November 20, 2015. The total cash payment of this dividend will be approximately $15.2 million.
On November 2, 2015, the Company sold its investment in a private company and anticipates a pre-tax gain of approximately $20.2 million in the fourth quarter as a result of the sale.
    

16


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

Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on management’s current expectations, estimates, projections, and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2014, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations
The following discussion of operating results provides an overview of our operations by addressing key elements in our Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Our six operating segments are: Surveillance, Instruments, OEM and Emerging Markets, Maritime, Security and Detection. Given the nature of our business, we believe revenue and earnings from operations (including operating margin percentage) are most relevant to an understanding of our performance at a segment level as revenue levels are the most significant indicators of business conditions for each of the respective segments and earnings from operations reflect our ability to manage each of our segments as revenue levels change. Additionally, at the segment level we disclose backlog, which represents orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months. See Note 17, "Operating Segments and Related Information," of the Notes to the Consolidated Financial Statements for additional information on the six operating segments.
Revenue. Consolidated revenue for the three months ended September 30, 2015 increased by 1.7 percent year over year, from $375.4 million in the third quarter of 2014 to $381.9 million in the third quarter of 2015. Consolidated revenue for the nine months ended September 30, 2015 increased by 2.1 percent year over year, from $1,096.3 million in the first nine months of 2014 to $1,119.4 million in the first nine months of 2015. Increases in revenues for the three month period in our Surveillance, OEM and Emerging Markets, Security and Detection segments were partially offset by declines in revenues in our Instruments and Maritime segments. An increase in revenue for the nine month period in our Security and Detection segments was partially offset by declines in revenue in the other four segments. The revenue increases were negatively impacted year over year by changes in currency exchange rates, particularly in our Instruments and Maritime segments.
The timing of orders, scheduling of backlog and fluctuations in demand in various regions of the world can give rise to quarter to quarter and year over year fluctuations in the mix of revenue. Consequently, year over year comparisons for any given quarter may not be indicative of comparisons using longer time periods. While we currently expect total annual revenue for 2015 to be flat to slightly higher than 2014 revenue, unexpected changes in economic conditions from key customer markets or other major unanticipated events may cause total revenue, and the mix of revenue between our segments, to vary from quarter to quarter during the year.
International sales accounted for 43.4 percent and 48.7 percent of total revenue for the quarters ended September 30, 2015 and 2014, respectively, and 47.5 percent and 49.0 percent for the nine months ended September 30, 2015 and 2014, respectively. The proportion of our international revenue compared to total revenue will fluctuate from quarter to quarter due to normal variation in order activity across various regions as well as specific factors that may affect one region and not another. Overall, we anticipate that revenue from international sales will continue to comprise a significant percentage of total revenue.
Cost of goods sold. Cost of goods sold for the three and nine months ended September 30, 2015 was $201.2 million and $573.2 million, respectively, compared to cost of goods sold for the three and nine months ended September 30, 2014 of $191.0

17


million and $560.7 million, respectively. The year over year increases in cost of goods sold primarily related to higher revenues for both the three month and nine month periods.
Gross profit. Gross profit for the quarter ended September 30, 2015 was $180.7 million compared to $184.4 million for the same quarter last year. Gross profit for the nine months ended September 30, 2015 was $546.3 million compared to $535.6 million for the same period last year. Gross margin, defined as gross profit divided by revenue, decreased from 49.1 percent in the third quarter of 2014 to 47.3 percent in the third quarter of 2015, and decreased from 48.9 percent in the first nine months of 2014 to 48.8 percent in the first nine months of 2015. The decrease in gross margin for the three month period was primarily due to lower gross margin in our Instruments and Maritime segments due to unfavorable exchange rate impacts on revenue and discounting due to promotional activities in certain markets by the Maritime segment.
Research and development expenses. Research and development expenses for the third quarter of 2015 totaled $31.1 million, compared to $34.0 million in the third quarter of 2014. Research and development expenses for the first nine months of 2015 and 2014 were $100.9 million and $106.7 million, respectively. Research and development expenses as a percentage of revenue were 8.1 percent and 9.0 percent for the three and nine months ended September 30, 2015, respectively. Research and development expenses as a percentage of revenue were 9.1 percent and 9.7 percent for the three and nine months ended September 30, 2014, respectively. We have, and will continue to have, fluctuations in quarterly spending depending on product development needs and overall business spending priorities and believe that annual spending levels are more indicative of our commitment to research and development. Over the past five annual periods through December 31, 2014, our annual research and development expenses have varied between 8.4 percent and 9.9 percent of revenue, and we currently expect these expenses to remain within that range, on an annual basis, for the foreseeable future.
Selling, general and administrative expenses. Selling, general and administrative expenses were $73.4 million and $76.3 million for the quarters ended September 30, 2015 and 2014, respectively. Selling, general and administrative expenses for the first nine months of 2015 and 2014 were $232.0 million and $241.7 million, respectively. The decreases in selling, general and administrative expenses year over year for the three and nine month periods were primarily related to a decrease in selling and administrative expenses in connection with favorable foreign exchange rates on expenses and lower corporate legal expenses, partially offset by an increase in marketing expenses. Selling, general and administrative expenses as a percentage of revenue were 19.2 percent and 20.3 percent for the quarters ended September 30, 2015 and 2014, respectively, and 20.7 percent and 22.1 percent for the nine months ended September 30, 2015 and 2014, respectively. Over the past five annual periods through December 31, 2014, our annual selling, general and administrative expenses have varied between 20.5 percent and 23.6 percent of revenue, and we currently expect these expenses to remain within that range, on an annual basis, for the foreseeable future.
Restructuring expenses. During the quarters ended September 30, 2015 and 2014, we incurred $0.3 million and $4.1 million, respectively, in pre-tax restructuring expenses, all of which were recorded in operating expenses in the Consolidated Statements of Income. During the first nine months ended September 30, 2015 and 2014, we incurred $1.1 million and $16.0 million, respectively, in pre-tax restructuring expenses; in 2014, $0.6 million of the restructuring charges were included in cost of goods sold.
Interest expense. Interest expense was $3.7 million for each of the third quarters of 2015 and 2014. Interest expense for the first nine months of 2015 was $10.7 million, compared to $11.0 million for the same period of 2014. Interest expense was primarily associated with the $250 million aggregate principal amount of our 3.75 percent senior unsecured notes and our term loan that was drawn upon under our credit agreement.
Income taxes. The income tax benefit of $1.9 million for the three months ended September 30, 2015 represents an effective tax rate of 24.0 percent less favorable discrete tax items, including a $17.4 million release of a previously recorded tax valuation allowance. We expect the annual effective tax rate for the full year of 2015 to be approximately 24.0 percent, excluding discrete items. The expected effective tax rate is lower than the US Federal tax rate of 35 percent because of the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits and discrete adjustments.

Segment Operating Results

Effective January 1, 2015, the Personal Vision Systems product line was transferred from the OEM and Emerging Markets segment to the Surveillance segment. Accordingly, certain of the following segment financial information has been reclassified for the three and nine months ended September 30, 2014 for comparative purposes.

18


Surveillance
Surveillance operating results are as follows (in millions, except percentages):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(as reclassified)
 
 
 
(as reclassified)
Revenue
$
131.6

 
$
125.3

 
$
352.3

 
$
362.1

Earnings from operations
39.9

 
33.4

 
96.5

 
79.3

Operating margin
30.3
%
 
26.6
%
 
27.4
%
 
21.9
%
Backlog, end of period
 
 
 
 
314

 
340

Revenue for the three months ended September 30, 2015 increased by 5.0 percent and, for the nine month period then ended, decreased 2.7 percent, compared to the same periods of 2014. The increase in revenue for the three month period was primarily due to increased shipments of units in the land and maritime product lines, partially offset by declines in revenue in the airborne and integrated systems product lines. The decrease in revenue for the nine month period was primarily due to reduced deliveries to US Government customers and decreases in airborne product line revenues, which were partially offset by increases in revenues in the land and maritime product lines. Earnings from operations for the three month period improved year over year primarily due to reductions in operating expenses and increased revenues, partially offset by slightly lower gross margins due to product mix. For the nine month period, earnings from operations improved year over year due to lower operating expenses and higher gross margins, partially offset by lower revenues. During the nine months ended September 30, 2015 and 2014, the segment recorded $0.2 million and $5.1 million of restructuring expenses, respectively.
Instruments
Instruments operating results are as follows (in millions, except percentages):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
74.8

 
$
82.6

 
$
248.9

 
$
250.6

Earnings from operations
21.6

 
23.2

 
78.0

 
64.7

Operating margin
28.8
%
 
28.1
%
 
31.3
%
 
25.8
%
Backlog, end of period
 
 
 
 
29

 
37

Revenue for the three and nine months ended September 30, 2015 decreased by 9.4 percent and 0.7 percent, respectively, compared to the same periods of 2014. The year over year decreases in revenue for the three and nine month periods were due to a year over year revenue decline in the Americas region, partially offset by an increase in the Asia Pacific region; on a product line basis, growth in our science, test and measurement, and fire product lines were offset by declines in our optical gas imaging product line and our higher end thermography products. Revenues for both the three and nine month periods were also negatively impacted by year over year changes in currency exchange rates. The decrease in earnings from operations for the three months ended September 30, 2015, compared to the same period of 2014, was primarily due to the decrease in revenue. The increase in earnings from operations for the nine months ended September 30, 2015, compared to the same period of 2014, was primarily due to the lower restructuring expenses and cost savings associated with restructuring activities. As a large portion of segment expenses are incurred in Europe, the segment experienced a favorable impact on its operating expenses from the changes in foreign currency rates which largely offset the associated decline in revenues in that region. Restructuring expenses for the three months ended September 30, 2015 and 2014 were $0.2 million and $3.7 million, respectively. Restructuring expenses for the nine months ended September 30, 2015 and 2014 were $0.9 million and $9.9 million, respectively.

19


OEM and Emerging Markets
OEM and Emerging Markets operating results are as follows (in millions, except percentages):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(as reclassified)
 
 
 
(as reclassified)
Revenue
$
51.4

 
$
49.9

 
$
137.6

 
$
148.9

Earnings from operations
14.2

 
12.8

 
33.5

 
35.5

Operating margin
27.7
%
 
25.7
%
 
24.4
%
 
23.8
%
Backlog, end of period
 
 
 
 
115

 
125

Revenue increased by 3.1 percent and decreased by 7.6 percent, for the three months and nine months ended September 30, 2015, respectively, compared to the same periods of the prior year. The increase in revenue year over year for the three month period was primarily due to higher deliveries of cooled cores, which was partially offset by the loss of approximately $2.0 million of revenue from our optical components group which was sold in August 2014 and the negative impacts of changes in currency exchange rates. For the nine month period, the decrease in revenue was primarily due to the loss of approximately $8.8 million in 2014 revenues from the optical components group. Segment earnings from operations and operating margin increased for the three month period primarily due to higher revenue and lower operating expenses. For the nine month period, the decline in earnings from operations was primarily due to the decrease in revenue, partially offset by lower operating expenses.
Maritime
Maritime operating results are as follows (in millions, except percentages):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
38.9

 
$
44.7

 
$
141.9

 
$
152.5

Earnings from operations
1.8

 
4.6

 
13.1

 
23.2

Operating margin
4.7
%
 
10.3
%
 
9.2
%
 
15.2
%
Backlog, end of period
 
 
 
 
22

 
14

Revenue for the three and nine months ended September 30, 2015 decreased by 13.0 percent and 7.0 percent, respectively, compared to the same periods of 2014, primarily due to the negative impact of changes in currency exchange rates on revenues in the Europe and Asia Pacific regions. Since the majority of the segment's costs of goods sold are incurred in US dollars, those costs did not receive the favorable impact of changes in currency exchange rates. Consequently, the decrease in earnings from operations and operating margin for both the three month and nine month periods were primarily due to the declines in year over year revenue, including discounting due to promotional activities.
Security
Security operating results are as follows (in millions, except percentages):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
59.3

 
$
48.6

 
$
158.2

 
$
122.7

Earnings from operations
7.2

 
7.0

 
18.9

 
14.6

Operating margin
12.2
%
 
14.4
%
 
12.0
%
 
11.9
%
Backlog, end of period
 
 
 
 
16

 
27


20


Revenue for the three and nine months ended September 30, 2015 increased by 22.0 percent and 28.9 percent, respectively, compared to the same periods of the prior year. The increase in revenue for the three month period was primarily due to increased deliveries for all segment product families, except thermal. For the nine month period, the increase in revenue was due to increased deliveries across all product families. The increases in earnings from operations year over year for the three and nine month periods were primarily due to the increases in revenues, partially offset by increases in sales and marketing support expenses.

Detection
Detection operating results are as follows (in millions, except percentages):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenue
$
25.8

 
$
24.2

 
$
80.6

 
$
59.5

Earnings from operations
5.3

 
4.2

 
17.3

 
5.5

Operating margin
20.5
%
 
17.2
%
 
21.5
%
 
9.3
%
Backlog, end of period
 
 
 
 
72

 
37


Revenue for the three and nine months ended September 30, 2015 increased by 6.8 percent and 35.4 percent, respectively, compared to the same periods of 2014. The increase in revenue for the three month period was primarily related to increased shipments from our explosives and radiation product lines, partially offset by lower CBRNE and contract engineering revenues; for the nine month period, the increase in revenue was primarily related to increased deliveries of our CBRNE threat response systems and related spare parts and services against orders received in the second half of 2014 on a large program with the United States government. The increases in earnings from operations and operating margins for the three and nine months ended September 30, 2015 compared to the same periods during the prior year were primarily due to the increases in revenue. Backlog at September 30, 2015 increased compared to the same date during the prior year primarily due to the receipt of a $51.1 million order for our CBRNE threat response systems and related spare parts and services during the first quarter of 2015.

21


Liquidity and Capital Resources
At September 30, 2015, we had a total of $525.4 million in cash and cash equivalents, of which $116.5 million was in the United States and $408.9 million was at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 2014 of $531.4 million, of which $164.1 million was in the United States and $367.3 million was at our foreign subsidiaries. The decrease in cash and cash equivalents during the nine months ended September 30, 2015 was primarily due to capital expenditures of $50.1 million, dividend payments of $46.2 million, repurchase of common stock of $93.4 million and the negative impact on cash from currency translation adjustments of $27.9 million, partially offset by increased cash from operating activities.
Cash provided by operating activities totaled $197.5 million for the nine months ended September 30, 2015, which primarily consisted of net earnings, adjusted for non-cash charges for depreciation and amortization, stock-based compensation and a non-cash credit for a discrete tax benefit.
Cash used by investing activities totaled $50.1 million for the nine months ended September 30, 2015, consisting of capital expenditures in the ordinary course of business.
Cash used by financing activities totaled $125.4 million for the nine months ended September 30, 2015, which primarily consisted of the payment of dividends, repurchases of our common stock and the quarterly term loan principal payment, partially offset by amounts provided by our stock compensation plans.
On February 8, 2011, we signed a Credit Agreement (“Credit Agreement”) with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders. The Credit Agreement provides for a $200 million, five-year revolving line of credit. On April 5, 2013, the Credit Agreement was amended to extend the maturity of the revolving credit facility from February 8, 2016 to April 5, 2018 in addition to incorporating a $150 million term loan facility maturing April 5, 2019. We have the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the line of credit by an additional $150 million until April 5, 2018. The Credit Agreement allows us and certain designated subsidiaries to borrow in US dollars, euros, Swedish Kronor, pound sterling and other agreed upon currencies. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on the Company’s leverage ratio, which ranges from 0.25 percent to 0.40 percent. The Credit Agreement contains two financial covenants that require the maintenance of certain leverage ratios with which we were in compliance at September 30, 2015. The five-year revolving line of credit available under the Credit Agreement and the term loan facility are not secured by any of our assets.
As noted above, the Credit Agreement amendment of April 5, 2013 incorporates a $150 million term loan facility that matures on April 5, 2019. On April 5, 2013 we drew down $150 million under the term loan facility. Interest is accrued at the one-month LIBOR rate plus the scheduled spread and paid monthly. By entering into interest rate swap agreements, we have effectively fixed the basis for calculating the interest rate on the term loan. The effective interest rate paid is equal to the fixed rate in the swap agreements plus the credit spread then in effect. At September 30, 2015, the effective interest rate on the term loan was 2.49 percent. Principal payments of $3.75 million are made in quarterly installments which commenced on June 30, 2013 and will continue through December 31, 2018 with the final maturity payment including any accrued interest due on April 5, 2019.
At September 30, 2015, we had no amounts outstanding under our revolving credit facility pursuant to the Credit Agreement and the commitment fee on the amount of unused credit was 0.3 percent. We had $42.7 million of letters of credit outstanding at September 30, 2015, which reduced the total available credit under the revolving credit facility.
On August 19, 2011, we issued $250 million aggregate principal amount of our 3.75 percent senior unsecured notes due September 1, 2016 (the "Notes"). The interest on the Notes is payable semiannually in arrears on March 1 and September 1. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of our common stock.
On February 5, 2015, our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. As of September 30, 2015, 3.2 million shares had been repurchased under this authorization, which expires on February 5, 2017.
United States income taxes have not been provided for on accumulated earnings of certain subsidiaries outside of the United States as we intend to reinvest the earnings in operations outside the United States indefinitely. Should we subsequently elect to repatriate such foreign earnings, we would need to accrue and pay United States income taxes, thereby reducing the amount of our cash.
We believe that our existing cash combined with the cash we expect to generate from operating activities and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. Except for approximately $6.0 million in building improvements to a facility we own, we do not have any significant capital commitments for the next twelve months nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.


22



Off-Balance Sheet Arrangements

Through September 30, 2015, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which establishes new guidance under which companies will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides for additional disclosure requirements. While ASU 2014-09 was to be effective for annual periods and interim periods beginning after December 15, 2016, on July 9, 2015, the FASB approved the deferral of the effective date to periods beginning on or after December 15, 2017. Accordingly, the Company currently intends to adopt ASU 2014-09 on January 1, 2018, and is currently evaluating the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period" ("ASU 2014-12"), which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual periods and interim periods beginning after December 15, 2015. Accordingly, the Company currently intends to adopt ASU 2014-12 on January 1, 2016, and does not expect the adoption of ASU 2014-12 to have a material impact on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" ("ASU 2014-15"). Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016. Accordingly, the Company currently intends to adopt ASU 2014-15 on January 1, 2017, and does not expect the adoption of ASU 2014-15 to have any impact on its consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30)" ("ASU 2015-03"), which simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2015, with early adoption permitted and should be applied retrospectively. The Company has adopted ASU 2015-03 on January 1, 2015 and the adoption of ASU 2015-03 did not have a material impact on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No 2015-16, "Business Combinations (Topic 805)" ("ASU 2015-16"), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2015. Accordingly, the Company has adopted ASU 2015-16 on January 1, 2015 and the adoption of ASU 2015-16 did not have a material impact on its consolidated financial statements.


Critical Accounting Policies and Estimates
The Company reaffirms the critical accounting policies and our use of estimates as reported in our Form 10-K for the fiscal year ended December 31, 2014, as described in Note 1, "Nature of Business and Significant Accounting Policies," of the Notes to the Consolidated Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2014.

Contractual Obligations
There were no material changes to our contractual obligations outside the ordinary course of our business during the quarter ended September 30, 2015.


23


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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2015, the Company has not experienced any changes in market risk exposure that would materially affect the quantitative and qualitative disclosures about market risk presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
As of September 30, 2015, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective such that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

24


PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

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


Item 1A.
Risk Factors

There has been no material change in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.


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

During the three months ended September 30, 2015, the Company repurchased the following shares:
 
Period
Total Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs(2)
August 1 to August 31, 2015
970,869

 
$
28.74

 
970,869

 
 
September 1 to September 30, 2015
1,198,000

 
$
28.42

 
1,198,000

 
 
Total
2,168,869

 
$
28.57

 
2,168,869

 
11,831,131

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



Item 3.
Defaults Upon Senior Securities
None.


Item 4.
Mine Safety Disclosures
Not applicable.


Item 5.
Other Information
None.



25


Item 6.
Exhibits

Number
  
Description
10.1
 
Fourth Amendment to Credit Agreement by and among FLIR Systems, Inc., the subsidiaries of FLIR Systems, Inc. party thereto, Bank of America, N.A. and the other lenders party thereto, dated as of October 27, 2015.
10.2
 
Executive Employment Agreement by and between FLIR Systems, Inc. and Amit Singhi, dated as of August 12, 2015 (incorporated by reference to the Current Report on Form 8-K filed on August 12, 2015).(1)
10.3
 
Change of Control Agreement by and between FLIR Systems, Inc. and Amit Singhi, dated as of August 12, 2015 (incorporated by reference to the Current Report on Form 8-K filed on August 12, 2015).(1) 
31.1
  
Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
31.2
  
Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
32.1
  
Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
32.2
  
Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906.
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extension Schema Document
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

(1) This exhibit constitutes a management contract or compensatory plan or arrangement.
    

26


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FLIR SYSTEMS, INC.
 
 
 
Date November 9, 2015
 
    /s/ AMIT SINGHI
 
 
Amit Singhi
 
 
     Sr. Vice President, Finance and Chief Financial Officer
 
 
(Duly Authorized and Principal Financial Officer)

27