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,
2016
.
The accompanying consolidated financial statements include the accounts of FLIR Systems, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31,
2017
.
Recently Adopted Accounting Pronouncements
Effective January 1, 2017, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The standard update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows. As a result of the adoption, on a prospective basis, the Company recognized $
2.9 million
and $
3.7 million
of excess tax benefits from stock-based compensation as a discrete item in income tax provision for the
three and six months
ended
June 30, 2017
, respectively. Historically, these amounts were recorded as additional paid-in capital. Upon adoption, the Company elected to apply the change retrospectively to the Consolidated Statement of Cash Flows which resulted in a reclassification of excess tax benefits from stock-based compensation of
$1.6 million
from cash flows from financing activities to cash flows from operating activities for the six months ended June 30, 2016. Additionally,
$5.6 million
paid in cash to satisfy withholding requirements for net settlement of restricted stock unit shares vested and stock options exercised has been reclassified from cash flows from operating activities to cash flows from financing activities to conform to the presentation required by the new standard in the Consolidated Statement of Cash Flows for the six months ended June 30, 2016. ASU 2016-09 also requires excess tax benefits and deficiencies to be excluded from the assumed future proceeds in the calculation of diluted shares. This change resulted in an increase in diluted weighted average shares outstanding of
179,000
shares and
195,000
shares for the three and six months ended June 30, 2017, respectively. The Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the Company's results of operations.
Reclassifications
The Company made certain reclassifications to the prior years' financial statements and notes to the consolidated financial statements to conform them to the presentation as of and for the
three and six months
ended
June 30, 2017
. These reclassifications had no effect on consolidated financial position, net earnings, shareholders' equity, or net cash flows for any of the periods presented.
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|
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 non-vested stock awards (referred to as restricted stock unit awards) granted under two plans: the FLIR Systems, Inc. 2002 Stock Incentive Plan (the “2002 Plan”) and the FLIR Systems, Inc. 2011 Stock Incentive Plan (the “2011 Plan”). The Company has discontinued issuing awards out of the 2002 Plan but previously-granted awards under the 2002 Plan remain outstanding.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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|
Note 2.
|
Stock-based Compensation - (Continued)
|
Stock Incentive Plans - (Continued)
The Company has granted time-based options, time-based restricted stock unit awards, market-based restricted stock unit awards and performance-based restricted stock unit awards. Options generally expire ten years from the grant date. Time-based options and restricted stock unit awards generally vest over a three-year period. Market-based restricted stock unit awards may be earned based upon the Company's total shareholder return compared to the total shareholder return of the component company at the 60th percentile level in the S&P 500 Index over a three-year period. Performance-based restricted stock unit awards may be earned based upon certain profitability metrics as approved by the compensation committee of the Company's board of directors, including return on invested capital or income from operations over the relevant three-year periods. Shares vested under the performance-based restricted stock unit awards and the market-based restricted stock unit awards must generally 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 fair market value at the lower of either the date of enrollment or 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 employees for a period of at least 18 months after the date of purchase.
The following table sets forth the stock-based compensation expense recognized in the Consolidated Statements of Income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of goods sold
|
$
|
631
|
|
|
$
|
855
|
|
|
$
|
1,032
|
|
|
$
|
1,470
|
|
Research and development
|
1,299
|
|
|
1,233
|
|
|
2,476
|
|
|
2,414
|
|
Selling, general and administrative
|
6,678
|
|
|
6,205
|
|
|
11,346
|
|
|
10,497
|
|
Stock-based compensation expense before income taxes
|
$
|
8,608
|
|
|
$
|
8,293
|
|
|
$
|
14,854
|
|
|
$
|
14,381
|
|
Stock-based compensation expense capitalized in the Consolidated Balance Sheets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2017
|
|
2016
|
Capitalized in inventory
|
$
|
1,053
|
|
|
$
|
685
|
|
As of
June 30, 2017
, the Company had approximately
$62.0 million
of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of
2.29
years.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator for earnings per share:
|
|
|
|
|
|
|
|
Net earnings for basic and diluted earnings per share
|
$
|
51,413
|
|
|
$
|
45,368
|
|
|
$
|
93,984
|
|
|
$
|
46,493
|
|
Denominator for earnings per share:
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
136,865
|
|
|
137,861
|
|
|
136,613
|
|
|
137,686
|
|
Assumed exercise of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method
|
1,584
|
|
|
1,132
|
|
|
1,653
|
|
|
1,146
|
|
Diluted shares outstanding
|
138,449
|
|
|
138,993
|
|
|
138,266
|
|
|
138,832
|
|
The effect of stock-based compensation awards for the
three and six months
ended
June 30, 2017
, which in aggregate consisted of
162,000
and
265,000
shares, respectively; and for the
three and six months
ended
June 30, 2016
, which in the aggregate consisted of
295,000
and
440,000
shares, respectively, have been excluded for purposes of diluted earnings per share since the effect of their inclusion would have been anti-dilutive.
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Note 4.
|
Fair Value of Financial Instruments
|
Factors used in determining the fair value of financial assets and liabilities are summarized into three broad categories in accordance with FASB ASC Topic 820, “Fair Value Measurements”:
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|
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, credit risk, and observable market prices for identical instruments that are traded in less active markets; and
|
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
|
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Company had
$70.9 million
and
$8.3 million
of cash equivalents at
June 30, 2017
and
December 31, 2016
, respectively, which were primarily investments in money market funds and overnight deposits. 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. All cash equivalents are comprised of instruments that are convertible to cash daily. The fair value of the Company’s foreign currency contracts and interest rate swap contracts as of
June 30, 2017
and
December 31, 2016
, are disclosed in Note 5, "Derivative Financial Instruments," 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," is approximately
$429.4 million
at
June 30, 2017
and is categorized as Level 2 based on observable prices for the identical instrument in a less active market. The fair value of the Company's credit facility and related borrowings, 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.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 5. Derivative Financial Instruments
Foreign Currency Exchange Rate Risk
The Company enters into foreign currency forward contracts not formally designated as hedges to manage the consolidated exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities. Changes in fair value of foreign currency forward contracts are recognized in income at the end of each reporting period based on the difference between the contract rate and the spot rate. In general, these gains and losses are offset in the Consolidated Statements of Income by the reciprocal gains and losses from cash settlement of the underlying assets or liabilities which originally gave rise to the exposure. The net amount of the gains and losses related to derivative instruments recorded in other (income) expense, net for the
three and six months
ended
June 30, 2017
were net
losses
of
$3.4 million
and
$7.7 million
, respectively. The net losses for the
three and six months
ended
June 30, 2016
were
$9.1 million
and
$2.1 million
, respectively.
The table below presents the net notional amounts of the Company’s outstanding foreign currency forward contracts by currency (in thousands):
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|
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|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
European euro
|
$
|
190,451
|
|
|
$
|
156,352
|
|
Swedish kroner
|
74,191
|
|
|
48,555
|
|
Canadian dollar
|
56,475
|
|
|
15,645
|
|
Brazilian real
|
9,562
|
|
|
2,747
|
|
Japanese yen
|
2,985
|
|
|
3,251
|
|
Australian dollar
|
2,129
|
|
|
1,653
|
|
British pound sterling
|
668
|
|
|
33,862
|
|
Other
|
485
|
|
|
—
|
|
|
$
|
336,946
|
|
|
$
|
262,065
|
|
At
June 30, 2017
, the Company’s foreign currency forward contracts, in general, had maturities of
three months
or less.
The carrying amount of the foreign exchange contracts included in the Consolidated Balance Sheets are as follows (in thousands):
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|
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|
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|
|
|
|
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|
|
|
|
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|
June 30, 2017
|
|
December 31, 2016
|
|
Prepaid Expenses and Other Current Assets
|
|
Other Current Liabilities
|
|
Prepaid Expenses and Other Current Assets
|
|
Other Current Liabilities
|
Foreign exchange contracts
|
$
|
3,853
|
|
|
$
|
1,768
|
|
|
$
|
2,369
|
|
|
$
|
75
|
|
Interest Rate Swap Contracts
At
June 30, 2017
, the effective interest rate on the borrowings made from the Company's revolving credit facility was
2.37 percent
. As of
June 30, 2017
, the following interest rate swaps were outstanding:
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|
Contract Date
|
|
Notional Amount
(in millions)
|
|
Fixed Rate
|
|
Effective Date
|
|
Maturity Date
|
March 15, 2013
|
|
$
|
43.1
|
|
|
1.02
|
%
|
|
April 5, 2013
|
|
March 31, 2019
|
March 29, 2013
|
|
$
|
43.1
|
|
|
0.97
|
%
|
|
April 5, 2013
|
|
March 31, 2019
|
The net fair value carrying amount of the Company's interest rate swaps was
$0.6 million
, of which
$0.3 million
has been recorded to prepaid expenses and other current assets and
$0.3 million
has been recorded to other assets in the Consolidated Balance Sheet as of
June 30, 2017
.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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|
Note 6.
|
Accounts Receivable
|
Accounts receivable are net of an allowance for doubtful accounts of $
6.2 million
and $
6.5 million
at
June 30, 2017
and
December 31, 2016
, respectively.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Raw material and subassemblies
|
$
|
217,113
|
|
|
$
|
200,640
|
|
Work-in-progress
|
58,533
|
|
|
43,430
|
|
Finished goods
|
129,682
|
|
|
127,301
|
|
|
$
|
405,328
|
|
|
$
|
371,371
|
|
Note 8. Property and Equipment
Property and equipment are net of accumulated depreciation of $
300.3 million
and $
275.1 million
at
June 30, 2017
and
December 31, 2016
, respectively.
The carrying value of goodwill and the activity for the six months ended
June 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
Balance, December 31, 2016
|
$
|
801,406
|
|
Goodwill from acquisitions
|
100,022
|
|
Currency translation adjustments
|
18,936
|
|
Balance, June 30, 2017
|
$
|
920,364
|
|
See Note 17, "Operating Segments and Related Information -
Operating Segments,
" of the Notes to the Consolidated Financial Statements for additional information on the carrying value of goodwill by operating segment at
June 30, 2017
.
See Note 18, "Business Acquisitions," of the Notes to the Consolidated Financial Statements for additional information on the addition of goodwill from acquisitions.
Note 10. Intangible Assets
Intangible assets are net of accumulated amortization of $
93.2 million
and $
77.8 million
at
June 30, 2017
and
December 31, 2016
, respectively.
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|
Note 11.
|
Credit Agreement
|
On February 8, 2011, the Company entered into a credit agreement with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders, as amended on April 5, 2013, October 27, 2015 and May 31, 2016 (the "Credit Agreement") which provides for a $500 million revolving line of credit. At
June 30, 2017
, the Company had
$86.3 million
outstanding under its revolving credit facility pursuant to the Credit Agreement and had
$18.2 million
of letters of credit outstanding, which reduces the total available revolving credit under the Credit Agreement to
$395.5 million
.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 12.
|
Accrued Product Warranties
|
The following table summarizes the Company’s warranty liability and activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accrued product warranties, beginning of period
|
$
|
19,971
|
|
|
$
|
17,227
|
|
|
$
|
20,845
|
|
|
$
|
16,514
|
|
Amounts paid for warranty services
|
(4,362
|
)
|
|
(5,458
|
)
|
|
(8,991
|
)
|
|
(9,598
|
)
|
Warranty provisions for products sold
|
3,782
|
|
|
5,826
|
|
|
7,491
|
|
|
10,560
|
|
Currency translation adjustments and other
|
139
|
|
|
(103
|
)
|
|
185
|
|
|
16
|
|
Accrued product warranties, end of period
|
$
|
19,530
|
|
|
$
|
17,492
|
|
|
$
|
19,530
|
|
|
$
|
17,492
|
|
|
|
|
|
|
|
|
|
Current accrued product warranties, end of period
|
|
|
|
|
$
|
16,262
|
|
|
$
|
14,661
|
|
Long-term accrued product warranties, end of period
|
|
|
|
|
$
|
3,268
|
|
|
$
|
2,831
|
|
Note 13. Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Unsecured notes
|
$
|
425,000
|
|
|
$
|
425,000
|
|
Credit Agreement
|
86,250
|
|
|
97,500
|
|
Unamortized discounts and issuance costs of unsecured notes
|
(4,947
|
)
|
|
(5,579
|
)
|
|
$
|
506,303
|
|
|
$
|
516,921
|
|
Current portion, long-term debt
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Long-term debt
|
$
|
491,303
|
|
|
$
|
501,921
|
|
In June 2016, the Company issued
$425 million
aggregate principal amount of its
3.125 percent
senior unsecured notes due
June 15, 2021
(the “2016 Notes”). The net proceeds from the issuance of the 2016 Notes were approximately
$421.0 million
, after deducting underwriting discounts and offering expenses, which are being amortized over a period of
five years
. Interest on the 2016 Notes is payable semiannually in arrears on December 15 and June 15. The proceeds from the 2016 Notes were used to repay the principal amount of the notes issued in August 2011 and outstanding in July 2016 and are being used for general corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock.
On May 31, 2016, the Company repaid its term loan and drew down
$105.0 million
under the revolving credit facility. Interest on amounts outstanding under the revolving credit facility accrues at the one-month LIBOR rate plus the applicable margin for the amount outstanding and is paid monthly in arrears. See Note 5, "Derivative Financial Instruments -
Interest Rate Swap Contracts
," of the Notes to the Consolidated Financial Statements for additional information on the effective interest rate on the revolving credit facility at
June 30, 2017
.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 14.
|
Shareholders’ Equity
|
The following table summarizes the common stock and additional paid-in capital activity during the
six
months ended
June 30, 2017
(in thousands):
|
|
|
|
|
Common stock and additional paid-in capital, December 31, 2016
|
$
|
12,139
|
|
Common stock issued pursuant to stock-based compensation plans, net
|
(1,987
|
)
|
Stock-based compensation
|
15,340
|
|
Common stock and additional paid-in capital, June 30, 2017
|
$
|
25,492
|
|
On
June 9, 2017
, the Company paid a dividend of
$0.15
per share on its outstanding common stock to the shareholders of record as of the close of business on
May 26, 2017
. The total cash payments for dividends during the
six
months ended
June 30, 2017
were
$41.0 million
.
Raytheon Litigation
FLIR Systems, Inc. and its subsidiary, FLIR Commercial Systems, Inc. (formerly known as Indigo Systems Corporation) (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 of the FLIR Parties infringed any of the trade secrets claimed and awarded Raytheon no damages. On March 31, 2016, the United States District Court for the Eastern District of Texas issued a Final Judgment denying Raytheon’s claims and awarding FLIR court costs and denying each of Raytheon’s and FLIR’s Renewed Motions for Judgment as a Matter of Law and denying FLIR’s Amended Rule 54(d) Motion for Attorneys’ Fees and Costs Under the Texas Theft Liability Act.
On April 29, 2016, Raytheon filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit of the denial by the United States District Court for the Eastern District of Texas of Raytheon’s Renewed Motion for Judgment as a Matter of Law, or in the Alternative, Motion for New Trial. On May 11, 2016, the FLIR Parties filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit of the Order of the United States District Court for the Eastern District of Texas Denying the FLIR Parties’ Amended Rule 54(d) Motion for Attorneys’ Fees and Costs under the Texas Theft Liability Act, the Order Denying the FLIR Parties’ Renewed Motion For Judgment as a Matter Of Law, and the Final Judgment to the extent it denied the FLIR Parties Attorneys’ Fees and Costs under the Texas Theft Liability Act. The matter remains ongoing and is subject to appeal and the Company is unable to estimate the amount or range of potential loss or recovery, if any, which might result if the final determination of this matter is favorable or unfavorable, but an adverse ruling on the merits of the original claims against the FLIR Parties, while remote, could be material.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 15.
|
Contingencies - (Continued)
|
Matters Involving the United States Department of State and Department of Commerce
On October 22, 2014, the Company initially contacted the United States Department of State Office of Defense Trade Controls Compliance (“DTCC”), 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 DTCC regarding the details of the issues raised in the October 22, 2014, submission. DTCC 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 and reference certain Company disclosures in addition to the submissions made in conjunction with the October 24, 2014 initial notification. On June 6, 2016, the Company executed a subsequent tolling agreement extending the tolling period for matters to be potentially included in an administrative proceeding for an additional 18 months until the end of December 2017. DTCC continues its review of the Company’s activities and the Company continues to engage actively with the United States government on these matters.
In May 2017, the Company submitted an initial notification to DTCC regarding potential violations related to certain export classifications obtained through the commodity jurisdiction process. DTCC acknowledged the notification and at the request of DTCC, the Company executed a tolling agreement for this matter, suspending the statute of limitations for a twelve (12) month period
.
In June 2017, the United States Department of Commerce Bureau of Industry and Security informed the Company of additional export licensing requirements that restrict the Company’s 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. This action was precipitated by concerns of potential diversion of some of the Company's products to prohibited end users and to countries subject to economic and other sanctions implemented by the United States. If the Company is found to have violated applicable rules and regulations with respect to customers and limitations on the end use of the Company’s products, the Company could be subject to substantial fines and penalties, suspension of existing licenses or other authorizations and/or loss or suspension of export privileges.
The Company is unable to reasonably estimate the time it may take to resolve these matters or the amount or range of potential loss, penalty or other government action, if any, that may be incurred in connection with these matters. However, an unfavorable outcome could result in substantial fines and penalties or loss or suspension of export privileges or of particular authorizations that could be material to the Company’s financial position, results of operations or cash flows in and following the period in which such an outcome becomes estimable or known.
SkyWatch Product Quality Matters
In March 2016, the Company learned of potential quality concerns with respect to as many as 312 Level III and Level IV SkyWatch Surveillance Towers sold by FLIR and companies acquired by FLIR from 2002 through 2014. The Company notified customers who purchased the affected SkyWatch Towers of the potential concerns and, as a precautionary measure, also temporarily suspended production of all Level III and Level IV SkyWatch Towers pending the completion of its review and the implementation of any necessary remedial measures. During the quarter ended September 30, 2016, the Company identified the cause of these quality issues and began testing certain remedial solutions to repair the affected SkyWatch Towers. Testing of the remedial solution for certain of the product variations affected was completed during the quarter ended June 30, 2017. During the quarter ended June 30, 2017, customers who purchased the product configurations for which a remedial solution has been identified and tested were notified of their options to request modifications to their fielded units. While there still remains uncertainty related to estimating the costs associated with a potential remedy and number of units which may require such remedy, the Company currently estimates the range of potential loss to be between
$4.5 million
and
$15 million
. As no single amount within the range is a better estimate than any other amount within the range, the Company has recorded a liability of
$4.5 million
as of
June 30, 2017
. Factors underlying this estimated range of loss may change from time to time, and actual results may vary significantly from this estimate.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 15.
|
Contingencies - (Continued)
|
Other Matters
The Company is also subject to other legal and administrative proceedings, investigations, claims and litigation arising in the ordinary course of business not specifically identified above. In these identified matters and others not specifically identified, the Company records a liability with respect to a matter when management believes it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of the loss. The Company believes it has recorded adequate provisions for any probable and estimable losses for matters in existence on the date hereof. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. While the outcome of each of these matters is currently not determinable, the Company does not expect that the ultimate resolution of any such matter will individually have a material adverse effect on the Company’s financial position, results of operations or cash flows. The costs to resolve all such matters may in the aggregate have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income tax provision
|
$
|
12,127
|
|
|
$
|
14,485
|
|
|
$
|
25,120
|
|
|
$
|
68,980
|
|
Effective tax rate
|
19.1
|
%
|
|
24.2
|
%
|
|
21.1
|
%
|
|
59.7
|
%
|
The effective tax rate for the three and six months ended
June 30, 2017
, is lower than the United States Federal tax rate of 35 percent mainly due to the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits, excess tax benefits from stock compensation, and other discrete adjustments.
As of
June 30, 2017
, the Company had approximately
$58.5 million
of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates approximately
$43.4 million
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 unrecognized tax benefits in the income tax provision. As of
June 30, 2017
, the Company had
$2.8 million
of accrued interest and penalties related to unrecognized tax benefits that are recorded as current and non-current accrued income taxes on the Consolidated Balance Sheet.
The Company currently has the following tax years open to examination by major taxing jurisdictions:
|
|
|
|
Tax Years:
|
United States Federal
|
2013 - 2015
|
State of California
|
2013 - 2015
|
State of Massachusetts
|
2013 - 2015
|
State of Oregon
|
2013 - 2015
|
Sweden
|
2012 - 2015
|
United Kingdom
|
2012 - 2015
|
Belgium
|
2011 - 2015
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 17. Operating Segments and Related Information
Operating Segments
The Company has
six
reportable operating segments 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.
Instruments
The Instruments segment develops and manufactures devices that image, measure, and assess thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications. Products include thermal imaging cameras, gas detection cameras, firefighting cameras, process automation cameras, and environmental test and measurement devices.
Security
The Security segment develops and manufactures cameras, video recording systems, and video management systems for use in commercial, critical infrastructure, and home security applications. Products include thermal and visible-spectrum cameras, digital and networked
video recorders, and related software and accessories that enable the efficient and effective safeguarding of assets at all hours of the day and through adverse weather conditions.
OEM & Emerging Markets
The OEM & Emerging Markets segment develops and manufactures thermal 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 and manufactures intelligent traffic monitoring and signal control systems, imaging payloads for Unmanned Aerial Systems ("UAS"), and thermal imaging solutions for use by consumers in the smartphone and mobile devices markets.
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.
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.
The Company’s chief operating decision maker ("CODM"), its Chief Executive Officer, evaluates each of its segment’s performance and allocates resources based on revenue and segment operating income. Intersegment revenues are recorded at cost and are eliminated in consolidation. The Company and each of its segments employ consistent accounting policies.
The following tables present revenue, operating income, and assets for the six segments. Operating income as reviewed by the CODM is revenue less cost of goods sold and operating expense, excluding general corporate expenses, acquisition costs, amortization of purchased intangible assets, amortization of acquisition-related inventory step-up, costs associated with the SkyWatch product remediation, restructuring charges, and executive transition costs. Accounts receivable and inventories for operating segments are regularly reviewed by management and are reported below as segment assets. All remaining assets, liabilities, capital expenditures, and depreciation are managed on a Company-wide basis.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 17. Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Operating segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue—External Customers:
|
|
|
|
|
|
|
|
Surveillance
|
$
|
129,209
|
|
|
$
|
113,440
|
|
|
$
|
247,938
|
|
|
$
|
237,591
|
|
Instruments
|
85,969
|
|
|
78,068
|
|
|
163,824
|
|
|
157,487
|
|
Security
|
49,709
|
|
|
63,380
|
|
|
94,786
|
|
|
110,441
|
|
OEM & Emerging Markets
|
87,447
|
|
|
56,980
|
|
|
172,212
|
|
|
104,825
|
|
Maritime
|
55,102
|
|
|
55,163
|
|
|
103,653
|
|
|
106,883
|
|
Detection
|
26,688
|
|
35,698
|
|
58,525
|
|
64,974
|
|
$
|
434,124
|
|
|
$
|
402,729
|
|
|
$
|
840,938
|
|
|
$
|
782,201
|
|
Revenue—Intersegments:
|
|
|
|
|
|
|
|
Surveillance
|
$
|
3,331
|
|
|
$
|
4,755
|
|
|
$
|
8,087
|
|
|
$
|
8,979
|
|
Instruments
|
7,325
|
|
|
1,213
|
|
|
13,114
|
|
|
2,788
|
|
Security
|
3,640
|
|
|
3,836
|
|
|
6,765
|
|
|
6,308
|
|
OEM & Emerging Markets
|
9,361
|
|
|
8,833
|
|
|
18,530
|
|
|
17,010
|
|
Maritime
|
621
|
|
|
1,458
|
|
|
1,298
|
|
|
2,072
|
|
Detection
|
1
|
|
|
31
|
|
|
1
|
|
|
31
|
|
Eliminations
|
(24,279
|
)
|
|
(20,126
|
)
|
|
(47,795
|
)
|
|
(37,188
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Segment operating income:
|
|
|
|
|
|
|
|
Surveillance
|
$
|
33,007
|
|
|
$
|
26,595
|
|
|
$
|
59,372
|
|
|
$
|
62,460
|
|
Instruments
|
23,627
|
|
|
19,695
|
|
|
44,773
|
|
|
39,676
|
|
Security
|
1,288
|
|
|
4,410
|
|
|
1,603
|
|
|
2,241
|
|
OEM & Emerging Markets
|
26,340
|
|
|
16,757
|
|
|
50,697
|
|
|
27,443
|
|
Maritime
|
9,390
|
|
|
7,521
|
|
|
14,594
|
|
|
13,328
|
|
Detection
|
7,024
|
|
|
10,320
|
|
|
15,761
|
|
|
18,557
|
|
|
$
|
100,676
|
|
|
$
|
85,298
|
|
|
$
|
186,800
|
|
|
$
|
163,705
|
|
A reconciliation of the Company's consolidated segment operating income to consolidated earnings before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Consolidated segment operating income
|
$
|
100,676
|
|
|
$
|
85,298
|
|
|
$
|
186,800
|
|
|
$
|
163,705
|
|
Unallocated corporate expenses
|
(25,017
|
)
|
|
(16,049
|
)
|
|
(43,240
|
)
|
|
(32,674
|
)
|
Amortization of purchased intangible assets
|
(7,016
|
)
|
|
(3,927
|
)
|
|
(13,751
|
)
|
|
(8,134
|
)
|
Amortization of acquisition-related inventory step-up
|
—
|
|
|
—
|
|
|
(1,992
|
)
|
|
—
|
|
SkyWatch product quality accrual
|
(2,000
|
)
|
|
—
|
|
|
(2,000
|
)
|
|
—
|
|
Restructuring charges
|
(13
|
)
|
|
(110
|
)
|
|
(101
|
)
|
|
(308
|
)
|
Consolidated earnings from operations
|
66,630
|
|
|
65,212
|
|
|
125,716
|
|
|
122,589
|
|
Interest and non-operating expense, net
|
(3,090
|
)
|
|
(5,359
|
)
|
|
(6,612
|
)
|
|
(7,116
|
)
|
Consolidated earnings before income taxes
|
$
|
63,540
|
|
|
$
|
59,853
|
|
|
$
|
119,104
|
|
|
$
|
115,473
|
|
Unallocated corporate expenses include general corporate expenses, acquisition related costs and executive transition costs.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 17. Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Segment assets (accounts receivable, net and inventories):
|
|
|
|
Surveillance
|
$
|
278,535
|
|
|
$
|
283,324
|
|
Instruments
|
125,942
|
|
|
114,681
|
|
Security
|
83,493
|
|
|
93,174
|
|
OEM & Emerging Markets
|
141,568
|
|
|
144,862
|
|
Maritime
|
73,963
|
|
|
61,494
|
|
Detection
|
33,836
|
|
|
25,856
|
|
|
$
|
737,337
|
|
|
$
|
723,391
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
Segment goodwill:
|
|
|
|
Surveillance
|
$
|
258,480
|
|
|
$
|
152,383
|
|
Instruments
|
151,799
|
|
|
147,595
|
|
Security
|
106,785
|
|
|
102,983
|
|
OEM & Emerging Markets
|
254,592
|
|
|
252,647
|
|
Maritime
|
100,724
|
|
|
97,860
|
|
Detection
|
47,984
|
|
|
47,938
|
|
|
$
|
920,364
|
|
|
$
|
801,406
|
|
Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
$
|
224,025
|
|
|
$
|
224,305
|
|
|
$
|
445,856
|
|
|
$
|
418,589
|
|
Europe
|
91,041
|
|
|
84,297
|
|
|
174,313
|
|
|
168,707
|
|
Asia
|
59,721
|
|
|
47,413
|
|
|
113,645
|
|
|
91,237
|
|
Middle East/Africa
|
35,248
|
|
|
28,629
|
|
|
60,390
|
|
|
56,341
|
|
Canada/Latin America
|
24,089
|
|
|
18,085
|
|
|
46,734
|
|
|
47,327
|
|
|
$
|
434,124
|
|
|
$
|
402,729
|
|
|
$
|
840,938
|
|
|
$
|
782,201
|
|
Long-lived assets by significant geographic locations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30,
2017
|
|
(as reclassified)
|
United States
|
$
|
689,044
|
|
|
$
|
676,007
|
|
Europe
|
508,272
|
|
|
490,089
|
|
Canada/Latin America
|
225,100
|
|
|
235,921
|
|
Other foreign
|
8,164
|
|
|
7,789
|
|
|
$
|
1,430,580
|
|
|
$
|
1,409,806
|
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 17. Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Major Customers
Revenue derived from major customers is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States government
|
$
|
111,824
|
|
|
$
|
100,106
|
|
|
$
|
228,059
|
|
|
$
|
185,742
|
|
|
|
Note 18.
|
Business Acquisitions
|
Point Grey Research, Inc.
On November 4, 2016, the Company completed the acquisition of the assets of Point Grey Research Inc. (“Point Grey”), a global leader in the development of advanced visible imaging cameras and solutions that are used in industrial automation systems, medical diagnostic equipment, people counting systems, intelligent traffic systems, military and defense products, and advanced mapping systems, for approximately
$259.2 million
in cash, subject to customary post-closing adjustments. The Company has performed a preliminary purchase price allocation which resulted in an allocation of
$39.8 million
to identifiable intangible assets and
$183.7 million
to goodwill which has been recorded in the Company’s OEM & Emerging Markets segment.
The preliminary allocation of the purchase price for Point Grey is as follows (in thousands):
|
|
|
|
|
Cash acquired
|
$
|
2,994
|
|
Other tangible assets and liabilities, net
|
35,064
|
|
Net deferred taxes
|
(2,438
|
)
|
Identifiable intangible assets
|
39,800
|
|
Goodwill
|
183,741
|
|
Total purchase price
|
$
|
259,161
|
|
The allocation of the purchase price related to this acquisition is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets, and preliminary estimates of the fair value of liabilities assumed. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of the identifiable intangible assets, property and equipment, and certain other tangible assets and liabilities. The preliminary goodwill of
$183.7 million
represents future economic benefits expected to arise from synergies from combining operations and the ability of Point Grey to provide the Company domain knowledge and distribution channels in adjacent markets.
In connection with the preliminary allocation of purchase price to the assets acquired and liabilities assumed, the Company identified certain intangible assets. The following table presents the acquired intangible assets, their preliminary estimated fair values, and preliminary estimated useful lives (in thousands, except years):
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
Amount
|
Developed technology
|
10 years
|
|
$
|
23,100
|
|
Customer relationships
|
7 years
|
|
13,200
|
|
Backlog
|
1 year
|
|
2,300
|
|
Non-Competition Agreements
|
5 years
|
|
1,000
|
|
Other
|
n/a
|
|
200
|
|
|
|
|
$
|
39,800
|
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 18. Business Acquisitions - (Continued)
Acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology, customer relationships, backlog, and non-competition agreements. Developed technology represents the economic advantage of having certain technologies in place that lower manufacturing and operating costs and drive higher margins. Customer relationships represents the relationships Point Grey has established in the OEM and people counting markets as of the date of the acquisition. Backlog represents “pre-sold” business at the date of acquisition, which provides positive earning streams post acquisition that exceed what is required to provide a return on the other assets employed. Non-competition agreements represent the economic benefit of having agreements with certain current and former employees and shareholders of Point Grey that restrict their ability to compete directly with the Company.
The developed technology was valued using the income approach and relief from royalty method. Customer relationships and backlog were valued using the income approach and multi-period excess earnings method. Non-competition agreements were valued using the income approach and the with-and-without method.
Prox Dynamics, AS
On November 30, 2016, the Company acquired 100% of the outstanding stock of Prox Dynamics AS (“Prox Dynamics”), a leading developer and manufacturer of nano-class UASs for military and para-military intelligence, surveillance, and reconnaissance applications, for approximately
$134.1 million
in cash, subject to customary post-close adjustments. At December 31, 2016, the Company reported the net tangible assets of
$11.3
million in the respective balance sheet accounts and the excess purchase price of
$122.8
million in other long-term assets.
During the three months ended March 31, 2017, the Company performed a preliminary purchase price allocation which resulted in an allocation of
$31.4 million
of identifiable intangible assets and
$91.9 million
of goodwill in conjunction with the Prox Dynamics acquisition, which has been recorded in the Company’s Surveillance business segment.
During the three months ended June 30, 2017, the Company finalized the purchase price allocation, resulting in a
$7.4 million
decrease to net deferred taxes, and a corresponding
$7.4 million
increase in goodwill. The goodwill of
$99.3 million
represents future economic benefits expected to arise from synergies from combining operations the ability of Prox Dynamics to provide the Company domain knowledge and distribution channels in adjacent markets.
The allocation of the purchase price for Prox Dynamics is as follows (in thousands):
|
|
|
|
|
Cash acquired
|
$
|
11,706
|
|
Other tangible assets and liabilities, net
|
(900
|
)
|
Net deferred taxes
|
(7,387
|
)
|
Identifiable intangible assets
|
31,400
|
|
Goodwill
|
99,269
|
|
Total purchase price
|
$
|
134,088
|
|
In connection with the allocation of purchase price to the assets acquired and liabilities assumed, the Company identified certain intangible assets. The following table presents the acquired intangible assets, their estimated fair values, and estimated useful lives (in thousands, except years):
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
Amount
|
Developed technology
|
8 years
|
|
$
|
23,400
|
|
Customer relationships
|
7 years
|
|
3,500
|
|
Patents
|
8 years
|
|
3,100
|
|
Trade name
|
8 years
|
|
1,400
|
|
|
|
|
$
|
31,400
|
|
Acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology, customer relationships, patents, and trade name. Developed technology and patents represent the economic advantage of having certain technologies in place that lower manufacturing and operating costs and drive higher margins. Customer relationships represents the relationships Prox Dynamics has established in the military and defense ministries of countries throughout the world. Trade name represents the "Black Hornet" name, which is well recognized within the industry and is known as a leading product within the nano-class UAS segment.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 18. Business Acquisitions - (Continued)
The developed technology and customer relationships were valued using the income approach and multi-period excess earnings method. Patents and trade name were valued using the income approach and relief from royalty method.
The acquisitions of Point Grey and Prox Dynamics are not significant as defined in Regulation S-X under the Securities Exchange Act of 1934, nor are they significant compared to the Company's overall results of operations. Consequently, no pro forma financial information is provided.
|
|
Note 19.
|
Subsequent Events
|
On
July 20, 2017
, the Company’s Board of Directors declared a quarterly dividend of
$0.15
per share on its common stock, payable on
September 8, 2017
, to shareholders of record as of the close of business on
August 25, 2017
. The total cash payment of this dividend will be approximately
$20.6 million
.