FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 6. Derivative Financial Instruments - (Continued)
Interest Rate Swap - (Continued)
The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
Classification
|
|
2020
|
|
2019
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
Derivative instruments in asset positions:
|
|
|
|
|
Interest Rate Swap
|
|
Prepaid expense and other current assets
|
|
$
|
541
|
|
|
$
|
404
|
|
Derivative instruments in liability positions:
|
|
|
|
|
Interest Rate Swap
|
|
Other current liabilities
|
|
566
|
|
|
453
|
|
Interest Rate Swap
|
|
Other long-term liabilities
|
|
1,463
|
|
|
1,012
|
|
|
|
|
|
|
|
|
Derivative instruments designated as fair value hedges:
|
|
|
|
|
Derivative instruments in asset positions:
|
|
|
|
|
Currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
8,595
|
|
|
—
|
|
Currency forward contracts
|
|
Other assets
|
|
17,325
|
|
|
—
|
|
Derivative instruments in liability positions:
|
|
|
|
|
Currency forward contracts
|
|
Other current liabilities
|
|
—
|
|
|
454
|
|
Currency forward contracts
|
|
Other long-term liabilities
|
|
—
|
|
|
1,189
|
|
|
|
|
|
|
|
|
Derivative instruments not formally designated as hedges:
|
|
|
|
|
Derivative instruments in asset positions:
|
|
|
|
|
Currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
812
|
|
|
3,010
|
|
Derivative instruments in liability positions:
|
|
|
|
|
Currency forward contracts
|
|
Other current liabilities
|
|
9,483
|
|
|
391
|
|
The following table presents the statement of income classification of derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Classification
|
|
2020
|
|
2019
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
Loss recognized in other comprehensive (income) loss, net of tax
|
|
Accumulated other comprehensive (income) loss
|
|
$
|
1,117
|
|
|
$
|
807
|
|
Loss reclassified from other comprehensive (income) loss to earnings for the effective portion
|
|
Interest expense
|
|
171
|
|
|
—
|
|
|
|
|
|
|
|
|
Derivative instruments designated as fair value hedges:
|
|
|
|
|
(Gain) loss recognized in earnings for effective portion
|
|
Other (income) expense, net
|
|
(22,766
|
)
|
|
—
|
|
(Gain) loss recognized in income for amount excluded from effectiveness testing
|
|
Other (income) expense, net
|
|
(1,139
|
)
|
|
—
|
|
(Gain) loss recognized in other comprehensive (income) loss, net of tax
|
|
Accumulated other comprehensive (income) loss
|
|
(3,870
|
)
|
|
—
|
|
|
|
|
|
|
|
|
Derivative instruments not formally designated as hedges:
|
|
|
|
|
|
|
(Gain) loss recognized in earnings
|
|
Other (income) expense, net
|
|
(12,890
|
)
|
|
291
|
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 7.
|
Accounts Receivable
|
Accounts receivable are net of an allowance for credit losses of $5.9 million and $6.1 million at March 31, 2020 and December 31, 2019, respectively.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Raw material and subassemblies
|
$
|
221,768
|
|
|
$
|
224,239
|
|
Work-in-progress
|
52,271
|
|
|
44,344
|
|
Finished goods
|
123,487
|
|
|
120,179
|
|
|
$
|
397,526
|
|
|
$
|
388,762
|
|
Operating leases are included in other assets, other current liabilities, and other long-term liabilities on the consolidated balance sheets. The Company does not have any finance leases at March 31, 2020.
Most of the Company’s operating leases are for buildings, warehouses and office space. These leases have remaining lease terms of approximately one year to ten years.
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
Operating lease expense
|
$
|
3,022
|
|
|
$
|
2,635
|
|
Short-term lease expense
|
27
|
|
|
246
|
|
Variable lease expense
|
570
|
|
|
514
|
|
Total lease expense
|
$
|
3,619
|
|
|
$
|
3,395
|
|
Supplemental balance sheet information related to operating leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2020
|
December 31, 2019
|
Operating lease right-of-use assets
|
$
|
32,488
|
|
$
|
35,479
|
|
Operating lease liabilities
|
$
|
36,062
|
|
$
|
39,291
|
|
Note 10. Property and Equipment
Property and equipment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Land
|
—
|
|
$
|
23,837
|
|
|
$
|
21,511
|
|
Buildings
|
30 years
|
|
167,690
|
|
|
167,852
|
|
Machinery and equipment
|
3 to 7 years
|
|
306,142
|
|
|
307,530
|
|
Office equipment and other
|
3 to 10 years
|
|
127,949
|
|
|
129,127
|
|
|
|
|
625,618
|
|
|
626,020
|
|
Less accumulated depreciation
|
|
|
(374,197
|
)
|
|
(370,115
|
)
|
|
|
|
$
|
251,421
|
|
|
$
|
255,905
|
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 10. Property and Equipment - (Continued)
Depreciation expense for the three months ended March 31, 2020 and 2019 was $11.8 million and $10.4 million, respectively.
During the three months ended March 31, 2020, the Company disposed of fixed assets with a net book value of $3.0 million and recognized a corresponding loss on disposal of $3.0 million which was included in "Selling, general and administrative" on the Consolidated Statements of Income.
In the first quarter of 2020, the Company completed a business reorganization as part of its “Project Be Ready” restructuring plan which resulted in identification of two reportable segments (Industrial Technologies and Defense Technologies). The Company commenced operating and reporting under the new organization structure effective January 1, 2020. See Note 20, “Restructuring” for further information on Project Be Ready and Note 18, "Operating Segments and Related Information" for additional information on the two new reportable operating segments.
Goodwill was allocated to identified reporting units using a relative fair value approach. The following table presents changes in the carrying value of goodwill and the activity by reportable segment for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Technologies
|
|
Defense Technologies
|
|
Consolidated
|
Balance, December 31, 2019
|
|
$
|
635,899
|
|
|
$
|
728,697
|
|
|
$
|
1,364,596
|
|
Goodwill from acquisitions
|
|
—
|
|
|
(12,617
|
)
|
|
(12,617
|
)
|
Currency translation adjustments
|
|
(7,244
|
)
|
|
(15,907
|
)
|
|
(23,151
|
)
|
Balance, March 31, 2020
|
|
$
|
628,655
|
|
|
$
|
700,173
|
|
|
$
|
1,328,828
|
|
In conjunction with the change in reportable segments, the Company evaluated goodwill for impairment, both before and after the segment change and determined that goodwill was not impaired.
The Company reviews its goodwill for impairment annually during the third quarter, or more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. As a result of a deterioration in macroeconomic conditions driven by COVID-19 as well as Company specific events, which combined resulted in declines to our stock price and market capitalization during the first quarter of 2020, the Company determined it was more likely than not that these factors had a significant adverse impact on its reporting units. An interim quantitative goodwill impairment analysis was performed as of March 31, 2020 and the Company determined that the fair values of its reporting units were greater than their carrying values. As such, no impairment was necessary for any of its reporting units.
See Note 19, "Business Acquisitions and Divestitures" for additional information on goodwill from acquisitions.
Note 12. Intangible Assets
Intangible assets are net of accumulated amortization of $138.9 million and $129.9 million at March 31, 2020 and December 31, 2019, respectively.
The aggregate amortization expense for the three months ended March 31, 2020 and 2019 was $11.9 million and $6.0 million, respectively.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The Company's debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Unsecured notes
|
$
|
425,000
|
|
|
$
|
425,000
|
|
Credit Agreement (term loans)
|
226,536
|
|
|
239,552
|
|
Credit Agreement (revolving credit facility)
|
191,000
|
|
|
16,000
|
|
Unamortized discounts and issuance costs
|
(3,340
|
)
|
|
(3,689
|
)
|
Total debt
|
$
|
839,196
|
|
|
$
|
676,863
|
|
Less: Credit facility
|
191,000
|
|
|
16,000
|
|
Less: Long-term debt, current portion
|
11,923
|
|
|
12,444
|
|
Long-term debt, net of current portion
|
$
|
636,273
|
|
|
$
|
648,419
|
|
In June 2016, the Company issued $425.0 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 for general corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock.
On March 29, 2019, the Company entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., MUFG Union Bank, N.A., and the other lenders party thereto. The Credit Agreement amended and restated the Company's existing Amended and Restated Credit Agreement, dated as of May 31, 2016 ("Existing Credit Agreement"). The Credit Agreement provides for a $650.0 million unsecured revolving credit facility, a $100.0 million unsecured term loan facility available in U.S. dollars amortizing at 5.0 percent per annum, and a $150.0 million unsecured term loan facility available in Swedish kronor amortizing at 5.0 percent per annum. The Credit Agreement has a term of five years and matures on March 29, 2024. In connection with the closing of the Credit Agreement, the Company made an initial borrowing of $100.0 million in revolving loans, $100.0 million in term loans in U.S. dollars, and the equivalent of $150.0 million in term loans in Swedish kronor. Additionally, the Company repaid in full all outstanding amounts, consisting of revolving loans in an aggregate principal amount of $375.0 million, under the Existing Credit Agreement.
The Company has the right, subject to certain conditions, including approval of additional commitments by qualified lenders, to increase the availability under the revolving credit facility by an additional $200.0 million until March 29, 2024. The Credit Agreement allows the Company and certain designated subsidiaries to borrow in United States dollars, European euros, Swedish kronor, British pound sterling, Japanese yen, Canadian dollars, Australian dollars, and other agreed upon currencies. Interest rates under the Credit Agreement are determined from the type and tenor of the borrowing and includes loans based on the published term Eurocurrency rate (e.g. LIBOR) in which the loan is denominated. The Eurocurrency rate loans have a floor of zero percent and an applicable margin that ranges from 1.000 percent to 1.375 percent depending on the Company’s consolidated total leverage ratio. At March 31, 2020, the borrowing rate on the revolving loan was 2.239 percent per annum, the borrowing rate on the U.S. dollar term loan was 2.700 percent per annum and the borrowing rate on the Swedish kronor term loan was 1.552 percent per annum.
The Credit Agreement requires the Company to pay a commitment fee on the amount of unused revolving commitments at a rate, based on our consolidated total leverage ratio, which ranges from 0.125 percent to 0.200 percent of unused revolving commitments. At March 31, 2020, the commitment fee on the amount of unused revolving credit was 0.175 percent per annum. The Credit Agreement contains one financial covenant that requires maintenance of a consolidated total leverage ratio with which the Company was in compliance at March 31, 2020.
The facilities available under the Credit Agreement are unsecured. The Credit Agreement also contains language providing for the adoption of a LIBOR successor rate in anticipation of the possibility of LIBOR benchmark reform, consistent with market practice. The Company is engaged in regular dialogue with its lenders and derivatives counterparties to keep apprised of the proposed successor rates in each of the jurisdictions in which there may have a need to execute a financial transaction. Although progress has been made by the various working groups, the Company believes it is too early to accurately assess any financial impact of the LIBOR benchmark reform.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 13. Debt - (Continued)
To manage the interest rate risk arising from the variability in interest expense attributable to amounts drawn under the Swedish kronor term loan facility, the Company entered into a floored interest rate swap with a Swedish kronor notional amount initially equivalent to $150.0 million. The interest rate swap was designated, and effective, as a cash flow hedge.
At March 31, 2020, the Company had $10.9 million of letters of credit outstanding, which reduces the total available revolving credit under the Credit Agreement.
On January 11, 2019, a standby letter of credit, not to exceed Swedish kronor 2.2 billion, was issued under a new bilateral letter of credit reimbursement agreement ("L/C Agreement") to secure a payment guarantee required by the Swedish Tax Authorities in order to grant the original respite from paying the tax reassessment described in Note 17, "Income Taxes." The outstanding amount of the L/C Agreement was equivalent to approximately $224.4 million at March 31, 2020. While outstanding amounts under the L/C Agreement do not reduce the available revolving credit from the Credit Agreement, they are considered indebtedness and influence the incremental debt capacity governed by our Credit Agreement covenants. The standby letter of credit was further amended on April 24, 2020 to reflect the new respite.
|
|
Note 14.
|
Accrued Product Warranties
|
The Company generally provides a twelve to twenty-four-month warranty on its products. A provision for the estimated future costs of warranty, based upon historical cost and product performance experience, is recorded when revenue is recognized. The following table summarizes the Company’s warranty liability and activity (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Accrued product warranties, beginning of period
|
$
|
19,143
|
|
|
$
|
18,583
|
|
Amounts paid for warranty services
|
(2,003
|
)
|
|
(2,776
|
)
|
Warranty provisions for products sold
|
2,860
|
|
|
2,414
|
|
Business acquisition
|
—
|
|
|
874
|
|
Currency translation adjustments and other
|
(191
|
)
|
|
(37
|
)
|
Accrued product warranties, end of period
|
$
|
19,809
|
|
|
$
|
19,058
|
|
|
|
|
|
Current accrued product warranties, end of period
|
$
|
15,018
|
|
|
$
|
15,747
|
|
Long-term accrued product warranties, end of period
|
$
|
4,791
|
|
|
$
|
3,311
|
|
|
|
Note 15.
|
Shareholders' Equity
|
On February 7, 2019, 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. This authorization will expire on February 7, 2021 and may be suspended or discontinued at any time. During the three months ended March 31, 2020, the Company repurchased approximately 4.1 million shares of the Company's common stock through open market transactions under the 2019 authorization. Total cash payments for the repurchase of common stock during the three months ended March 31, 2020 were $150.0 million. On March 20, 2020, the Company paid a dividend of $0.17 per share on its outstanding common stock to the shareholders of record as of the close of business on March 6, 2020. Total cash payments for dividends during the three months ended March 31, 2020 were $22.7 million.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Matters Involving the United States Department of State and Department of Commerce
On April 24, 2018, the Company entered into a Consent Agreement with the United States Department of State's Directorate of Defense Trade Controls (“DDTC”) to resolve allegations regarding the unauthorized export of technical data and defense services to dual and third country nationals from certain Company facilities, the failure to properly use and manage export licenses and export authorizations, and failures to report certain payments under 22 CFR Part 130 in potential violation of the International Traffic in Arms Regulation (“ITAR”). The Consent Agreement has a four-year term and provides for: (i) a civil penalty of $30.0 million with $15.0 million of this amount suspended on the condition that the funds have or will be used for Department-approved Consent Agreement remedial compliance measures, (ii) the appointment of an external Special Compliance Official to oversee compliance with the Consent Agreement and the ITAR; (iii) two external audits of the Company’s ITAR compliance program; and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures, and training. During the three-month period ended March 31, 2018, the Company recorded a $15.0 million charge for the portion of the penalty that is not subject to suspension. In April 2018 and 2019, the Company paid $1.0 million and $3.5 million, respectively, of the $15.0 million charge and as of March 31, 2020, the remaining amount payable of $3.5 million and $7.0 million has been recorded in other current liabilities and other long-term liabilities, respectively. The remaining $10.5 million is payable in annual installments of $3.5 million through April 2022. The Company expects recent and future investments in remedial compliance measures will be sufficient to cover the $15.0 million suspension amount.
As part of the Consent Agreement, DDTC acknowledged that the Company voluntarily disclosed certain of the alleged Arms Export Control Act and ITAR violations, which were resolved pursuant to the Consent Agreement, cooperated in the DDTC's review, and instituted a number of compliance program improvements.
In May 2017, the Company submitted an initial notification to DDTC regarding potential violations related to certain export classifications obtained through the commodity jurisdiction process and a final voluntary disclosure in August 2017. The Company also submitted a voluntary self-disclosure regarding the same matter with the United States Department of Commerce Bureau of Industry and Security ("BIS"). DDTC and BIS both acknowledged the submissions, and, at the request of the agencies, the Company executed tolling agreements for this matter. The DDTC tolling agreement has lapsed; the Company executed a tolling agreement with BIS, and has extended the agreement, suspending the statute of limitations through June 1, 2020. The Company also executed a tolling agreement with the Department of Justice ("DOJ") which has been extended, suspending the statute of limitations through June 1, 2020. This matter remains under review by DDTC, DOJ, and BIS.
In June 2017, BIS informed the Company of additional export licensing requirements that restrict the Company’s ability to sell certain 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 sale without a license or 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. BIS subsequently favorably modified these restrictions to reduce the applicability of the restrictions to sales of FLIR's Tau camera cores (as opposed to finished products containing Tau camera cores) to customers in China not identified on a list maintained by the United States Department of Commerce and persons in a country other than those in EAR Country Group A:5 (Supplement No. 1 to Part 740 of the EAR). If the Company is found to have violated applicable rules and regulations with respect to customers and limitations on the export and 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.
At this time, based on available information regarding this proceeding, 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 315 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. The Company identified the cause of these quality issues, notified customers of their option to request repair and modification of their in-field units, and has begun in-field repairs of identified affected units.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 16. Contingencies - (Continued)
SkyWatch Product Quality Matters - (Continued)
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 on remaining units to be between $3.0 million and $9.6 million. As no single amount within the range is a better estimate than any other amount within the range, the Company has recorded an accrual of $3.0 million in other current liabilities as of March 31, 2020. Factors underlying this estimated range of loss may change from time to time, and actual results may vary significantly from this estimate.
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 cannot be predicted with certainty, the Company believes the probability is remote that the outcome of each of these matters 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Income tax provision
|
$
|
7,774
|
|
|
$
|
13,009
|
|
Effective tax rate
|
33.5
|
%
|
|
17.4
|
%
|
The effective tax rate for the three months ended March 31, 2020 is higher than the United States Federal tax rate of 21.0 percent mainly due to non-recognition of the tax benefit of current year operating losses of a foreign subsidiary, an increase in unrecognized tax benefits related to positions taken on prior year tax returns, and state taxes. These amounts were offset partially by benefits related to US export sales and research credits.
As of March 31, 2020 and December 31, 2019, the Company has accrued income tax liabilities of $37.1 million related to the transition tax enacted on December 22, 2017 as part of the Tax Cuts and Jobs Act. Of the amounts accrued, none is expected to be due within one year. The remaining transition tax will not accrue interest and will be paid in annual installments beginning in 2021 through 2024.
The Company has not provided United States, state or foreign income taxes for earnings generated after January 1, 2018 by certain subsidiaries outside the United States as management currently intends to reinvest the earnings in operations and other activities outside of the United States indefinitely. Should the Company subsequently elect to repatriate such foreign earnings, the Company would need to accrue and pay state and foreign income taxes, thereby reducing the amount of our cash. United States taxes would generally not be payable due to changes made by the Tax Cuts and Jobs Act.
As of March 31, 2020, the Company had approximately $21.1 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates approximately $10.7 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 March 31, 2020, the Company had $4.3 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.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 17. Income Taxes - (Continued)
During the three-month period ended December 31, 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of the Company's non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $298.8 million (Swedish kronor 3.0 billion). On March 26, 2020, the Company received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA's reassessment. The Company does not agree with the Court’s ruling, continues to believe the STA's arguments in the reassessment are not in accordance with Swedish tax regulations or the treaty for the avoidance of double taxation between Sweden and Belgium, and plans to appeal the decision through the Swedish court system, as necessary. Consequently, no adjustment to the Company's unrecognized tax benefits has been recorded in relation to this matter. The Company has received a respite from paying the reassessment until after a decision by the Administrative Appeals Court of Stockholm by putting in place a bank guarantee to secure possible future payment of the tax and interest. There can be no assurance that the Company’s appeal will be successful.
During the three-month period ended September 30, 2019, the European Commission announced the opening of a separate review to assess whether an excess profit tax ruling granted by Belgium to one of the Company's international subsidiaries is in breach of European Union state aid rules. The Company believes all taxes assessed by Belgium have been paid and has not adjusted unrecognized tax benefits in relation to this matter.
Management believes that the Company's recorded tax liabilities are adequate in the aggregate for its income tax exposures.
The Company currently has the following tax years open to examination by major taxing jurisdictions:
|
|
|
|
Tax Years:
|
United States Federal
|
2016-2018
|
State of California
|
2015-2018
|
State of Massachusetts
|
2015-2018
|
State of Oregon
|
2016-2018
|
Sweden
|
2012-2018
|
United Kingdom
|
2015-2018
|
Belgium
|
2012-2018
|
Note 18. Operating Segments and Related Information
Operating Segments
The Company’s chief operating decision maker ("CODM"), its Chief Executive Officer, evaluates each of its segments’ 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.
In the first quarter of 2020, the Company completed a business reorganization as part of its "Project Be Ready" restructuring plan which resulted in identification of two reportable segments (Industrial Technologies and Defense Technologies). The Company commenced operating and reporting under the new organization structure effective January 1, 2020. See Note 20, “Restructuring” for further information on Project Be Ready.
Industrial Technologies Segment
The Industrial Technologies segment develops and manufactures thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops, manufactures, and services offerings that image, measure, and analyze thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications, imaging payloads for Unmanned Aerial Systems ("UAS"), and machine vision cameras. Additionally, the segment develops, manufactures, and services fixed-mounted visible and thermal imaging cameras and related analytics software for perimeter security, critical infrastructure, recreational and commercial maritime, and traffic monitoring and control. Offerings include thermal imaging cameras, analytics software, gas detection cameras, firefighting cameras, process automation cameras, environmental test and measurement devices, security cameras, marine electronics, and traffic cameras.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 18. Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Defense Technologies Segment
The Defense Technologies segment develops and manufactures enhanced imaging and recognition solutions for a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. The segment also develops and manufactures sensor instruments and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE") threats for military force protection, homeland security, and commercial applications. Offerings include airborne, land, maritime, and man-portable multi-spectrum imaging systems, radars, lasers, imaging components, integrated multi-sensor system platforms, CBRNE detectors, nano-class UAS solutions, and services related to these systems. The segment also produces advanced multi-mission unmanned air and ground based systems serving US Department of Defense and Federal government agencies, public safety, and governmental customers in international markets.
The following tables present revenue, operating income, and assets for the two segments. Operating income as reviewed by the CODM is revenue less cost of goods sold and operating expenses, excluding general corporate expenses, separation, transaction, and integration costs, amortization of acquired intangible assets, restructuring expenses and asset impairment charges, and discrete legal and compliance matters. Net accounts receivable, inventories and demonstration assets for the 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.
Operating segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenue—External Customers:
|
|
|
|
Industrial Technologies
|
$
|
276,415
|
|
|
$
|
271,386
|
|
Defense Technologies
|
174,508
|
|
|
173,350
|
|
|
$
|
450,923
|
|
|
$
|
444,736
|
|
Revenue—Intersegments:
|
|
|
|
Industrial Technologies
|
$
|
2,702
|
|
|
$
|
4,586
|
|
Defense Technologies
|
1,834
|
|
|
1,512
|
|
Eliminations
|
(4,536
|
)
|
|
(6,098
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Segment operating income:
|
|
|
|
Industrial Technologies
|
$
|
64,265
|
|
|
$
|
69,019
|
|
Defense Technologies
|
33,154
|
|
|
46,890
|
|
|
$
|
97,419
|
|
|
$
|
115,909
|
|
A reconciliation of the Company's consolidated segment operating income to consolidated earnings before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Consolidated segment operating income
|
$
|
97,419
|
|
|
$
|
115,909
|
|
Unallocated corporate expenses
|
(36,244
|
)
|
|
(28,290
|
)
|
Amortization of purchased intangible assets
|
(11,896
|
)
|
|
(5,928
|
)
|
Restructuring expenses
|
(20,784
|
)
|
|
(609
|
)
|
Consolidated earnings from operations
|
28,495
|
|
|
81,082
|
|
Interest and non-operating expenses, net
|
(5,297
|
)
|
|
(6,325
|
)
|
Consolidated earnings before income taxes
|
$
|
23,198
|
|
|
$
|
74,757
|
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 18. Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Unallocated corporate expenses include general corporate expenses, separation, transaction, and integration costs, amortization of acquired intangible assets, restructuring expenses and asset impairment charges, and discrete legal and compliance matters.
A reconciliation of the Company's consolidated segment operating assets to consolidated total assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Operating segment assets:
|
|
|
|
Net accounts receivable, inventories and demonstration assets:
|
|
|
|
Industrial Technologies
|
$
|
368,199
|
|
|
$
|
405,166
|
|
Defense Technologies
|
360,791
|
|
|
332,639
|
|
|
$
|
728,990
|
|
|
$
|
737,805
|
|
Goodwill:
|
|
|
|
Industrial Technologies
|
628,655
|
|
|
635,899
|
|
Defense Technologies
|
700,173
|
|
|
728,697
|
|
|
$
|
1,328,828
|
|
|
$
|
1,364,596
|
|
Total operating segment assets
|
$
|
2,057,818
|
|
|
$
|
2,102,401
|
|
|
|
|
|
Assets not allocated:
|
|
|
|
Cash and cash equivalents
|
$
|
308,615
|
|
|
$
|
284,592
|
|
Prepaid expenses and other current assets
|
92,929
|
|
|
86,337
|
|
Property and equipment, net
|
251,421
|
|
|
255,905
|
|
Deferred income taxes
|
39,458
|
|
|
39,983
|
|
Intangible assets, net
|
231,953
|
|
|
247,514
|
|
Other assets
|
140,043
|
|
|
120,809
|
|
Total assets
|
$
|
3,122,237
|
|
|
$
|
3,137,541
|
|
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 March 31, 2020
|
|
Industrial Technologies
|
|
Defense Technologies
|
|
Total
|
United States
|
$
|
103,337
|
|
|
$
|
115,947
|
|
|
$
|
219,284
|
|
Europe
|
65,335
|
|
|
19,476
|
|
|
$
|
84,811
|
|
Asia
|
73,387
|
|
|
11,864
|
|
|
$
|
85,251
|
|
Middle East/Africa
|
18,027
|
|
|
25,128
|
|
|
$
|
43,155
|
|
Canada/Latin America
|
16,329
|
|
|
2,093
|
|
|
$
|
18,422
|
|
|
$
|
276,415
|
|
|
$
|
174,508
|
|
|
$
|
450,923
|
|
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 18. Operating Segments and Related Information - (Continued)
Revenue and Long-Lived Assets by Geographic Area - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Industrial Technologies
|
|
Defense Technologies
|
|
Total
|
United States
|
$
|
133,422
|
|
|
$
|
109,304
|
|
|
$
|
242,726
|
|
Europe
|
73,864
|
|
|
26,596
|
|
|
100,460
|
|
Asia
|
41,393
|
|
|
17,386
|
|
|
58,779
|
|
Middle East/Africa
|
9,865
|
|
|
17,407
|
|
|
27,272
|
|
Canada/Latin America
|
12,842
|
|
|
2,657
|
|
|
15,499
|
|
|
$
|
271,386
|
|
|
$
|
173,350
|
|
|
$
|
444,736
|
|
Long-lived assets consist of net property and equipment, net identifiable intangible assets, goodwill and other long-term assets. Long-lived assets by significant geographic locations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
United States
|
$
|
1,122,056
|
|
|
$
|
1,137,375
|
|
Europe
|
418,747
|
|
|
435,024
|
|
Other foreign
|
411,442
|
|
|
416,425
|
|
|
$
|
1,952,245
|
|
|
$
|
1,988,824
|
|
Major Customers
Revenue derived from major customers is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
United States government
|
$
|
132,149
|
|
|
$
|
137,493
|
|
|
|
Note 19.
|
Business Acquisitions and Divestitures
|
Business Acquisitions
Acyclica, Inc. On September 10, 2018, the Company acquired 100% of the outstanding stock of Acyclica, Inc., a privately held software developer for automotive roadway and intersection data generation and analysis for approximately $9.7 million in cash, including an estimate for contingent consideration pursuant to the stock purchase agreement. During the third quarter of fiscal year 2019, the Company finalized the purchase price allocation and recorded $2.7 million of net tangible assets and goodwill of $7.0 million in the Industrial Technologies segment.
SeaPilot AB. On October 16, 2018, the Company acquired substantially all of the outstanding shares of SeaPilot AB, a privately held technology company for approximately $4.7 million in cash. During the third quarter of fiscal year 2019, the Company finalized the purchase price allocation and recorded $1.7 million of net tangible assets and goodwill of $3.0 million in the Industrial Technologies segment.
Aeryon Labs Inc. On January 28, 2019, the Company acquired 100% of the outstanding stock of Aeryon Labs, Inc. ("Aeryon"), a privately held developer of high-performance UAS for the global military, public safety, and critical infrastructure markets for approximately $205.9 million in cash. The acquisition enhances the Company’s domain knowledge in unmanned aerial systems and expands distribution channels in adjacent markets. During the fourth quarter of fiscal year 2019, the Company finalized the purchase price allocation and recorded $44.4 million of net tangible assets and goodwill of $161.5 million in the Defense Technologies segment.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 19.
|
Business Acquisitions and Divestitures - (Continued)
|
Business Acquisitions - (Continued)
Endeavor Robotics Holdings, Inc. On March 4, 2019, the Company acquired 100% of the outstanding stock of Endeavor Robotics Holdings, Inc. ("Endeavor"), a privately held developer of tactical unmanned ground vehicles for the global military, public safety, and critical infrastructure markets for approximately $385.9 million in cash. The acquisition enhances the Company’s offerings in unmanned ground systems and expands distribution channels in adjacent markets. During the first quarter of fiscal year 2020, the Company completed the tax assessment for the short–period return that resulted in a goodwill adjustment of $12.6 million. Accordingly, the Company finalized the purchase price allocation and recorded $102.7 million of identified intangible assets and $271.4 million of goodwill in the Defense Technologies segment.
The final allocation of the purchase price for Endeavor is as follows (in thousands):
|
|
|
|
|
|
Cash acquired
|
|
$
|
6,687
|
|
Other tangible assets and liabilities
|
|
14,915
|
|
Net deferred taxes
|
|
(9,776
|
)
|
Identified intangible assets
|
|
102,740
|
|
Goodwill
|
|
271,365
|
|
Total purchase price
|
|
$
|
385,931
|
|
The goodwill of $271.4 million represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as a separate intangible asset. All of the goodwill presented above is not expected to be deductible for tax purposes.
The Company identified $102.7 million of intangible assets. The following table summarizes the acquired intangible assets and their estimated fair values and estimated useful lives (in thousands, except years):
|
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
Amount
|
Developed technology
|
5.0 years
|
|
$
|
60,400
|
|
In-process research and development
|
9.0 years
|
|
28,000
|
|
Trademarks and trade name
|
4.5 years
|
|
9,990
|
|
Backlog
|
1.0 year
|
|
3,850
|
|
Customer contracts
|
1.0 year
|
|
500
|
|
|
|
|
$
|
102,740
|
|
Acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology, in-process research and development, trademarks and backlog. Developed technology represents the economic advantage of having certain technologies in place that lower manufacturing and operating costs and drive higher margins. In-process research and development consist of proprietary robot technology. Trademarks provide value to the marketing or promotion of an entity and its products or services. 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.
The developed technology and in-process research and development were valued using the income approach and relief from royalty method. The trade names and backlog were valued using an income approach method.
New England Optical Systems, Inc. On May 1, 2019, the Company acquired 100% of the outstanding stock of New England Optical Systems, Inc., a privately-held engineering and manufacturing company engaged in the design and production of infrared optical assemblies. The transaction consideration included a $21.9 million cash payment with up to an additional $12.0 million in deferred compensation payable over a two-year period. During the first quarter of fiscal year 2020, the Company finalized the purchase price allocation and concluded that there were no changes to the previously recorded $6.4 million of identified intangible assets and $14.0 million of goodwill in the Industrial Technologies segment as presented in Note 20, "Business Acquisitions and Divestitures" of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019. All of the goodwill is expected to be deductible for tax purposes.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 19.
|
Business Acquisitions and Divestitures - (Continued)
|
Business Acquisitions - (Continued)
The business acquisitions listed above 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.
Divestiture of Raymarine
In February 2020, the Company announced a plan to sell its Raymarine non-thermal maritime electronics business, subject to certain conditions of the proposed transaction and customary regulatory approvals. Since that announcement, global economic impacts and market uncertainties from the COVID-19 pandemic have intensified and therefore, the Company has suspended its efforts to sell the business.
Note 20. Restructuring
In the first quarter of 2020, the Company initiated a strategy-driven restructuring plan, Project Be Ready, to simplify the Company’s product portfolio and better align resources with higher growth opportunities while reducing costs. Project Be Ready includes an organizational realignment, targeted workforce reductions, and facility optimization initiatives. All previously approved ongoing restructuring activities have been consolidated into Project Be Ready.
The Company expects to incur total costs of approximately $40.0 million to $55.0 million related to Project Be Ready, including approximately $20.0 million to $25.0 million of employee separation costs, approximately $5.0 million to $10.0 million of facility consolidation expenses, and approximately $15.0 million to $20.0 million of third party and other costs. The Company estimates that a majority of the cumulative pretax costs will be cash outlays related to employee separation, facility consolidation, and third-party expenses and that the costs will continue through 2021.
Restructuring expenses related to Project Be Ready were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
2020
|
|
2019
|
Employee separation costs
|
$
|
10,465
|
|
|
$
|
—
|
|
Lease consolidation expenses
|
204
|
|
|
—
|
|
Third party and other costs
|
10,115
|
|
|
—
|
|
Total Restructuring Program Expenses
|
$
|
20,784
|
|
|
$
|
—
|
|
During the three months ended March 31, 2020, the Company recognized a total of $20.8 million of expense in connection with Project Be Ready which have been recorded in “Restructuring Expenses” on the Consolidated Statements of Income.
The restructuring liability related to this program was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation costs
|
|
Lease consolidation expenses
|
|
Third party and other costs
|
|
Total
|
Balance at December 31, 2019
|
$
|
1,343
|
|
|
$
|
339
|
|
|
$
|
2,441
|
|
|
$
|
4,123
|
|
Accrual and accrual adjustments
|
10,465
|
|
|
204
|
|
|
10,115
|
|
|
20,784
|
|
Cash payments
|
(1,685
|
)
|
|
(119
|
)
|
|
(4,181
|
)
|
|
(5,985
|
)
|
Balance at March 31, 2020
|
$
|
10,123
|
|
|
$
|
424
|
|
|
$
|
8,375
|
|
|
$
|
18,922
|
|
During the three months ended March 31, 2019, the Company recognized $0.6 million of expense in connection with other restructuring activities not associated with Project Be Ready which have been recorded in “Restructuring Expenses” on the Consolidated Statements of Income.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
|
Note 21.
|
Subsequent Events
|
On April 30, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.17 per share on its common stock, payable on June 5, 2020, to shareholders of record as of the close of business on May 22, 2020. The total cash payment of this dividend will be approximately $22.2 million.