UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-K
(Mark one)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2015.
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21918
_________________________________________________________________
FLIR Systems, Inc.
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of incorporation or organization)
27700 SW Parkway Avenue, Wilsonville, Oregon
(Address of principal executive offices)
93-0708501
(I.R.S. Employer Identification No.)
97070
(Zip code)
Registrant’s telephone number, including area code: (503) 498-3547
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Name of Each Exchange
on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or amendment to this Form 10-K. ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one)
Large accelerated filer x
Non-accelerated filer ¨
Accelerated filer ¨
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of June 30, 2015, the aggregate market value of the shares of voting and non-voting stock of the registrant held by non-affiliates was
$4,278,863,278.
As of February 19, 2016, there were 137,557,972 shares of the registrant’s common stock, $0.01 par value, outstanding.
The registrant has incorporated by reference into Part III of this Form 10-K, portions of its Proxy Statement for its 2016 Annual Meeting
DOCUMENTS INCORPORATED BY REFERENCE:
of Shareholders.
FLIR Systems, Inc.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1
1
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 1B Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
29
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . 32
Item 7A Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 8
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . 80
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
PART III
Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . 82
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
PART IV
Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Forward-Looking Statements
This Annual Report on Form 10-K (the “Report”), including “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7 contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR”
or the “Company”) that are based on management’s current expectations, estimates, projections and assumptions about the
Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations
of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors
including, but not limited to, those discussed in “Risk Factors” in Item 1A, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Item 7, and elsewhere in this Report as well as those discussed from time to time in the
Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by
general industry, economic and market conditions. Such forward-looking statements speak only as of the date of this Report or,
in the case of any document incorporated by reference, the date of that document, and the Company does not undertake any
obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes
made to this document by wire services or Internet service providers. If the Company updates or corrects one or more forward-
looking statements, investors and others should not conclude that the Company will make additional updates or corrections with
respect to other forward-looking statements.
ITEM 1.
BUSINESS
GENERAL
PART I
FLIR Systems, Inc. (“FLIR,” the “Company,” “we,” “us,” or “our”) is a world leader in developing technologies that enhance
perception and awareness. We design, develop, market, and distribute solutions that detect people, objects and substances that may
not be perceived by human senses and improve the way people interact with the world around them. We bring these innovative
technologies - which include thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic
systems, and advanced threat-detection solutions - into daily life.
Founded in 1978, FLIR is a pioneer in advanced sensors and integrated sensor systems that enable the gathering, measurement,
and analysis of critical information through a wide variety of applications in commercial, industrial, government, and consumer
markets worldwide. We offer the broadest range of infrared, also known as thermal, imaging solutions in the world, with products
that range from consumer-use thermal camera smartphone accessories to highly advanced aircraft-mounted imaging systems for
military and search and rescue applications, with products in between serving a multitude of markets, customers, and applications.
As the cost of thermal imaging technology has declined, our opportunities to increase the adoption of thermal technology and
create new markets for the technology have expanded. In order to better serve the customers in these markets, we have augmented
our thermal product offerings with complementary sensing technologies, such as visible imaging, radar, laser, sonar, chemical
sensing, and environmental sensing technologies.
Our goal is to both enable our customers to benefit from the valuable information produced by advanced sensing technologies and
to deliver sustained superior financial performance for our shareholders. We create value for our customers by improving personal
and public safety and security, providing advanced intelligence, surveillance, reconnaissance, and tactical defense capabilities,
facilitating air, ground, and maritime-based situational awareness, enhancing enjoyment of the outdoors, detecting electrical,
mechanical and building envelope problems, displaying process irregularities, detecting volatile organic gas emissions, and a
variety of other uses of thermal and other sensing technologies.
Our business model and range of solutions allow FLIR to sell products to various end markets, including industrial, original
equipment manufacturing ("OEM"), military, homeland security, enterprise, infrastructure, environmental, and consumer. We sell
off-the-shelf products in configurations to suit specific customer requirements in an efficient, timely, and affordable manner, and
support those customers with training and ongoing support and services. Centered on the design of products for low-cost
manufacturing and high-volume distribution, our commercial operating model has been developed over time and provides us with
1
a unique ability to adapt to market changes and meet our customers’ needs. Because we aggregate product demand and production
across these markets, we are able to generate significant volume - this volume drives down cost, which then increases demand,
enabling a virtuous cycle of lower prices and higher unit volumes. Our manufacturing and supply processes are vertically integrated,
minimizing lead times, facilitating prompt delivery, controlling costs and ensuring that components satisfy our high quality
standards.
We have evolved our product suite over time, expanding our reach into markets that are adjacent to thermal imaging, with the
intent of expanding the adoption and channel development for thermal imaging technology. Examples of this evolution include
our entrance into the visible-image security and surveillance market, the maritime electronics market, and the traffic monitoring
and signal control market. We intend to continue this evolution as we continue to lower the cost of advanced sensing products. As
the cost to own thermal technology continues to decline, the application of these sensors is expanding beyond imaging to areas
such as data acquisition where thermal sensors can provide important data that can be used for a wide variety of applications.
We believe that FLIR's brand is known for quality, innovation and trust and that customers are drawn to us for products and solutions
that are effective, innovative, easy to use, and sold at competitive market prices. We intend to: continue to reduce the cost of thermal
technology through higher volumes and new product and process improvements; innovate new applications and form-factors for
our technology based on customer feedback; improve the customer experience through improved user-interface, ease-of-use, and
software; increase customer loyalty and trust by providing world-class product warranties and support; and improve operational
processes to realign resources to be nimble in response to customers’ needs and market trends.
We are organized into the following six operating segments:
Surveillance: The Surveillance segment provides enhanced imaging and recognition solutions under our commercially developed,
military qualified ("CDMQ®") model to a wide variety of military, law enforcement, public safety, and other government customers
around the world for the protection of borders, troops, and public welfare. Surveillance also develops hand-held and weapon-
mounted thermal imaging systems for use by consumers. These products are sold off-the-shelf or can be customized for specific
applications and range in price from under $2,000 for certain hand-held and weapon-mounted systems to over $1 million for our
most advanced stabilized multi-spectral targeting systems. Revenue from Surveillance was $503.0 million in 2015, which
represented approximately 32 percent of consolidated revenue.
Instruments: The Instruments segment provides devices that image, measure, and assess thermal energy, gases, electricity, and
other environmental elements for industrial, commercial, and scientific applications under the FLIR and Extech brands. These
tools are used by professionals in electrical and mechanical, building envelope, manufacturing plant facility maintenance,
petrochemical, utilities, HVAC/R, firefighting, safety and health, and a variety of other sectors. Revenue from Instruments was
$347.5 million in 2015, which represented approximately 22 percent of consolidated revenue.
Security: The Security segment develops and manufactures a wide spectrum of cameras and video recording systems for use in
commercial, critical infrastructure, and home monitoring applications. The segment sells products under the FLIR and Lorex
brands. Revenue from Security was $226.6 million in 2015, which represented approximately 15 percent of consolidated revenue.
OEM & Emerging Markets: The OEM & Emerging Markets segment provides thermal imaging camera cores and components
that are utilized by third parties to create thermal and other types of imaging systems. This segment also houses our emerging
businesses, including intelligent traffic systems, imaging solutions for the smartphone and mobile devices market, and thermal
imaging solutions for commercial-use unmanned aerial systems. Revenue from OEM & Emerging Markets was $186.7 million
in 2015, which represented approximately 12 percent of consolidated revenue.
Maritime: The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and
commercial maritime market under the FLIR and Raymarine brands. The segment provides boats of all sizes a full suite of electronic
instruments, control systems, and communications equipment. Revenue from Maritime was $177.9 million in 2015, which
represented approximately 11 percent of consolidated revenue.
Detection: The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification,
and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE") threats for military force protection,
homeland security, first responders, and commercial applications. Detection has strengths in understanding the nature of
sophisticated security threats, the technological potential of advanced detection instruments and systems, and the complex
procurement processes of United States and many international government customers. Revenue from Detection was $115.3 million
in 2015, which represented 7 percent of consolidated revenue.
2
For additional information concerning the Company’s segments, including revenues from external customers, earnings from
operations, and total assets by segment presented in accordance with our segment structure, see Note 17 to the Consolidated
Financial Statements in Item 8.
Our headquarters are located at 27700 SW Parkway Avenue, Wilsonville, Oregon, 97070, and the telephone number at this location
is (503) 498-3547. Information about the Company is available on our website at www.flir.com.
TECHNOLOGY AND CAPABILITIES
Infrared is a portion of the electromagnetic spectrum that is adjacent to the visible spectrum but is invisible to the human eye due
to its longer wavelengths. Unlike visible light, infrared radiation (or heat) is emitted directly by all objects above absolute zero in
temperature. Thermal imaging systems detect this infrared radiation and convert it into an electronic signal, which is then processed
into a video signal and displayed on a video screen. Thermal sensors provide several benefits over ubiquitous visible light-based
sensing technologies, including the ability to see in complete darkness, measure temperature remotely and without touching the
surface of the object, image through obscurants such as smoke and fog, detect and discriminate living beings in an efficient and
reliable way, see over long distances with minimal atmospheric interference, and image many types of otherwise invisible gases.
For these reasons we feel the potential of our core technology to grow in prevalence and importance is significant, particularly as
the cost to produce the technology continues to decline.
Thermal imaging systems are different than other types of “low light” night vision systems, such as visible light intensification
systems used in green or gray sighted night vision goggles, because thermal imaging systems are not adversely affected by the
presence of visible light, so they can be used day or night and are not susceptible to rapid changes in visible light levels. Thermal
imaging systems are particularly well-suited for security applications involving the early detection of human activity due to the
typically large temperature difference found between a human and the surrounding background. Since infrared systems are detecting
emitted infrared radiation, they are passive - and thus more covert than certain “active” or “illuminated” infrared systems.
Additionally, thermal imaging systems have the ability to measure absolute temperatures remotely, a critical feature for a variety
of commercial, industrial, and scientific applications.
An infrared detector, which collects or absorbs infrared radiation and converts it into an electronic signal, is the primary component
of thermal imaging systems. The two types of infrared detectors we manufacture and use in our systems are often referred to as
“cooled” and “uncooled” detectors. Cooled detectors utilize a mechanical sterling cycle micro-cooler to reduce the operating
temperature of the infrared sensor to approximately -200°C. These detectors offer very high sensitivity and spatial resolution for
long-range applications or those applications requiring high measurement precision. Cooled detectors, while more sensitive and
thus able to see farther, result in a product that is more expensive, heavier, more complex, and uses more power than those using
uncooled detectors. Uncooled detectors operate at room temperature and do not require a micro-cooler, resulting in products that
are lighter, use less power and are less expensive to produce than those using cooled detectors. The cost of both types of detectors
is declining, and we expect to continue reducing costs as volumes rise and the technology advances.
We have expertise in the calibration and repair of our products, and maintain service facilities at many locations worldwide. Each
of our service facilities has the capability to perform the complex calibrations required to service thermal imaging systems. We
also maintain field service capabilities under the direction of our independent representatives or distributors in certain locations
outside the United States.
As our customers have sought, and will continue to seek, new ways to address their needs and requirements in the most cost-
effective and efficient manner, we have integrated thermal imaging with complementary technologies such as visible imaging,
lasers, radar, and more. The following capabilities and disciplines are integrated into our business and processes:
System Design and Integration
We have developed extensive competencies in the design and integration of numerous capabilities and payloads into integrated
systems or sub-systems. Competencies such as stabilization, packaging and systems integration allow us to effectively combine
a wide variety of technologies and payloads to suit our customers’ needs. We strive to minimize the size, weight, power consumption,
and cost in each of our product designs.
3
Radiometry
Our ability to produce thermal imaging systems that can accurately measure temperature remotely is critical in many of our
Instruments segment markets. We have demonstrated know-how in designing and producing systems that can measure temperature
to within very precise tolerances while maintaining accuracy and stability over time and over a wide range of ambient temperatures.
We believe our skills in this area, known as thermal radiometry, offer an important competitive advantage over many of our
competitors.
Mechanical Engineering
The design and production of thermal imaging systems involves highly sophisticated mechanical engineering techniques,
particularly in the design and assembly of the supporting structures for system components such as detector arrays, micro-coolers,
and optics. We also have expertise in designing stabilized assemblies used in our gimbal-mounted products utilizing precise electro-
mechanical control, gyroscopes, electronic stabilization, and specialized optical control mechanisms.
Infrared Detector Design Manufacturing
We design and manufacture both cooled and uncooled infrared detector arrays, in high volumes and at low costs. We believe our
uncooled vanadium oxide microbolometers and cooled detectors using indium antimonide and indium gallium arsenide are among
the highest performing infrared detectors of their type available in the world. Internal design and manufacturing of these detectors
provides significant cost and engineering advantages compared with the use of external sources.
Integrated Circuits and Electronic Design
We have significant electronic design capabilities across several specialized areas, including readout-integrated circuit design,
signal processing, image processing, and electronics integration. Our design expertise lies in the areas of reliability, low power
consumption, and extreme environmental survivability.
Software Development
Software is an increasingly important aspect of our overall engineering and design activity. We offer networking capabilities, video
analytics, and advanced firmware in our camera and other sensing systems. Many of our products are supported by a software
eco-system that includes dedicated desktop and mobile platform applications. Our products are typically developed with broad
compatibility with common industry standards and protocols.
Optical Design, Fabrication and Coating
We design and manufacture sophisticated infrared optics using materials such as silicon, germanium, and zinc selenide that are
required to produce a thermal imaging system. This capability allows us to rapidly develop optics optimized for use with our
cameras and avoid costs and delays associated with reliance on third-party optics suppliers. We also have the capability to produce
silicon wafer-level micro-optics at high volumes and the ability to apply custom multi-layer, vapor-deposited coatings to improve
the transmission of the lens materials that are used in infrared systems.
Micro-Coolers
We manufacture some of the industry’s smallest, lightest, and lowest power micro-coolers for use in cooling infrared detectors.
Our coolers are especially effective in hand-held applications, where light weight and long battery life are essential.
Lasers and Laser Components
Many of our more sophisticated systems are increasingly being offered with various types of laser payloads, including pointers,
illuminators, rangefinders, and designators. We design and manufacture purpose-built laser rangefinders and designators for
inclusion in some of our gimbaled multi-sensor systems. We also manufacture certain laser-related materials and components for
external customers.
4
Tactical Platforms
We develop and manufacture comprehensive and integrated solutions for surveillance, assessment, and response. These platform
solutions draw from our Surveillance and Detection products, as well as products sourced outside of the Company. These unmanned
and manned networkable mobile and vehicle mounted systems can be deployed in nearly any environment and have provided
security at borders, at theme parks, for police and military forces, at national monuments, and at high-profile events, both in the
United States and internationally.
RESEARCH & DEVELOPMENT
Our success has been and will continue to be substantially affected by our ability to innovate new products and technologies that
both augment our existing offerings and create new avenues for growth. We strive to differentiate ourselves from our competition
with our research and development ("R&D") capabilities. Our internally funded R&D expenses were $132.9 million, $142.8
million, and $147.7 million in 2015, 2014 and 2013, respectively. We intend to continue to have significant internal R&D expenses
in the future to provide a continuing flow of innovative and high-quality products to maintain and enhance our competitive position
in each of our business segments. In addition to these internally funded activities, we engaged in R&D projects that were reimbursed
by government agencies or prime contractors pursuant to development contracts we undertook. We believe our R&D capabilities
are most efficiently deployed in a commercial environment, where we are free to innovate to meet market and customer needs, as
such, the amount of externally funded R&D work that we undertake has been declining.
COMPETITIVE STRENGTHS
With our decades of experience in developing and marketing infrared sensor products, we have built several unique competitive
advantages that are core to our success. We look to leverage these strengths to continue to increase the availability of and uses for
advanced sensing technologies and to grow our revenue and profitability:
Commercial Operating Model
A key differentiator of our business model is our commercial approach to technology investment and product strategy. This is
characterized by our commercial approach to R&D as described above, as well as our focus on global deployment, innovative
marketing communications, superior customer service, rapid product development cycles, innovation of new technologies and
unique products, ability to design for large-volume and low-cost production, and control of multiple production inputs through
our vertically integrated operations.
Vertically Integrated Manufacturing and Supply
We have built a vertically integrated manufacturing operation that provides control over several key component technologies.
Through acquisitions and internal development, we have created this internal supply network that allows for optimized
manufacturing throughput, rapid response to changes in customer demand, increased product design flexibility, enhanced product
reliability, and independence in designing key components. Further, this integrated approach enables us to lower costs and improve
the functionality of critical components so that they work together most efficiently within our products. In comparison to competitors
that do not possess a similar level of vertical integration, our model helps us deliver products in a more timely and cost-effective
manner as we rely less on third-party suppliers for critical components.
Industry-Leading Market Position
We are a leading developer of advanced, proprietary sensor systems that are highly reliable, accurate, and effective. We strive to
develop products that lead in the areas of Size, Weight, Power and Cost ("SWAP-c"). We believe we have achieved significant
penetration into many markets, including the government, industrial, commercial, and consumer markets by pioneering new
applications and being a "first-mover" in these markets. Having a leading position in the markets we serve allows us to secure
new and continuing business while also achieving manufacturing economies of scale. Increased unit volumes work to reduce costs
throughout our business, which allows us to create new products that feature lower price points. This creates a virtuous cycle
whereby we are able to make advanced sensor technologies more affordable to a wide array of end-users while reducing costs.
This established presence across multiple markets enhances our competitive position.
5
Broad Product Lines
We offer a wide array of sensor products, including infrared imaging cameras and systems, detector cores, visible-light cameras,
CBRNE threat detectors, test and measurement instruments, radars, maritime electronics, and related products and solutions. Our
customers can buy these products off the shelf or request a customized sensor solution. This ability to serve a variety of customers
with disparate needs and specifications allows us to be successful in facilitating the use of advanced sensors in a broad range of
applications. We have the ability to rapidly conceive, design, prototype, and manufacture new products to meet the evolving
landscapes of the markets we serve. Our development process incorporates significant customer satisfaction and field-use data
and results in the rapid creation of new features that are able to address the changing needs of the end-user. This continual evolution
of our products has proven successful through our high level of customer retention and revenue and income growth.
Internally Funded Innovation
We have expertise in developing sensing instruments that are both highly advanced from a technical standpoint and commercially
viable and salable across multiple types of customers. Since the beginning of 2011, we have invested $707.9 million in internally
funded research and development of new technologies and products. Utilizing our own funds for R&D provides us with full
ownership of the development process and the end product, and also focuses our R&D teams on projects that will result in products
that are commercially viable, yield the highest expected financial return and can be marketed to multiple markets for multiple
applications.
Diverse Customer Base
We sell our products to thousands of commercial and government customers for use in a variety of applications and markets
worldwide. The buyers and users of our products include United States and foreign governments and government agencies,
aerospace and defense contractors, electricians and tradesmen, commercial seaports, first responders, critical infrastructure
operators, electrical generation and gas processing plants, heating and air conditioning technicians, building inspectors, food
processors, automobile parts manufacturers, commercial and residential security providers, research and lab technicians,
manufacturing companies, recreational boaters, and general commercial consumers. We believe that the diversity of our customers,
end-user markets, and applications helps to mitigate fluctuations in demand from any particular customer or market. The diversity
of our customers and of the end-users of sensor technologies provides us with multiple long-term growth opportunities.
Global Distribution Capabilities
Our core infrared imaging products have expanded from high-end products sold primarily to military customers and niche research
firms to everyday tools providing valuable information-gathering and assessment capabilities for a multitude of industrial,
government, and commercial entities and consumers. With the widening adoption of these technologies, distribution has become
a key advantage to our business globally. We believe our sales and distribution organization is among the largest in the industry
and effectively covers the world with a combination of direct sales, third-party representatives and distributors, independent dealers,
retail outlets, application engineers, and service and training centers. Internationally, we have invested heavily to build a strong
presence to sell and service our products, a key advantage in penetrating certain markets, such as foreign governments. Our sales
representatives, including third-party distributors, undergo a comprehensive training program on each product’s technical
specifications, functions, and applications. We also continuously update our training programs to incorporate technological and
competitive shifts and changes. We sell in many distinct markets and have established specific sales channels for each market. We
intend to continue to expand this distribution platform through internal growth and external acquisitions.
Investment in Research and Development and Intellectual Property Platform
We have invested heavily in R&D, resulting in industry-leading innovations and a robust and growing patent portfolio that is
focused on our core technologies as well as many of our emerging technologies and businesses. To complement our patent portfolio,
we continue to strengthen our key brands by unifying critical design features across product lines, enhancing our worldwide
trademark coverage, refining our domain portfolio, and growing brand awareness through social media outlets.
6
Consistent Generation and Distribution of Cash Flows
Our earnings, combined with our modest capital expenditure requirements, result in the generation of significant free cash flows.
In the years ended December 31, 2015 and 2014, our net cash provided by operating activities was $275.8 million and $226.2
million, respectively. Our operating cash flows have exceeded our net earnings in each of the last five years. This ability to
consistently convert revenues into net operating cash provides us significant flexibility in making growth and capital deployment
decisions, such as consummating strategic acquisitions, undertaking new product and technology development initiatives,
expanding our distribution and marketing presence, making capital investments, paying dividends, and repurchasing shares of our
common stock in the open market. Since 2011, we have utilized approximately $245.4 million of cash for acquisitions, $799.4
million for share repurchases, $249.8 million for dividends, and $281.7 million for capital expenditures. Since we began paying
dividends in 2011, we have annually increased our dividend at a compound annual growth rate of approximately 16 percent.
STRATEGY
Our clear and consistent strategy has enabled strong and steady business performance while allowing expansion into areas of
growth. We look to build on our leading position in advanced sensor systems by leveraging our key competitive strengths through
a focused corporate strategy that will yield growth in both revenue and profitability. Key elements of the FLIR growth strategy
include:
Control the corners
We seek to have strong positions in both the entry-level and high-performance price points in each market we serve. We believe
this will provide us with the ability to innovate solutions throughout the full solution spectrum of each market and sell products
for the broadest customer base in the market. We believe this approach has created a significant competitive advantage for many
of our businesses. Our focus will remain on continuous cost reduction of sensor technology, innovative next-generation solutions
for evolving customer needs, and creating virtuous cycles of demand across all of our markets.
Lower costs, increase awareness
We strive to aggressively lower the cost and increase awareness of thermal sensor technology to enable our approach to high-
volume markets. The price and awareness of thermal technology have been and continue to be the barriers to broad adoption. By
increasing the awareness of thermal imaging, through thoughtful and impactful marketing and solution design, we believe our
customers will recognize the benefits of thermal sensing and, as prices decline, recognize the value proposition of infrared
technology.
Identify needs
We consistently look to identify customers' needs that can be solved by our capabilities. When we identify such a market need,
we invest in research, distribution, product development, and staffing to create the best product solution and most efficient go-to-
market strategy. This has allowed us to pioneer several new markets for thermal imaging. Our experience in finding and building
these new markets has allowed us to create a repeatable system for continuing to expand the uses and demand for advanced sensor-
based technologies.
Brand, distribution, and innovation
We intend to grow the size and our share of the markets we participate in as well as develop markets for our technology that do
not currently exist through a strong brand, broad distribution, and highly innovative products and solutions. We invest in brand
development to support our goal of being the top brand in thermal sensing, and intend to expand our brand power into new arenas.
We have developed and utilize both our own distribution infrastructure and that of hundreds of partners, resulting in a diverse,
efficient, and effective platform for selling and delivering our products. We also leverage a strong innovation engine, built from
a talented and driven employee base and a willingness to invest in high-return opportunities, to create valuable intellectual property
and cutting-edge products.
7
Build trust
We believe trust is our most valuable asset. We focus on building trust with stakeholders - including current and future customers,
shareholders, employees, and our communities. We build that trust by operating on an uncompromising foundation of ethical
behavior and producing products that deliver a differentiated value proposition to our customers. We also build trust by maintaining
an effective and open line of communication with our employees, stakeholders, and community members.
Financial discipline
We intend to continue to operate with financial discipline in order to create value for our stakeholders. We believe that the
cornerstones to financial discipline are revenue and profit growth. We are focused on growing our top-line revenues and converting
that to profits for bottom-line growth. We also intend to focus on continuous improvement through creating process efficiencies,
building operational scale, and utilizing robust financial controls. We believe that these factors will ultimately generate superior
long-term returns on investment for our shareholders.
BUSINESS SEGMENTS
Surveillance Segment
The Surveillance segment develops and manufactures enhanced imaging and situational awareness solutions for a wide variety of
military, law enforcement, public safety, and other government entities around the world. The segment also develops and sells
hand-held and mounted scopes for consumers in the hunting and outdoors markets. Our solutions are used to protect borders,
conduct search and rescue missions, gather intelligence, and protect critical infrastructure by providing the capability to see over
long distances, day or night, through adverse weather conditions, through many obscurants, and from a wide variety of vehicle,
man-portable, and fixed-installation platforms.
Surveillance infrared imaging systems typically employ cooled infrared detector and numerous other imaging technologies to
identify and track objects from long distances and at high resolution. The Surveillance segment also utilizes uncooled thermal
technology to enable markets where size, weight, power consumption, and cost are important considerations. Uncooled Surveillance
segment products include hand-held and tripod-mount monoculars and binoculars, weapon sights, and military-vehicle vision
systems. We also design and manufacture lasers and laser components, such as rangefinders, illuminators, and target markers.
Our customers require systems that operate in demanding environments such as extreme climatic conditions, battlefield and military
environments, or maritime conditions. Systems are often installed onto larger platforms and must be able to integrate with other
systems such as aircraft avionics, radars, remote weapon systems, laser systems, command and control centers, and large, broad-
based security networks.
We address our core markets through either a commercial, off-the-shelf ("COTS") model or a CDMQ model. The products we
develop under the COTS model are applicable to a range of commercial and government customers and markets, including military
applications. CDMQ products are specifically designed to meet military specifications. In both the COTS and CDMQ product
development models, we use internally generated funds for research and development, and we generally own all rights to the
products and their design.
Markets
Search and rescue
Thermal imaging systems are used in airborne, shipborne, and land-based missions to rescue individuals in danger, distress, or
who are wounded or lost in adverse conditions. These systems are in use today by organizations such as the United States Army,
United States Air Force, United States Coast Guard, United States Marine Corps, United States Air National Guard, and many
international customers.
Force protection
In instances where military or other personnel are deployed in hostile areas, thermal imaging systems and radars mounted on
towers or other platforms are deployed to detect, identify, and defeat potential threats at an early stage. Our systems are deployed
for this purpose by the United States Army, United States Marine Corps, and other organizations worldwide.
8
Border and maritime patrol
Our systems are used in airborne, shipborne, hand-held and fixed-installation applications for border and maritime surveillance,
particularly at night, to enforce borders and monitor coastal waters, to support national fishing boundaries and to prevent smuggling.
Our cameras are currently deployed along numerous borders worldwide, including in the United States, Europe, and the Middle
East.
Surveillance and reconnaissance
High-definition thermal imaging systems are used in surveillance and reconnaissance applications for the precise positioning of
objects or people from substantial distances and for enhanced situational awareness, particularly at night or in conditions of reduced
or obscured visibility. We also offer high-resolution, frequency-modulated, continuous-wave radars that enable wide-area
surveillance capable of detecting potential threats before they cross a perimeter. These systems can be installed on fixed platforms,
manned-mobile platforms, and unmanned aerial systems.
Airborne law enforcement
We are a leader in the supply of stabilized airborne thermal imaging systems for federal, state, and local law enforcement agencies.
This type of equipment gives those agencies the ability to track suspects, locate lost persons, and provide situational awareness to
officers on the ground.
Targeting
We offer several products that provide precise target location and designation capabilities in applications ranging from man-portable
devices to high-definition, multi-spectral, stabilized airborne laser designator systems.
Drug interdiction
Thermal imaging systems enable government agencies to expand their drug interdiction and support activities by allowing 24/7
wide-area surveillance and detection capabilities. Our systems are in use by the United States Customs Service, United States
Drug Enforcement Agency and United States Federal Bureau of Investigation, as well as by similar foreign government agencies.
Personal vision
We develop easy to use, affordable, and lightweight personal vision thermal cameras, such as monoculars and hunting scopes, that
provide people the ability to see at night and stay safe in various settings. They enhance people’s enjoyment of the outdoors by
enabling them to keep track of their camping party, see and track animals, and navigate during deteriorated weather conditions.
We believe the personal vision systems market is very large and is becoming increasingly accessible as we reduce the price of
advanced thermal imaging products.
Sales and Distribution
Our Surveillance business has a direct sales staff and a network of independent representatives and distributors covering major
government markets worldwide. Included in this organization are technical and customer support staff in the United States, Europe,
the Middle East, and Asia Pacific regions who provide application development, technical training, and operational assistance to
direct and indirect sales personnel as well as to customers.
The Surveillance segment typically has the highest backlog of our segments relative to revenue and in absolute terms. At December
31, 2015, the Surveillance segment had a total backlog of $309 million. Backlog represents orders that have been received for
products, contract research and development, or other services for which a contractual agreement is in place and delivery or
performance is expected to occur within 12 months.
Customers
Surveillance segment customers generally consist of United States and foreign government agencies, including civilian, military,
paramilitary, and police forces, as well as defense contractors and aircraft manufacturers. A substantial portion of Surveillance
segment consolidated revenue is derived from sales to United States and foreign government agencies, and our business will
continue to be substantially dependent upon such sales. We expect revenue outside the United States to continue to account for a
significant portion of our Surveillance segment's revenue. The Surveillance segment is susceptible to some seasonality in its orders
primarily based on the United States government budget year end. The result is that the third quarter tends to exhibit the largest
amount of orders for our Surveillance segment. However, fiscal policy trends, increased revenue from outside the United States,
budget delays, and general economic trends can overshadow this seasonality in any given year.
9
Competition
The Surveillance segment operates in a highly competitive market. Many of our competitors in the government sector are well-
established contractors for various governments and have more financial and other resources than we possess. The principal
competitive factors in the government markets include technical innovation, agency relationships, product quality and reliability,
price, and ability to deliver. We believe we compete successfully in these markets with our best-in-class technologies, our products’
abilities to outperform customer requirements and competitors’ products, our lower-priced solutions that result from our CDMQ
operating model, and our service and support functions that exist in the field and near the customer. Our current principal competitors
in the Surveillance markets include divisions of BAE Systems, DRS (a Finmeccanica company), Elbit Systems, General Dynamics,
L-3 Communications, Lockheed Martin, Raytheon, Sagem, Sofradir, and Thales.
Instruments Segment
The Instruments segment develops hand-held, fixed mount, and desktop imaging and measurement products. Thermal imaging
camera products detect and measure heat and surface temperature differences, offering high accuracy, sophisticated diagnostic
functionality, and a product range that spans a wide price spectrum. The Instruments segment's thermal cameras and related products
are utilized by a growing number of industrial plant professionals, residential construction and contracting firms, energy production
workers, manufacturing equipment and production line technicians, tradesmen, and homeowners.
The Instruments segment offers a broad range of cooled and uncooled thermal products, with thermal cameras for laboratory and
research and development applications; optical gas imagers for oil, power, and chemical production applications; highly ruggedized
cameras for firefighters that are used for fire attack, overhaul, and search-and-rescue operations; fixed and pan-tilt thermal cameras
for factory line automation and plant safety monitoring; and multiple lines of professional and mid-level thermal cameras for
building analysis, predictive maintenance, and electrical systems analysis.
Under our FLIR and Extech brands, the Instruments segment provides a comprehensive line of rugged and reliable test and
measurement instruments, such as moisture meters, electrical test clamp meters, power analyzers, and multi-functional meters.
These measurement instruments are used to evaluate electrical and environmental factors, including voltage, sound, light, heat
index, and water quality. Leveraging our low-cost thermal sensors, we augment and enhance these familiar tools used in many
industrial and commercial trades with Infrared Guided Measurement ("IGM"). IGM allows users to more efficiently address issues
by first discovering via a thermal image the precise area of over-heating, moisture damage, or air ingress, allowing them to then
apply the relevant sensor, such as voltage, current, spot temperature, or moisture probe, at the point of concern.
Markets
Building and HVAC/R
Thermal imaging cameras are increasingly used by building and home inspectors, roofing specialists, plumbers, general contractors,
and real estate firms to evaluate and measure the integrity of buildings by quickly revealing structural problems, such as air leaks
and missing insulation, to help ensure efficient use of energy and other resources. Heating, ventilation, air conditioning, and
refrigeration ("HVAC/R") and mechanical contractors use thermal cameras and test and measurement equipment to ensure comfort
in residences and workplaces by discovering, monitoring, and documenting airflow, leaks, and temperatures in ductwork and other
forms of heating/cooling distribution systems. Hand-held test and measurement tools are used to measure airflow, humidity, carbon
monoxide levels, light, sound, and other environmental factors.
Electrical
Electricians and mechanical technicians utilize thermal cameras and test and measurement equipment to quickly conduct electrical
diagnostics, such as identifying circuit overloads, finding loose wire connections, and measuring currents, all without having to
touch dangerous components. From overheating electrical circuits to corroded connections, thermal cameras and test meters provide
the diagnostic functions needed to verify correct installations, quickly trace the source of problems, and enable efficient electrical
systems. Hand-held test and measurement tools are used to measure currents, voltage, resistance, continuity, and other electrical
parameters.
Predictive maintenance
Thermal imaging systems are used for monitoring the condition of mechanical and electrical equipment. Such monitoring enables
factory and plant maintenance technicians to quickly reveal equipment faults, manifested as hot or cold spots, so they can be
10
repaired before they fail. This increases equipment productivity and avoids catastrophic failures or major damage, which reduces
operating expenses by lowering repair costs and reducing downtime. Improved functionality of image analysis software, smaller
size and weight, and simplicity of system operation are critical factors for this well-established market segment. Hand-held test
and measurement tools are used to measure airflow, humidity, carbon monoxide levels, sound, vibration and other environmental
factors.
Firefighting
Thermal imaging is a well-known technology in the firefighting market, with firefighters and first responders worldwide utilizing
thermal imaging cameras for protecting their own life and saving the lives of others. Thermal imaging technology allows first
responders to assess conditions of a space prior to and after entry by providing them the ability to see through most forms of smoke.
This also allows them to search for people and animals and identify fire hot spots in burning buildings or smoke filled environments.
Providing the ability to measure temperatures in a non-contact mode from a safe distance helps firefighters to protect themselves
against dangerous phenomena like roll-overs and flash-overs.
Research and science
High-end thermal imaging systems provide the unique ability to detect very small differences in temperature. This capability is
useful in industrial R&D, where developers study, see, and quantify the heat dissipation, stress tolerance, and thermal characteristics
of their materials, components, and products. At colleges and universities, instructors use thermal imagery to help students visualize
the theories of heat transfer and thermodynamics, improving student comprehension of key concepts, and for both fundamental
and applied research. In the defense sector, cooled thermal imaging cameras are used in the development of firearms, ammunition,
guided missiles, and aircraft.
Oil and gas production
Thermal imaging cameras can visualize and pinpoint certain gas leaks. In industrial, utility, and oil and gas refinery settings, optical
gas imagers visually reveal plumes of gases such as SF6 (Sulfur Hexafluoride), hydrocarbons, carbon monoxide and carbon dioxide
from a safe distance. Optical gas imaging cameras can continuously scan installations in remote areas or in zones that are difficult
to access. Continuous monitoring allows the user to be informed when a dangerous or costly gas leak appears. Typical examples
are monitoring pipelines, petrochemical industry and offshore operations.
Manufacturing process control
Temperature consistency is critical to the quality of many manufactured components, materials, and products, including metals,
plastics, paper, and glass. Thermal cameras, both fixed and mobile, help factories ensure product quality and identify other defects
in both products and in the manufacturing process itself through the continuous monitoring of the production line, resulting in
higher output and nearly perfect quality control. Other users of thermal cameras in the manufacturing sectors include worker safety
and fire prevention, analysis of welding and fastening effectiveness, food inspection, packaging quality, and electronic and
mechanical component manufacturing, ranging in size from small hybrid integrated circuits to jet engines.
Sales and Distribution
Our Instruments business has a direct sales staff and a network of distributors and retailers covering major markets worldwide,
including technical and customer support staff in the United States and internationally who provide application development,
technical training, and operational assistance to direct and indirect sales personnel as well as to customers. Dedicated staffs of
business development managers for the firefighting, science, optical gas imaging and automation markets assist the distribution
channel with application development, technical training, and operational assistance. With a focused sales organization and
specialized sales teams that serve the specific R&D market, we have been successful at building and leveraging strong relationships
with various research institutes and universities worldwide.
At December 31, 2015, the Instruments segment had a total backlog of $27 million. Backlog represents orders that have been
received for products or services for which a contractual agreement is in place and delivery or performance is expected to occur
within 12 months.
Customers
Instruments segment customers are found around the world in commercial, government, trades, educational, research, agricultural,
and non-professional/consumer segments. They include utility companies, electrical contractors, building inspectors, damage
restoration contractors, first responders, universities, and numerous commercial enterprises. Given the high-value nature of many
of our thermography-related instruments, our thermography products’ revenues tend to be correlated with seasonal trends, in
11
particular capital spending trends. In general, customers in markets like predictive maintenance and R&D are sensitive to the broad
economy because our cameras are viewed as capital expenditure items. We expect revenue outside the United States to continue
to account for more than half of our Instrument segment revenue.
Competition
The Instruments segment operates in highly competitive markets. The primary competitive factors include brand reputation,
technical innovation, product breadth, functionality, quality, reliability, and price. We believe we compete successfully in these
markets with our innovative products, multi-function capabilities, our high value-to-price ratio, and our service and support
functions. Our current principal competitors in the Instruments segment's markets include Danaher, Testo, Seek Thermal, SATIR,
OPGAL, Infratec, Guide Infrared, and Nippon Avionics for thermal imaging cameras. The test and measurement products compete
with products from Danaher, Testo, Gossen Metrawatt, Textron, General Tools, Ideal Industries, and others. The firefighting camera
products compete primarily with Bullard, ISG/Scott, Argus, Dräger, and MSA.
Security Segment
The Security segment provides security solutions for a multitude of applications, from home and small business monitoring to
enterprise and infrastructure security. The segment develops video security solutions for use in commercial, critical infrastructure,
and home security applications. These solutions include thermal and visible-spectrum cameras, digital and networked video
recorders, and related video management systems ("VMS") software and video analytics software accessories that enable the
efficient and effective safeguarding of assets at all hours of the day and night and during adverse weather conditions.
Our video security cameras are marketed under the FLIR brand name, for thermal and professional-grade visible spectrum cameras,
and the Lorex brand name, for the consumer do-it-yourself ("DIY") and small business user. Security segment cameras come in
indoor/outdoor, fixed, pan/tilt, and dome configurations, are network-ready, available with a variety of lens options, and provide
analog and digital video outputs. Our MPX (Megapixel over Coax) products allow customers to upgrade security systems to high-
definition resolution using an existing coax cable that may already be present, saving the time and money of rewiring their building.
With our recent acquisition of DVTEL, Inc., we offer a full spectrum of end to end security systems complete with video analytics
and advanced VMS capability. This acquisition also strengthens our presence in the enterprise portion of the security market. In
addition, our security products comply with several industry standards, can be integrated with dozens of video management systems
and video analytics providers, and are accessible remotely on Apple iOS, Android, PC, or Mac devices through our FLIR Cloud
service.
Markets
Utilities
Power plants, electrical substations, and water facilities utilize visible spectrum and thermal imaging cameras to provide continuous
surveillance day or night. Our cameras are integrated with video analytics to provide automated alarm notification. At electrical
substations, our thermal products provide protection against materials theft and acts of sabotage, and provide notifications when
connections switchgear and transformers reach dangerous operating temperatures.
Nuclear power
Recent rules from the United States Nuclear Regulatory Commission require nuclear facilities to provide continuous 24-hour
surveillance, observation, and monitoring of their perimeter and control areas. Our thermal security cameras are well suited for
this requirement, providing true 24/7 monitoring capability even during most adverse weather conditions.
Petrochemical
Our thermal security cameras help petrochemical facilities meet the United States Department of Homeland Security's new Chemical
Facility Anti-Terrorism Standards. Thermal security cameras are highly effective in meeting the standards' requirements for
monitoring a facility's perimeter, securing applicable assets, and solidifying a deter, detect, and delay strategy.
Ports and borders
Our long range thermal and visible security cameras provide "beyond the fence" situational awareness and advanced warning
capabilities. Airport and border authorities around the world utilize our thermal security cameras to help keep people and equipment
safe, operating day and night, in nearly all weather or lighting conditions.
12
Commercial and residential
FLIR’s full-spectrum security solutions offer a comprehensive line of thermal and visible cameras to protect commercial facilities.
Our products are also used in a wide range of home applications that may include the use of thermal, visible or image intensified
cameras as well as network video recorders and other peripheral equipment.
Sales and Distribution
Our Security segment sales organization specializes in delivering complete solutions for thermal and visible security. Our Lorex
products are sold through both brick and mortar and online retail outlets. Commercial and professional-grade security products
utilize direct sales, a network of independent reps, and distributors covering major markets worldwide.
At December 31, 2015, the Security segment had a total backlog of $16 million. Backlog represents orders that have been received
for products or services for which a contractual agreement is in place and delivery or performance is expected to occur within 12
months.
Customers
Our Security segment serves a broad customer base that is expanding every year. Our visible-spectrum solutions are purchased
by high-end critical infrastructure users, security hardware distributors, systems integrators, contractors, and homeowners. Thermal
security cameras are currently sold in all global regions, with most customers falling into the high-end critical infrastructure
category. However, recent volume production of our thermal camera cores has allowed us to drop the cost of thermal security
cameras to a point where it is an affordable option for many commercial security networks.
Competition
The Security segment operates in highly competitive markets. Many of our competitors are well-established brands. Key competitive
factors include technical innovation, analytics, video monitoring, system integration and compatibility, price, and ability to deliver.
Our competitive advantages include our broad line of thermal camera offerings, which combined with our DIY consumer product
line offers both high- and low-end solutions to our customers. Our current principal competitors include Axis Communications,
Bosch, Hikvision, Dahua, Infinova, Avigilon, Sony, Samsung, Q-see, and Panasonic.
OEM & Emerging Markets Segment
The OEM & Emerging Markets segment develops and manufactures thermal imaging camera cores and related components. A
thermal camera core is an integrated, plug-and-play camera system that includes the infrared sensor as well as the related image
processing electronics and an optical lens. We offer cooled and uncooled cores that are based on long wave infrared (LWIR), mid-
wave infrared (MWIR), and short wave infrared (SWIR) sensors. We also sell to third parties thermal sensors and readout integrated
circuit ("ROIC") products, which are used to convert pixel-level information into digital information, essential in the design of
infrared, visible, ultra violet, and X-Ray sensors.
Our vertically integrated manufacturing capability, built over many years, enables us to provide thermal camera core and component
products to other FLIR segments at low cost as well as sell cores and components to third party customers. Our cores and components
are designed for easy and efficient integration into higher levels of product assembly. Third party OEMs integrate these cores and
components into their own branded products. We operate under this model so to aggregate the largest amount of volume possible,
which lowers our total cost to produce camera cores and components.
The OEM & Emerging Markets segment also houses our Emerging Markets businesses, which are businesses that are identified
as high-potential but do not yet have the scale to represent their own segment. Included in Emerging Markets is our Intelligent
Traffic Systems business, which develops and manufactures software-enabled automotive and pedestrian monitoring and control
systems, our Mobile products business, makers of thermal imaging accessories for the smartphone market, and our commercial
Unmanned Aerial Systems ("UAS") business, which provides thermal cameras and cores for use on or integration into UAS
systems, which are often referred to as “drones.”
13
Markets
OEM
We supply cooled and uncooled thermal camera cores, sensors, and ROICs on an OEM basis to an array of manufacturers of
finished products in both the military and commercial spaces. These customers require a product at a lower level of integration
than a fully developed thermal imaging system. Examples of major applications in this segment are automotive, firefighting, UAS,
military, digital X-ray, and security.
Mobile
Leveraging our ability to produce thermal sensors at a low cost and with low size, weight, and power consumption, we created a
line of personal thermal imaging cameras that attach to smartphones. The mass adoption of smartphones has driven significant
growth in the development of tools that extend the utility of these devices, and our FLIR ONETM products do this by empowering
consumers with thermal imaging on their phones. We believe that the potential of thermal imaging as a tool for consumers provides
this segment with an emerging opportunity for growth.
Intelligent Transportation
Visible and thermal imaging helps transportation departments all over the world monitor vehicles and pedestrians in urban
environments, detect incidents on highways and in tunnels, collect traffic data, control traffic signals, and ensure the safety on
public roads and railways. These systems are able to detect vehicles and use the information to control traffic lights in order to
improve traffic flow. While road-embedded magnetic loops have historically been the primary technology for analyzing
intersections and roadways, visible and thermal imaging are increasingly being used for this application. Thermal imaging
technology has shown to be highly effective at detecting the presence of vehicles as it is not impeded by darkness, colors, shadows,
direct sunlight, light from oncoming traffic, or weather effects. We believe that the value of these solutions in terms of improved
traffic flow, fuel conservation, and public safety is significant.
Sales and Distribution
We employ a direct sales force for selling and distributing our OEM cores and components, while our lower-cost cores are also
available at electronics components distributors. The majority of our Mobile market sales are generated through wholesale channels,
which include national and regional consumer electronics chains, large online retailers, and specialty retailers. We also sell our
Mobile products directly to consumers through our own network of e-commerce websites. In addition, we sell our products to
independent distributors in various countries where we generally do not have direct sales operations, and through licensees. A
dedicated staff of business development managers for the Intelligent Traffic products assists the distribution channel, made up of
traffic control systems integrators and engineering consultants, with application development, technical training, and operational
assistance.
At December 31, 2015, the OEM & Emerging Markets segment had a total backlog of $140 million. Backlog represents orders
that have been received for products, contract research and development, or other services for which a contractual agreement is
in place and delivery or performance is expected to occur within 12 months.
Customers
Typical OEM customers include makers of military aircraft and vehicles, automotive safety equipment, firefighting equipment,
security cameras, hunting equipment, unmanned aerial systems, and maritime equipment. Our OEM sales personnel maintain
direct relationships with most of these customers. We sell our Mobile products to a diverse group of consumers, including
homeowners, outdoors people, and technology enthusiasts. Customers for our Intelligent Traffic products are traffic and public
transportation authorities in cities and municipalities all over the world who deploy thermal imaging cameras and other equipment
in urban areas, on highways, in tunnels, and on bridges.
Competition
While our market share in OEM cores and components is estimated to be nearly 50 percent based on independent industry research,
we view the thermal OEM market as highly competitive. We believe the key drivers of success in these markets are: technological
proficiency in imaging sensors, product quality, product cost, and scalability of operations. We believe we are well positioned to
operate in this competitive environment given our demonstrated ability to innovate high-quality sensors at low cost due to our
vertically-integrated operating model, our advanced R&D capabilities, and our broad product offering. Our primary competitors
14
in the OEM space are ULIS, DRS, L-3, and BAE Systems. In Mobile products, our competitors include Seek Thermal and Opgal.
In the Intelligent Traffic product space, our major competitors include Image Sensing Systems, Iteris, and Citilog.
Maritime Segment
The Maritime segment develops and manufactures a broad range of thermal imaging and marine electronic products for recreational
and commercial customers globally. The segment provides boats of all sizes a full suite of electronic systems including multi-
function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and
communications equipment. These products are utilized for general navigation, sport fishing, cruising, and sailing.
Our primary product offering is multifunction navigation displays ("MFDs"). Our MFDs are designed to provide boaters visual
navigation data from multiple sensors, including GPS, autopilot, sonar, and radar. We have several lines of MFD products, serving
leisure and fishing boats of all sizes, in saltwater or freshwater environments. Our Dragonfly® product line addresses the MFD
needs of the small-boat recreational fishermen, including kayakers and freshwater bass anglers, while our larger MFDs serve large
saltwater boat end-users. We also integrate our MFDs to use and control thermal and visual cameras, onboard entertainment
products, engine instruments, and data services like satellite weather. Recognizing the importance of mobile devices to boaters,
we offer Wi-Fi enabled MFDs along with mobile apps that give boaters access to the MFD and sensors from anywhere on board
the vessel.
Our marine instrument products are dedicated displays and sensors for monitoring depth, boat speed, and wind information. Our
sonar solutions are engineered to serve the needs of both the inland and saltwater fishing customers. These sonars serve as fishermen’s
eyes below the water so they can detect fish, locate underwater structure, and identify the habitat of the fish they are trying to
catch. We also offer autopilot solutions that provide precision steering control for open water passages. To keep boaters connected,
we offer several communication products, such as VHF marine radios for ship-to-ship and ship-to-shore communications, and our
automatic identification system (AIS) solutions enable the wireless exchange of navigation status between vessels and vessel-
monitoring centers. The Maritime segment’s thermal camera solutions are designed to enhance a boater’s overall situational
awareness in limited visibility and are used primarily to identify other vessels, navigation aids, and hazards. Thermal maritime
cameras are also utilized for search and rescue and local law enforcement surveillance operations.
We market our Maritime segment products under both the FLIR and Raymarine brands. FLIR-branded maritime products consist
of thermal cameras designed for recreational, commercial, and first-responder vessels. The Raymarine line of marine electronics
is designed and marketed primarily to recreational boaters and light-commercial customers.
Markets
Recreational Boating
The recreational boating market, which represents the majority of our sales, is comprised of fresh and saltwater fishing, sport/
cruising, and sailing. Our core MFD products are engineered to address the needs of all three segments. We also develop products
specifically for strategic markets and customers, such as Dragonfly® sonars for freshwater fishermen, wind instruments for sailors,
and vessel automation for boat builders.
Commercial Maritime
The commercial maritime market is comprised of light commercial, heavy commercial, and light-defense segments. We address
these commercial markets with both our thermal maritime cameras and our marine electronics systems.
Sales and Distribution
Our Maritime segment sells products worldwide through a network of aftermarket distributors, technical dealers, boat builders/
OEMs, and retailers. We have a dedicated business development team to address the unique requirements of our OEM boat-builder
channel. With our OEM boat builders, we differentiate ourselves by providing full system solutions. We also add value to our boat-
building partners through technical installation training of the OEM factory staff. In the United States, we devote special teams
to the retail channel so we can address this channel’s dynamic and unique merchandising and promotional needs. Our sales team
is supported by technical support teams and applications engineers. The technical teams provide customer support and conduct
regular training sessions with our technical dealer and OEM customers.
15
At December 31, 2015, the Maritime segment had a total backlog of $28 million. Backlog represents orders that have been received
for products or services for which a contractual agreement is in place and delivery or performance is expected to occur within 12
months.
Customers
Our FLIR maritime thermal cameras are supplied to an array of commercial customers including tugboats, work boats, and passenger
vessels. Both FLIR and Raymarine maritime-branded thermal cameras are supplied to recreational sport fishing and cruising
powerboat customers. Raymarine’s primary end consumers include freshwater and saltwater fishing boat owners, cruising power
boats, and sailboat owners. In the fishing segment, Raymarine customers include kayakers, bass boat owners, bay boats, center
consoles, and offshore sport fish boat owners. The cruising segment includes owners of sport boats, cruisers, and trawlers. Sailing
customers include owners of day sailors, racers, cruising yachts and multi-hull sailboats.
Our Maritime segment also supplies thermal cameras to maritime first responders and maritime law enforcement organizations
around the globe, including the United States Coast Guard. Our cameras are used by marine divisions of city fire and police
departments along with local fish and wildlife enforcement organizations.
Competition
Our Maritime segment operates in a highly competitive market for marine electronics. Like consumer electronics, delivering
innovative features and lower price points are critical to the success of our marine electronics products. Consumers typically
purchase marine electronics as a system of products from one brand, so it is critical that we deliver a competitive offering in each
of our product lines. Our primary marine electronic competitors include Garmin, Navico, Furuno, and Humminbird.
Detection Segment
Our Detection segment develops and manufactures field-ready sensor instruments and integrated platform solutions for the accurate
detection, identification, classification, and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE")
threats for military force protection, homeland security, and commercial applications.
Detection segment solutions combine multi-threat detection and identification technologies into single hand-held or desktop
instruments. Product lines include hand-held and fixed radiation detectors, hand-held and desktop explosives trace detectors,
desktop and portable mass spectrometers, and continuous air monitoring devices for aerosolized biological threats and disclosure
sprays. The segment also manufactures integrated systems of multiple pieces of equipment to create turn-key solutions used by
first responders for the detection, identification, sample collection, decontamination, marking, and hazard reporting of CBRNE
threats.
Our products utilize mission-based user interfaces to expedite decision-making for field operators and advanced technicians. Our
advanced CBRNE detection instruments provide lab-quality confidence in a field-proven, highly reliable, and ruggedized package.
Customers around the world use our products for forensic analysis, military reconnaissance, force protection, public security, law
enforcement, emergency response, environmental monitoring, building and event security, teaching, and research.
The Detection segment leverages an established technical R&D organization that enables the business to offer smart, simple, and
reliable products that meet the evolving needs of government and commercial security providers. With many years of experience
working in collaboration with multiple government agencies, the Detection segment has developed relationships with various
government decision-makers and has substantial knowledge of the governmental procurement process.
Markets
Government and private sector entities continue to seek new ways to address increasingly sophisticated terrorist threats and to
respond to other security risks, natural disasters, and unintentional incidents that threaten public safety. Our multi-purpose products
meet the requirements for a broad range of end-users and end uses.
We offer biological air monitors that are used by various governmental agencies for security at facilities and events. Our explosives
detection products are used to identify military-grade explosives and homemade explosive devices in a wide array of military and
16
public safety applications, such as screening high-risk individuals at checkpoints and identifying improvised explosive device
(IED) makers, and our radiation products protect the public by warning of radionuclide exposure.
Sales and Distribution
The Detection segment sells products worldwide primarily through a combination of a direct sales force and a distributor network,
but also utilizes third-party sales representatives, value-added resellers, and systems integrators. With a centralized sales
organization and specialized sales teams that serve specific markets, we have been successful at building and leveraging strong
relationships with key decision-makers at various government agencies and commercial entities. Some Detection segment products
are designed as components or sub-systems that are incorporated into third-party products or systems.
The Detection segment derives a portion of its revenue, approximately 13 percent in 2015, from funding received from agencies
of the United States government pursuant to research projects. The revenue recognized under these contracts represents
reimbursement by the customer for time periods ranging from several months to several years. Our participation in these and other
development programs has culminated in the development of a number of commercial products. In general, our contracts with the
United States government permit us to retain all rights to patents emerging from the funded R&D efforts.
At December 31, 2015, the Detection segment had a total backlog of $82 million. Backlog represents orders that have been received
for products, contract research and development, or other services for which a contractual agreement is in place and delivery or
performance is expected to occur within 12 months.
Customers
The Detection segment sells its products, systems, and services to a broad base of federal, state, and local government customers,
to all branches of the United States military, foreign militaries, private sector businesses and commercial ports both in the United
States and internationally. Using a regionally deployed sales force, the business sells to agencies of the United States government,
such as the Departments of Homeland Security, Defense, and Energy, as well as the Transportation Security Administration, the
Federal Bureau of Investigation, NASA, the Secret Service, the Coast Guard, and agencies of multiple state and local governments
in the United States. Similar to our Surveillance segment, the Detection segment experiences some seasonality in its orders due
to the United States government budget year end.
Competition
The markets in which the Detection segment competes are dynamic and highly competitive. Success in these markets depends on
our ability to develop new technologies to meet rapidly evolving customer needs, reduce production and development costs,
integrate with third-party devices and systems, establish and foster relationships with key government and commercial customers,
and recruit highly technical personnel. The Detection segment competes in various markets with companies such as Agilent
Technologies, Canberra Industries, Safran, SAIC, Smiths Detection, Thermo Fisher Scientific, and United Technologies.
SALES, MARKETING, CUSTOMER SUPPORT AND TRAINING
Our sales and distribution organization covers the world with a combination of direct sales, third-party representatives and
distributors, system integrators, independent dealers, retail outlets, application engineers, and service and training centers.
Internationally, we have invested heavily to build a strong presence to sell and service our products, a key advantage in penetrating
certain markets, such as foreign governments. Our sales representatives, including third-party distributors, undergo a comprehensive
training program on each product’s technical specifications, functions, and applications. We also continuously update our training
programs to incorporate technological and competitive shifts and changes. We sell in many distinct markets and have established
specific sales channels for each market.
Our primary marketing activities include online advertising, participating in trade shows, partner sponsorships, optimizing our
website for search keywords so that prospects searching for imaging and sensing solutions online find FLIR quickly, press releases
about new products and company developments, social media outreach, and cooperative advertising.
We offer a strong product warranty coupled with responsive support accessible via phone, web, and e-mail, and our localized
support locations for high-end systems helps us stand out in our markets.
17
Our Infrared Training Center ("ITC") offers training, certification, and re-certification in all aspects of thermography, including
specialized instruction in building diagnostics, roofing, electrical, mechanical, research and science, and optical gas imaging.
Online courses cover the basics of thermal camera operation and reporting software. The ITC is also the premier sponsor of
InfraMation, thermal imaging’s leading users conference which is typically held annually.
MANUFACTURING
We manufacture many of the critical components for our products, including but not limited to infrared detectors, gimbals, pan-
tilts, optics and coatings, laser sub-systems, and micro-coolers, and develop much of the software and middleware for our systems.
This vertical integration minimizes lead times, facilitates prompt delivery of our products, controls costs, and ensures that these
components satisfy our quality standards. We purchase other parts pre-assembled, including certain detectors, coolers and optics,
circuit boards, cables, and wire harnesses. These purchased and manufactured components are then assembled into finished systems
and tested at one of our primary production facilities located in the United States, Sweden, Estonia, and Canada. Certain components
and finished goods, including some of our visible-spectrum cameras, test and measurement products and maritime electronics, are
produced by contract manufacturers.
Our manufacturing operations are, from time to time, audited by certain customers, which include several major aircraft
manufacturers, and have been certified as meeting their quality standards. Substantially all of our manufacturing locations are
either ISO 9001:2000 or :2008 certified with certain locations having higher certifications.
INTELLECTUAL PROPERTY
To support our focus on being an innovation leader in our key markets and protect our proprietary information, we rely on a
combination of patent, trademark, copyright, and trade secret rights, a strong Internet domain presence, confidentiality agreements,
joint development agreements, and contractual provisions. Over the past several years we have intensified our efforts to protect
our innovations through increased United States and international patent filings, and to strengthen our core brands through thoughtful
trademark procurement and domain portfolio refinement. We will continue to actively develop our intellectual property and intend
to emphasize initiatives that will further promote innovation and leadership in marketable technologies. We cannot, however, be
certain or give any assurance that we can secure patent or trademark protection on all our innovations, maintain our competitive
advantage or that competitors will not develop similar or superior capabilities.
GOVERNMENT REGULATION
Thermal technology is controlled for export, re-export and retransfer by the United States government. Depending on the technology,
the export of infrared products may be controlled by the United States Department of State or the Bureau of Industry and Security.
In general, the more sophisticated the technology and the higher the performance of the product, the more restrictive are the
licensing requirements. Licensing requirements differ from country to country, end user to end user and differ with product
performance and field of intended use. The export of some of our products are controlled by the International Traffic and Arms
Regulation ("ITAR").
As a United States government supplier, we must comply with specific procurement regulations and other requirements and are
subject to routine audits and investigations by United States government agencies. If we fail to comply with these rules and
regulations, the results could include: reductions in the value of contracts; contract modifications or termination; the assessment
of penalties and fines; and/or suspension or debarment from United States government contracting or subcontracting for a period
of time or permanently.
18
EMPLOYEES
As of December 31, 2015, we had 3,003 employees of which 1,726 were located in the United States and 1,277 located outside
of the United States. We have generally been successful in attracting highly skilled technical, marketing, and management personnel.
None of our employees in the United States are represented by a union or other bargaining group. Certain employees in Europe
are represented by unions and workers councils whose contracts are subject to periodic renegotiations. We believe our relationships
with our employees, unions and workers councils are generally good.
ENVIRONMENTAL MATTERS
Our operations are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the
discharge, treatment, storage, disposal and remediation of certain materials, substances, and wastes used in our operations. We
continually assess our obligations and compliance with respect to these requirements. We have also assessed the risk for
environmental contamination for our various manufacturing facilities, including our acquired businesses and facilities and, where
appropriate, have obtained indemnification from the sellers of those businesses and facilities.
We believe that our current operations are in substantial compliance with all existing applicable environmental laws and permits.
Operating and maintenance costs associated with environmental compliance are a normal, recurring part of our operations.
Historically, these costs have not been material.
AVAILABLE INFORMATION
Our Internet website address is www.flir.com. This Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and other
required filings are available through our Internet website as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission. Our Internet website and the information contained therein or
connected thereto are not intended to be incorporated into this Report.
19
ITEM 1A.
RISK FACTORS
The following are important factors that could cause actual results or events to differ materially from those contained in any
forward-looking statements made by or on behalf of the Company. If we are unable to adequately respond to these risks and
uncertainties, our business, financial condition and results of operations could be materially adversely affected. Additionally, we
cannot be certain or give any assurance that any actions taken to reduce known risks and uncertainties will be effective.
Risks, Uncertainties and Other Factors Related to Our Business
We depend on the United States government for a material portion of our business and changes in government spending could
adversely affect our business
We derive significant revenue from contracts or subcontracts funded by United States government agencies. A significant reduction
in the purchase of our products by these agencies or contractors for these agencies would have an adverse effect on our business.
For the fiscal years ended December 31, 2015, 2014 and 2013, approximately 20 percent, 20 percent and 24 percent, respectively,
of our revenues were derived directly or indirectly from sales to the United States government and its agencies. The funding of
contracts awarded to us depends on the overall United States government budget and appropriations process, which is beyond our
control. In addition, at its discretion, the United States government may change its spending priorities and/or terminate, reduce or
modify contracts.
Substantial uncertainty exists in the spending levels and priorities of the United States government, particularly with respect to
military expenditures. Continued and further reductions in military spending could have a material adverse effect on our results
from operations.
As a United States government supplier, we are subject to a number of procurement rules and regulations
Government contractors must comply with specific procurement regulations and other requirements and are subject to routine
audits and investigations by United States government agencies. In addition, violations of unrelated laws and statutes can lead to
debarment and other penalties. If we fail to comply with procurement rules and regulations and other laws and statutes, the results
could include: reductions in the value of contracts; contract modifications or termination; the assessment of penalties and fines;
and/or suspension or debarment from United States government contracting or subcontracting for a period of time or permanently.
An adverse action by the United States government could also result in lost sales to non-governmental customers who might
disqualify us as a result of such adverse action.
Operating margins may be negatively impacted by reduction in sales or by a change in the mix of products sold
Our expense levels are based, in part, on our expectations regarding future sales and these expenses are largely fixed in the short
term. Some expenses, such as those related to research and development activities, would likely be maintained in the event of a
sales downturn in order to maintain and enhance the long-term competitiveness of the Company. We maintain inventories of
finished goods, components and raw materials at levels we believe are necessary to meet anticipated sales. Accordingly, we may
not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted and actual sales.
Any significant shortfall of sales may result in us carrying higher levels of inventories of finished goods, components and raw
materials thereby increasing our risk of inventory obsolescence and corresponding inventory write-downs and write-offs. Our
fixed costs, including facilities and information technology costs, compliance and public company costs, and depreciation and
amortization related to previous acquisitions and capital expenditures, are significant and are difficult to reduce in the short term.
Our operating margins vary by product and substantial changes in the mix of products sold could also have a negative impact on
our operating margins.
We may experience impairment in the value of our tangible and intangible assets
Our industry is subject to rapid changes in technology, which may result in unexpected obsolescence or impairment of our assets.
As of December 31, 2015, our intangible assets, including goodwill, totaled $737.6 million and represented approximately 31
percent of our total assets. Most of these intangibles are the result of acquisitions in which the purchase price exceeded the value
of the tangible assets acquired. We amortize certain of these intangibles over their anticipated useful life and review goodwill for
20
impairment annually or more frequently if warranted by events. To date we have not experienced any impairment of our intangible
assets, but there can be no assurance that we will not experience such impairment in the future. In addition, certain of our tangible
assets such as inventory and machinery and equipment may experience impairment in their value as a result of such events as the
introduction of new products, changes in technology or changes in customer demand patterns. We depreciate our machinery and
equipment at levels we believe are adequate; however, there can be no assurance that there will not be a future impairment that
may have a material impact on our business, financial condition and results of operations.
We face risks from international sales and business activities
We market and sell our products worldwide and international sales have accounted for, and are expected to continue to account
for, a significant portion of our revenue. For the years ended December 31, 2015, 2014 and 2013, international sales accounted
for 47 percent, 49 percent and 50 percent, respectively, of our total revenue. We also manufacture certain products and subassemblies
in Europe and we have several contract manufacturing agreements with third parties in Europe and in Asia. Our international
business activities are subject to a number of risks, including:
•
•
•
•
•
•
•
•
•
•
•
•
the imposition of and changes to governmental licensing restrictions and controls impacting our technology and products;
restrictions and prohibitions on the export of technology and products;
trade restrictions;
difficulty in collecting receivables and governmental restrictions with respect to currency;
inadequate protection of intellectual property;
labor union activities;
changes in tariffs and taxes;
restrictions on repatriation of earnings;
restriction on the importation and exportation of goods and services;
risks, costs, impacts and obligations associated with the United States Foreign Corrupt Practices Act ("FCPA"), and other
anti-bribery and anti-corruption laws applicable to us, and costs and penalties from violations of such laws and related
regulations;
difficulties in staffing and managing international operations; and
political and economic instability.
No assurance can be given that these factors will not have a material adverse effect on our future international sales and operations
and, consequently, on our business, financial condition and results of operations. Furthermore, compliance with complex foreign
and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international
jurisdictions. These numerous and sometimes conflicting laws and regulations include import and export laws, anti-competition
laws, anti-corruption laws, such as the FCPA and the U.K. Bribery Act, and other local laws prohibiting corrupt payments to
governmental officials, data privacy requirements, tax laws, and accounting, internal control and disclosure requirements. Violations
of these laws and regulations could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees,
prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and
could also materially affect our reputation, business and results of operations. In certain foreign jurisdictions, there is a higher risk
of fraud or corruption and greater difficulty in maintaining effective internal controls and compliance programs. Although we have
implemented policies and procedures designed to promote compliance with applicable laws and regulations, there can be no
assurance that our employees, contractors or agents will not violate our policies or applicable laws and regulations. In addition,
our international contracts may include industrial cooperation agreements requiring specific in-country purchases, investments,
manufacturing agreements or other financial obligations, known as offset obligations, and may provide for penalties if we fail to
meet such requirements. The impact of these factors is difficult to predict, but one or more of them could have a material adverse
affect on our financial position, results of operations, or cash flows.
We face risks from currency fluctuations
Historically, currency fluctuations have affected our operating results. Changes in the value of foreign currencies in which our
sales or costs incurred are denominated have in the past caused, and could in the future cause, fluctuations in our operating results.
We seek to reduce our exposure to currency fluctuations by denominating, where possible, our international sales in United States
dollars, by balancing expenses and revenues in various currencies and by undertaking limited hedging of forecasted currency
21
exposures. With respect to international sales denominated in United States dollars, a decrease in the value of foreign currencies
relative to the United States dollar could make our products less price competitive.
We may not be successful in obtaining the necessary export licenses to conduct operations abroad and the United States government
may prevent proposed sales to foreign governments and customers
Export and other licenses are required from United States government agencies under the ITAR, the Export Administration Act,
the Trading with the Enemy Act of 1917, and the Arms Export Control Act of 1976 and other similar laws and regulations for the
sale, use and export of many of our products. We can give no assurance that we will be successful in obtaining these licenses. The
aftermath of 9/11, the rise of terrorism and the changing geopolitical environment, and heightened tensions with other countries
(which shift and evolve over time), has led to heightened government scrutiny of export licenses for products in our markets and
has resulted in lengthened review periods for our license applications, including in countries where we have historically made
significant sales. Failure to obtain or delays in obtaining these licenses would prevent or delay us from selling our products outside
the United States and could have a material adverse effect on our business, financial condition and results of operations.
General economic conditions may adversely affect our business, operating results and financial condition
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of capital
investment and consumer spending. Economic factors that could adversely influence demand for the Company’s products include
uncertainty about global economic conditions leading to reduced levels of investment, changes in government spending levels
and/or priorities, the size and availability of government budgets, customers’ and suppliers’ access to credit, consumer confidence
and other macroeconomic factors affecting government, industrial or consumer spending behavior.
In recent years, our performance has been negatively impacted by reduced spending by United States government agencies, global
economic weakness, and the Eurozone crisis. Continuation of the conditions that led to reduced spending and potential further
reductions in spending globally by either consumers or government agencies could have a material adverse effect on our business,
financial condition and results of operations.
Our primary markets are volatile and unpredictable
Our business depends on the demand for our products and solutions in a variety of commercial, industrial and government markets.
In the past, the demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our
control, including:
•
•
•
•
•
the timing, number and size of orders from, and shipments to, our customers, as well as the relative mix of those orders;
variations in the volume of orders for a particular product or product line in a particular fiscal quarter;
the size and timing of new contract awards;
the timing of the release of government funds for procurement of our products; and
the timing of orders and shipments within a given fiscal quarter.
Seasonal fluctuations in our operating results result from:
•
•
•
the seasonal pattern of contracting by the United States government and certain foreign governments;
the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations; and
the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration.
Competition in our markets is intense and our failure to compete effectively could adversely affect our business
Competition in the markets for our products is intense. The speed with which companies can identify new applications for thermal
imaging, develop products to meet those needs and supply commercial quantities at low prices to the market are important
competitive factors. We believe the principal competitive factors in our markets are product performance, price, customer service
and training, product reputation, and effective marketing and sales efforts. Many of our competitors have greater financial, technical,
research and development, and marketing resources than we do. All of these factors, as well as the potential for increased competition
from new market entrants, require us to continue to invest in, and focus on, research and development and new product innovation.
22
No assurance can be given that we will be able to compete effectively in the future and a failure to do so could have a material
adverse effect on our business, financial condition and results of operations.
Our products may suffer from defects or errors leading to substantial product liability, damage or warranty claims
We include complex system designs and components in our products that may contain errors or defects, particularly when we
incorporate new technology into our products or release new versions. If any of our products are defective, we might be required
to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses
including expenses arising from product liability and warranty claims, disrupt sales and affect our reputation and that of our
products, which could have a material adverse effect on our business, financial condition and results of operations. As we expand
our presence into new markets, we may face increased exposure to product liability claims. We maintain product liability insurance
but cannot be certain that it will be sufficient or will continue to be available on acceptable terms.
Risks, Uncertainties and Other Factors Related to Our Technology and Intellectual Property
Our inability to protect our intellectual property and proprietary rights and avoid infringing the rights of others could harm our
competitive position and our business
Our ability to compete successfully and achieve future revenue growth depends, in part, on our ability to protect our proprietary
technology and operate without infringing the rights of others. To accomplish this, we rely on a combination of patent, trademark,
copyright and trade secret laws, confidentiality agreements and contractual provisions to protect our proprietary rights. Many of
our proprietary rights are held in confidence as trade secrets and are not covered by patents, making them more difficult to protect.
Although we currently hold worldwide patents covering certain aspects of our technologies and products, and we are actively
pursuing additional patents, we cannot be certain that we will obtain additional patents or trademarks on our technology, products
and trade names. Furthermore, we cannot be certain that our patents or trademarks will not be challenged or circumvented by our
competitors or that measures taken by us to protect our proprietary rights will adequately deter their misappropriation or disclosure.
Any failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial
condition and results of operations. Moreover, because intellectual property does not necessarily prevent our competitors from
entering the markets we serve, there can be no assurance that we will be able to maintain our competitive advantage or that our
competitors will not develop capabilities equal or superior to ours.
Litigation over patents and other intellectual property is common in our industry. We have been the subject of patent and other
intellectual property litigation in the past and cannot be sure that we will not be subject to such litigation in the future. Similarly,
there exists the possibility we will assert claims in litigation to protect our intellectual property. Lawsuits defending or prosecuting
intellectual property claims and related legal and administrative proceedings could result in substantial expense to us and significant
diversion of effort of our personnel. An adverse determination in a patent suit or in any other proceeding in which we are a party
could subject us to significant liabilities, result in the loss of intellectual property rights we claim or impact our competitive position.
Additionally, an adverse determination could require us to seek licenses from third parties. If such licenses are not available on
commercially reasonable terms or at all, our business, financial condition and results of operations could be adversely affected.
Our future success will depend on our ability to respond to the rapid technological change in the markets in which we compete,
our ability to introduce new or enhanced products and enter into new markets
The markets in which we compete are characterized by rapid technological developments and frequent new product introductions,
enhancements and modifications. Our ability to develop new products and technologies that anticipate changing customer
requirements, reduce costs and otherwise retain or enhance our competitive position in existing and new markets will be an
important factor in our future results from operations. We will continue to make substantial capital expenditures and incur significant
research and development costs to improve our manufacturing capability, reduce costs, and develop and introduce new products
and enhancements. If we fail to develop and introduce new products and technologies in a timely manner, our business, financial
condition and results of operations would be adversely affected. In addition, we cannot be certain that our new products and
technologies will be successful or that customers will accept any of our new products.
23
Our business could be negatively impacted by cybersecurity threats and other security threats and technology disruptions
We face certain security threats and technology disruptions, including threats to our information technology infrastructure, attempts
to gain access to our or our customers’ proprietary or classified information, threats to the physical security of our facilities and
employees, threats of terrorism events, and failures of our technology tools and systems. We are subject to laws and rules issued
by various agencies concerning safeguarding and maintaining infrastructure and physical security and information confidentiality.
Our information technology networks and related systems are critical to the operation of our business and essential to our ability
to successfully perform day-to-day operations. We are also involved with information technology systems for certain customers
and other third parties, for which we face similar security threats as for our own. In particular, cybersecurity threats-which include,
but are not limited to, computer viruses, spyware and malware, attempts to access information, denial of service attacks and other
electronic security breaches-are persistent and evolve quickly. Such threats have increased in frequency, scope and potential impact
in recent years. Further, a variety of technological tools and systems, including both company-owned information technology and
technological services provided by outside parties, support our critical functions. These technologies, as well as our products, are
subject to failure and the user’s inability to have such technologies properly supported, updated, expanded or integrated into other
technologies and may contain open source and third party software which may unbeknownst to us contain defects or viruses that
pose unintended risks to our customers. These risks if not effectively mitigated or controlled could materially harm our business
or reputation. While we believe that we have implemented appropriate measures and controls, there can be no assurance that such
actions will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information or corruption
of data.
We require user names and passwords in order to access our information technology systems. We use encryption and authentication
technologies designed to secure the transmission and storage of data and prevent access to our data or accounts. These security
measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other
irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names,
passwords or other sensitive information, which may in turn be used to access our information technology systems. These security
systems cannot provide absolute security. To the extent we were to experience a breach of our systems and were unable to protect
sensitive data, such a breach could materially damage business partner and customer relationships, and curtail or otherwise impact
the use of our information technology systems. Moreover, if a security breach of our information technology system affects our
computer systems or results in the release of personally identifiable or other sensitive information of customers, business partners,
employees and other third parties, our reputation and brand could be materially damaged, use of our products and services could
decrease, and we could be exposed to a risk of loss, litigation and potential liability.
Although we have in the past and continue to be subject to cybersecurity threats and other security threats and technology disruptions,
to date none has had a material impact on our business, financial condition or results of operations. Nonetheless, in the future,
these types of events could disrupt our operations and customer and other third party information technology systems. They also
could require significant management attention and resources, negatively impact our reputation among our customers and the
public and challenge our eligibility for future work on sensitive or classified systems, which could have a material adverse effect
on our business, financial condition and results of operations.
Risks, Uncertainties and Other Factors Related to Our Corporate Structure and Organization
Our future success depends in part on attracting and retaining key senior management and qualified technical, sales and other
personnel
Our future success depends in part on the efforts and continued services of our key executives and our ability to attract and retain
qualified technical, sales and other personnel. Significant competition exists for such personnel and we cannot assure the retention
of our key executives, technical and sales personnel or our ability to attract, integrate and retain other such personnel that may be
required in the future. We cannot assure that employees will not leave and subsequently compete against us. If we are unable to
attract and retain key personnel, our business, financial condition and results of operations could be adversely affected.
We must successfully manage a complex global organization
As we have grown, the size and scope of our worldwide operations have also increased substantially. We currently design,
manufacture and market numerous product lines in locations worldwide. Significant management time and effort is required to
24
effectively manage the increased complexity of the business and our failure to successfully do so could have a material adverse
effect on our business, financial condition and results of operations. Our inability to continue to manufacture our products at one
or more of our facilities as a result of, for example, a prolonged power outage, earthquake, fire or other natural disaster, or labor
or political unrest, could prevent us from supplying products to our customers and could have a material adverse effect on our
business, financial condition and results of operations.
We may be unable to successfully integrate recent or future acquisitions into our operations, thereby disrupting our business and
harming our financial condition and results of operations
We have made ten acquisitions of various sizes in the past five years. The integration of businesses, personnel, product lines and
technologies can be difficult, time consuming and subject to significant risks. For example, we could lose key personnel from
companies that we acquire, incur unanticipated costs, lose major sources of revenue, fail to integrate critical technologies, suffer
business disruptions, fail to capture anticipated synergies, fail to establish satisfactory internal controls, or incur unanticipated
liabilities. Any of these difficulties could disrupt our ongoing business, distract our management and employees, increase our
expenses and decrease our revenue.
We frequently evaluate strategic opportunities available to us and it is likely that we will make additional acquisitions in the future.
Such acquisitions may vary in size and complexity. Any future acquisitions are subject to the risks described above. Furthermore,
we might assume or incur additional debt or issue additional equity securities to pay for future acquisitions. Additional debt may
negatively impact our results and increase our financial risk, and the issuance of any additional equity securities could dilute our
then existing shareholders’ ownership. No assurance can be given that we will realize anticipated benefits of any future acquisitions,
or that any such acquisition or investment will not have a material adverse effect on our business, financial condition and results
of operations.
We have indebtedness as a result of the issuance of our 3.75 percent senior unsecured notes (the “Notes”) and borrowings against
our term loan, and we are subject to certain restrictive covenants under our unsecured credit facility and the indenture governing
the Notes which may limit our operational and financial flexibility
Our ability to meet our debt service obligations and comply with the financial covenants under our credit facility will be dependent
upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which
are beyond our control. Our inability to meet our debt service obligations or comply with the required covenants could result in a
default under the credit facility or indenture. In the event of any such default, under the credit facility, the lenders thereunder could
elect to declare all outstanding debt, accrued interest and fees under the facility to be due and immediately payable. In the event
of any such default under our indenture, either the trustee or the holders of at least 25 percent of the outstanding principal amount
of the Notes could declare the principal amount of all of the Notes to be due and payable immediately.
We may not be able to refinance our indebtedness on favorable terms, if at all. Our inability to refinance our indebtedness could
materially and adversely affect our liquidity and our ongoing results of operations.
Our ability to refinance indebtedness, including the Notes which we expect to refinance in 2016, will depend in part on our operating
and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative,
regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing
could increase our interest expense. A refinancing of our indebtedness, including the Notes, could also require us to comply with
more onerous covenants and further restrict our business operations. Our inability to refinance our indebtedness or to do so upon
attractive terms could materially and adversely affect our business, results of operations, financial condition and cash flows, and
make us vulnerable to adverse industry and general economic conditions.
Changes in our effective income tax rate may have an adverse effect on our results of operations
We are subject to taxes in the United States and numerous foreign jurisdictions, including Belgium, where a number of our
subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant
change. Our future effective tax rate could be affected by changes in the mix of earnings in countries with different statutory tax
rates, changes in the valuation of deferred tax assets and liabilities, changes in the enforcement environment, and changes in tax
laws or their interpretations, including in the United States and in foreign jurisdictions. For example, in January 2016, the European
25
Commission announced a decision concluding that certain rules under Belgian tax legislation are deemed to be incompatible with
European Union regulations on “state aid.” As a result of this decision, the European Commission has directed the Belgian
Government to recover past taxes from certain entities, which we expect to include one of our Belgian subsidiaries regarding the
amount of taxes applicable to us during a three year period ending in July 2015. Negotiations are ongoing between the Belgian
Government and the European Commission to agree on a methodology to calculate the applicable amounts for each company
impacted by the decision. Furthermore, the decision may be appealed before the General Court of the European Union by the
Belgian Government and by companies which are directly affected by the decision. Although no demand for payment or other
official notice has been received by us to date, we are currently reviewing the matter, including the potential impact to the 2016
tax provision, and expect to take actions necessary to preserve our rights, including reducing or eliminating the amount determined
to be “state aid.” We expect that the ultimate amount owed, if any, will be determined after litigation and/or negotiation and such
amount could be material.
Our future effective tax rate may be adversely affected by a number of additional factors including:
•
•
•
•
•
•
•
•
•
•
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the valuation of our deferred tax assets and liabilities;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in share-based compensation expense;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles;
changes in foreign tax rates or agreed upon foreign taxable base; and/or
the repatriation of earnings from outside the United States for which we have not previously provided for United States
taxes.
Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the
United States Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our financial
condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income
tax returns by the IRS or other taxing authorities are not resolved in our favor.
State of Oregon law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if
the transaction would benefit our shareholders
Other companies may seek to acquire or merge with us. An acquisition or merger of our Company could result in benefits to our
shareholders, including an increase in the value of our common stock. Some provisions of our Articles of Incorporation and Bylaws,
including our ability to issue preferred stock without further action by our shareholders, as well as provisions of the State of Oregon
law, may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
26
ITEM 2.
PROPERTIES
At December 31, 2015, we conducted manufacturing, research and development, and sales and administration in 79 facilities
worldwide. Of these, we owned 7 facilities with approximately 713 thousand square feet and leased 24 facilities with approximately
330 thousand square feet in the United States, and we owned 7 facilities with approximately 330 thousand square feet and leased
41 facilities with approximately 291 thousand square feet outside the United States, primarily in Europe. Our headquarters is
located in Wilsonville, Oregon.
Our major facilities include the following locations:
Location
Wilsonville (Portland), Oregon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Billerica (Boston), Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Täby (Stockholm), Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elkridge (Baltimore), Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nashua, New Hampshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tallinn, Estonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Markham (Toronto), Ontario, Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goleta (Santa Barbara), California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fareham (Portsmouth), United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stillwater, Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meer (Antwerp), Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owned
Leased
(Square feet in Thousands)
—
—
—
109
—
—
—
—
—
35
12
465
154
133
205
—
140
46
27
169
63
—
—
106
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,043
621
Our reportable segments operate out of facilities as follows:
Surveillance: Wilsonville, Oregon; North Billerica, Massachusetts; Täby, Sweden; Elkridge, Maryland; and 14 facilities in
the United States and 7 facilities located outside the United States.
Instruments: Täby, Sweden; Nashua, New Hampshire; Tallinn, Estonia; and 2 facilities in the United States and 19 facilities
located outside the United States.
Security: Markham, Ontario, Canada and 1 facility in the United States and 19 facilities outside the United States.
OEM & Emerging Markets: Goleta, California and 1 facility in the United States and 13 facilities located outside the United
States.
Maritime: Fareham, United Kingdom and 1 facilities in the United States and 18 facilities located outside the United States.
Detection: Stillwater, Oklahoma; Elkridge, Maryland; and 6 facilities in the United States and 3 facilities located outside the
United States.
We believe all of our properties are suitable for their intended use, adequate to meet our current and near-term business needs,
and in good condition. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.
27
ITEM 3.
LEGAL PROCEEDINGS
FLIR Systems, Inc. and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.) (together,
the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007 in the United States
District Court for the Eastern District of Texas. Raytheon's complaint, as amended, asserted claims for tortious interference, patent
infringement, trade secret misappropriation, unfair competition, breach of contract and fraudulent concealment. The FLIR Parties
filed an answer to the complaint on September 2, 2008, in which they denied all material allegations. On October 27, 2010, the
FLIR Parties and Raytheon entered into a settlement agreement that resolved the patent infringement claims (the "Patent Claims")
pursuant to which the FLIR Parties paid $3 million to Raytheon and entitles the FLIR Parties to certain license rights in the patents
that were the subject of the Patent Claims. On October 28, 2014, a four-week trial began with respect to Raytheon's remaining
claims of misappropriations of trade secrets and claims related to 31 alleged trade secrets. On November 24, 2014, a jury in the
United States District Court for the Eastern District of Texas rejected Raytheon’s claims and determined that 27 of the alleged
trade secrets were not in fact trade secrets and that neither Indigo, prior to its acquisition by FLIR Systems, Inc., nor FLIR Systems,
Inc. infringed any of the trade secrets claimed and awarded Raytheon no damages. The court has yet to rule on any post-trial
motion seeking to modify the jury verdict or on the FLIR Parties' motion for an award of attorney’s fees in the amount of $28
million as a prevailing party under the Texas Theft Liability Act. The matter remains ongoing and is subject to appeal and the
Company is unable to estimate the amount or range of potential loss or recovery, if any, which might result if the final determination
of this matter is favorable or unfavorable, but an adverse ruling on the merits of the original claims against the FLIR Parties, while
remote, could be material.
On October 22, 2014, the Company initially contacted the United States Department of State Office of Defense Trade Controls
Compliance (“DDTC”), pursuant to International Traffic in Arms Regulation (“ITAR”) § 127.12(c), regarding the unauthorized
export of technical data and defense services to dual and third country nationals in at least four facilities of the Company. On April
27, 2015, the Company submitted its initial report to DDTC regarding the details of the issues raised in the October 22, 2014
submission. DDTC subsequently notified the Company that it was considering administrative proceedings under Part 128 of ITAR
and requested a tolling agreement, which the Company executed on June 16, 2015. DDTC continues its review and the Company
is unable to reasonably estimate the time it may take to resolve the matter or the amount or range of potential loss, penalty or other
government action, if any, that may be incurred in connection with this matter. However, an unfavorable outcome could potentially
be material to the financial condition and results of operations of the Company in the period in which such an outcome becomes
estimable or known.
We are also subject to other legal proceedings, claims and litigation arising in the ordinary course of business. We make a
provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated.
We believe we have recorded adequate provisions for any probable and estimable losses. While the outcome of such matters is
currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on
our financial position, results of operations or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
28
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company has been traded on the NASDAQ Global Market since June 22, 1993, under the symbol
“FLIR.” The following table sets forth, for the quarters indicated, the high and low closing sales price for our common stock as
reported on the NASDAQ Global Select Market, a segment of the NASDAQ Global Market.
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
High
33.97
31.93
31.99
30.56
$
Low
29.80
30.09
27.06
26.01
$
High
36.00
37.23
35.14
34.32
$
Low
29.00
33.42
31.34
28.36
At December 31, 2015, there were approximately 92 holders of record of our common stock and 137,350,023 shares
outstanding. During the year ended December 31, 2014, we paid dividends quarterly at the rate of $0.10 per share for a total of
$56.5 million. During the year ended December 31, 2015, we paid dividends quarterly at the rate of $0.11 per share for a total of
$61.4 million. We currently intend to continue to pay cash dividends to holders of our common stock for the foreseeable future,
but such payment remains at the discretion of our Board of Directors and will depend upon many factors, including our financial
condition, earnings, and other factors our Board of Directors deems relevant.
The graph below shows a comparison of the five-year cumulative total shareholder return for the Company’s common stock
with the cumulative total returns on the Standard & Poor’s (“S&P”) 500 Index and the S&P 500 Electronic Equipment & Instruments
Index for the same five-year period. The data used for this graph assumes that $100 was invested in the Company and in each
index on December 31, 2010, and that all dividends were reinvested.
29
The stock performance graph was plotted using the following data:
FLIR Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100.00
S&P 500 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
S&P 500 Electronic Equipment Instruments &
2010
2011
$ 84.99
102.11
2012
$ 76.66
118.45
2103
$ 104.73
156.82
2014
$ 113.81
178.28
2015
$ 100.29
180.75
Components Index . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
76.14
85.71
121.71
149.77
139.59
During 2015, we repurchased approximately 4.2 million shares for a total of approximately $123.2 million. The following
table summarizes our 2015 common stock repurchase activities:
Period
May 1 to May 31, 2015. . . . . . . . . . . . . . . .
August 1 to August 31, 2015. . . . . . . . . . . .
September 1 to September 30, 2015 . . . . . .
December 1 to December 31, 2015. . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Number of
Shares Purchased
1,000,000
970,869
1,198,000
1,000,000
4,168,869
Average Price Paid
per Share
$
$
$
$
$
31.43
28.74
28.42
29.81
29.55
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
1,000,000
970,869
1,198,000
1,000,000
4,168,869
Maximum Number
of Shares that May
Yet Be Purchased at
December 31, 2015
Under the Plans or
Programs
10,831,131
All share repurchases are subject to applicable securities laws, and are at times and in amounts as management deems
appropriate. All shares of our common stock repurchased in 2015 were repurchased under authorization by our Board of Directors,
granted on February 5, 2015, pursuant to which we were authorized to repurchase up to 15.0 million shares of our outstanding
common stock in the open market or through privately negotiated transactions. This authorization will expire on February 5, 2017.
30
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.”
Year Ended December 31,
2015
2014
2013
2012
2011
(in thousands, except per share amounts)
Statement of Income Data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,557,067
803,506
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . .
753,561
Gross profit . . . . . . . . . . . . . . . . . . . . . .
$ 1,530,654
780,281
750,373
$ 1,496,372
759,362
737,010
$ 1,405,358
670,174
735,184
$1,544,062
714,743
829,319
Operating expenses:
Research and development . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . .
Earnings from operations. . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net. . . . . . . . . . . . . . . . .
Earnings from continuing operations
before income taxes . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . .
Earnings from continuing operations. . .
Loss from discontinued operations, net of tax . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . $
Basic earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . .
Basic earnings per share. . . . . . . . . . . . . $
Diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . $
_______________
132,892
313,544
1,361
447,797
305,764
14,086
(1,167)
(12,601)
305,446
63,760
241,686
—
241,686
1.73
—
1.73
1.72
—
1.72
$
$
$
$
$
142,751
331,995
16,383
491,129
259,244
14,593
(1,405)
(3,473)
249,529
49,268
200,261
—
200,261
147,696
322,739
25,832
496,267
240,743
14,091
(1,058)
(1,276)
137,354
292,500
2,000
431,854
303,330
11,659
(1,582)
1,341
(1)
147,177
368,947
—
516,124
313,195
5,487
(1,273)
(2,098)
228,986
51,971
177,015
—
$ 177,015
291,912
66,556
225,356
(2,958)
$ 222,398
311,079
88,427
222,652
(1,178)
$ 221,474
1.42
—
1.42
1.39
—
1.39
$
$
$
$
1.24
—
1.24
1.22
—
1.22
$
$
$
$
1.49
(0.02)
1.47
1.47
(0.02)
1.45
$
$
$
$
1.41
(0.01)
1.40
1.38
(0.01)
1.38
(1) Selling, general and administrative expenses for 2011 include the payment of a $39.0 million litigation settlement.
2014
(As
reclassified)
2015
December 31,
2013
2012
2011
(in thousands)
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, excluding current portion . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . .
702,169
2,406,400
264,707
93,750
1,649,515
$
990,771
2,349,311
15,041
357,986
1,609,773
$ 1,033,216
2,343,359
15,064
372,528
1,613,380
$ 923,679
2,190,655
374
248,319
1,599,901
$1,000,339
2,149,114
136
247,861
1,579,029
(2)
(2)
Other Financial Data:
Cash dividends declared per common share . . . . $
0.24
0.44
(2) Working capital and total assets for 2014 have been adjusted for reclassification of deferred tax assets related to the adoption of Accounting
Standards Update No. 2015-17. See Note 1 to the Consolidated Financial Statements in Item 8 for further information. 2011, 2012 and 2013 were
not adjusted.
0.36
0.28
0.40
$
$
$
$
31
ITEM 7.
Overview
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a world leader in sensor systems that enhance perception and awareness. We were founded in 1978 and have since
become a premier designer, manufacturer, and marketer of thermal imaging and other sensing products and systems. Our advanced
sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications
in commercial, industrial, and government markets worldwide.
Our goal is to both enable our customers to benefit from the valuable information produced by advanced sensing technologies
and to deliver sustained superior financial performance for our shareholders. We create value for our customers by providing
advanced surveillance and tactical defense capabilities, improving personal and public safety and security, facilitating air, ground,
and maritime navigation, enhancing enjoyment of the outdoors, providing infrastructure inefficiency information, conveying pre-
emptive structural deficiency data, displaying process irregularities, and enabling commercial business opportunities through our
continual support and development of new thermal imaging data and analytics applications. Our business model meets the needs
of a wide range of customers – we sell off-the-shelf products to many markets and also offer a variety of system configurations
to suit specific customer requirements. Centered on the design of products for low cost manufacturing and high volume distribution,
our commercial operating model has been developed over time and provides us with a unique ability to adapt to market changes
and meet our customers’ needs.
This Management's Discussion and Analysis of Financial Condition and Results of Operations is prepared and reported based
on our reporting structure of six operating segments. For a more detailed description of our segments, see "Business Segments"
within Item 1.
International revenue accounted for approximately 47 percent, 49 percent and 50 percent of our revenue in 2015, 2014 and
2013, respectively. We anticipate that international sales will continue to account for a significant percentage of revenue in the
future. We have exposure to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations
in the value of the United States dollar relative to other currencies. Factors contributing to this variability include significant
manufacturing activity in Europe, significant sales denominated in currencies other than the United States dollar, and cross currency
fluctuations between such currencies as the United States dollar, euro, Swedish kronor and British pound sterling. The impact of
those fluctuations is reflected throughout our consolidated financial statements, and primarily due to the United States dollar
strengthening in 2015, there was a meaningful impact on our results of operations in 2015, including a reduction of approximately
$63 million in revenue and reductions in the carrying values of our foreign net assets when translated from foreign currencies to
United States dollars.
We experience fluctuations in orders and sales due to seasonal variations and customer sales cycles, such as the seasonal
pattern of contracting by the United States and certain foreign governments, the desire of customers to take delivery of equipment
prior to fiscal year ends due to funding considerations, and the tendency of commercial enterprises to fully utilize annual capital
budgets prior to expiration. Such events have resulted and could continue to result in fluctuations in quarterly results in the future.
As a result of such quarterly fluctuations in operating results, we believe that quarter-to-quarter comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as indicators of future performance.
We expect that macroeconomic factors, including reduced spending by United States government agencies and economic
weaknesses in certain geographic markets, will continue to present challenges for us and render predictions regarding future
performance difficult to make.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related
to revenue recognition, allowance for doubtful accounts, inventories, goodwill, warranty obligations, contingencies and income
taxes on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. Senior management has discussed the development, selection and disclosure of these estimates with
the Audit Committee of our Board of Directors. We believe the following critical accounting policies and the related judgments
and estimates affect the preparation of our consolidated financial statements.
32
Revenue recognition. Revenue is recognized when persuasive evidence of an arrangement exists, upon delivery of the product
to the customer at a fixed or determinable price with a reasonable assurance of collection, passage of title and risk of loss to the
customer as indicated by the contractual terms and fulfillment of all significant obligations.
We design, market and sell our products primarily as commercial, off-the-shelf products. Certain customers request different
system configurations, generally based on standard options or accessories that we offer. In general, our revenue arrangements do
not involve acceptance provisions based upon customer specified acceptance criteria. In those circumstances when customer
specified acceptance criteria exist, revenue is deferred until customer acceptance if we cannot demonstrate that the system meets
those specifications prior to shipment. For any contracts with multiple elements (i.e., training, installation, additional parts, etc.)
we allocate revenue among the deliverables primarily based upon objective and reliable evidence of fair value of each element in
the arrangement. If objective and reliable evidence of fair value of any element is not available, we use an estimated selling price
for purposes of allocating the total arrangement consideration among the elements. In addition, judgments are required in evaluating
the credit worthiness of our customers. Credit is not extended to customers and revenue is not recognized until we have determined
that collectability is reasonably assured.
Allowance for doubtful accounts. Our policy is to maintain allowances for estimated losses resulting from the inability of our
customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability
of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining
or modifying their credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination
of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause.
If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing,
deterioration in the customer’s operating results or financial position or other material events impacting their business, we record
a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available.
Actual write-offs during the past three years have not been material to our results of operations.
We also record an allowance for all other customers based on certain other factors including the length of time the receivables
are past due and historical collection experience with individual customers. As of December 31, 2015, our accounts receivable
balance of $326.1 million is reported net of allowances for doubtful accounts of $6.9 million. We believe our reported allowances
at December 31, 2015 are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their
inability to make payments, we may need to record additional allowances that would result in additional selling, general and
administrative expenses being recorded for the period in which such determination is made.
Inventory. Our policy is to record inventory write-downs when conditions exist that indicate that our inventories are likely
to be in excess of anticipated demand or are obsolete based upon our assumptions about future demand for our products and market
conditions. We regularly evaluate the ability to realize the value of our inventories based on a combination of factors including
the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values
and new product introductions. Purchasing requirements and alternative usages are evaluated within these processes to mitigate
inventory exposure. When recorded, our write-downs are intended to reduce the carrying value of our inventories to their net
realizable value and establish a new cost basis. As of December 31, 2015, our inventories of $393.1 million are stated net of
inventory write-downs. If actual demand for our products deteriorates or market conditions are less favorable than those that we
project, additional inventory write-downs may be required in the future.
Goodwill. Goodwill represents the excess purchase price of an acquired enterprise or assets over the estimated fair value of
identifiable net assets acquired. We assess goodwill for potential impairment at the reporting unit level during the third quarter of
each year, or whenever events or circumstances indicate that the carrying value of these assets may exceed their fair value. We
may assess qualitative factors to make this determination, or bypass such a qualitative assessment and proceed directly to testing
goodwill for impairment using a two-step process. Qualitative factors we may consider include, but are not limited to,
macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services,
regulatory and political developments and entity specific factors such as strategies and financial performance. If there are indicators
that goodwill has been impaired we proceed to a two-step impairment test, whereby the first step is comparing the fair value of a
reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds the carrying value,
goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value of a reporting unit
exceeds its fair value. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal
to the difference is recorded. Our impairment test in the current year did not indicate an impairment of goodwill in any of our
reporting units.
33
Product warranties. Our products are sold with warranty provisions that require us to remedy deficiencies in quality or
performance of our products over a specified period of time, generally twelve to twenty-four months, at no cost to our customers.
Our policy is to record warranty liabilities at levels that represent our estimate of the costs that will be incurred to fulfill those
warranty requirements at the time that revenue is recognized. We believe that our recorded liability of $16.5 million at December 31,
2015 is adequate to cover our future cost of materials, labor and overhead for the servicing of our products sold through that date.
If actual product failures or material or service delivery costs differ from our estimates, our warranty liability would need to be
revised accordingly.
Contingencies. We are subject to the possibility of loss contingencies arising in the normal course of business. We consider
the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the
amount of loss in determining loss contingencies. An estimated loss is accrued when it is probable that an asset has been impaired
or a liability has been incurred and the amount can be reasonably estimated. We regularly evaluate current information available
to us to determine whether such accruals and disclosures should be adjusted.
Income taxes. We account for income taxes using the asset and liability method, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the
tax basis of the assets and liabilities measured using the enacted tax rates in effect in the years in which the differences are expected
to reverse. Valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets
are not more likely than not to be realized in the future. In making that determination, on a jurisdiction by jurisdiction basis, we
estimate our future taxable income based upon historical operating results and external market data. Future levels of taxable income
are dependent upon, but not limited to, general economic conditions, competitive pressures and other factors beyond our control.
As of December 31, 2015, we have determined that a valuation allowance against our deferred tax assets of $2.6 million is required.
If we should determine that we may be unable to realize our deferred tax assets to the extent reported, an adjustment to the deferred
tax assets would be recorded in the period such determination is made.
We are subject to income taxes in the United States and in numerous foreign jurisdictions, and in the ordinary course of business,
there are many transactions and calculations where the ultimate tax determination is uncertain. While we believe the positions we
have taken are appropriate, we have reserves for taxes to address potential exposures involving tax positions that are being challenged
or that could be challenged by the tax authorities. We record a benefit on a tax position when we determine that it is more likely
than not that the position is sustainable upon examination, including resolution of any related appeals or litigation processes, based
on the technical merits of the position. For tax positions that are more likely than not to be sustained, we measure the tax position
at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is effectively settled, using
information that is available at the reporting date. We review the tax reserves as circumstances warrant and adjust the reserves as
changes in available facts arise that affect our potential liability for additional taxes.
34
Consolidated Operating Results
The following table sets forth for the indicated periods certain items as a percentage of revenue:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_______________
(1)
Totals may not recompute due to rounding.
Year Ended December 31,(1)
2015
100.0%
51.6
48.4
2014
100.0%
51.0
49.0
2013
100.0%
50.7
49.3
8.5
20.1
0.1
28.8
19.6
0.9
(0.1)
(0.8)
19.6
4.1
15.5%
9.3
21.7
1.1
32.1
16.9
1.0
(0.1)
(0.2)
16.3
3.2
13.1%
9.9
21.6
1.7
33.2
16.1
0.9
(0.1)
(0.1)
15.3
3.5
11.8%
The following discussion of operating results provides an overview of our operations by addressing key elements in our
Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of
our business segments to our consolidated revenue and earnings from operations for 2015, 2014 and 2013. Given the nature of
our business, we believe revenue and earnings from operations (including operating margin percentage) are most relevant to an
understanding of our performance at a segment level. Additionally, at the segment level we disclose backlog, which represents
orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.
35
Revenue. Revenue for 2015 totaled $1,557.1 million, an increase of 1.7 percent from 2014 revenue of $1,530.7 million. Year
over year revenue growth was primarily due to increases in our Security and Detection segments, partially offset by declines in
our Surveillance, Instruments, OEM & Emerging Markets, and Maritime segments. The revenue increase was negatively impacted
by year over year changes in foreign currency rates, particularly in our Instruments and Maritime segments. On a constant currency
basis, revenue for 2015 would have been an increase of approximately 5.8 percent over 2014 revenue.
Revenue for 2014 totaled $1,530.7 million, an increase of 2.3 percent over 2013 revenue of $1,496.4 million. Most of our
operating segments reported increases in year over year revenues. Revenue from the United States government customers declined
by $44.5 million from 2013 to 2014.
International revenue in 2015 totaled $734.2 million, representing 47.2 percent of revenue. This compares with international
revenue in 2014 which totaled $747.0 million, representing 48.8 percent of revenue, and $740.7 million in 2013, representing 49.5
percent of revenue. While the sales mix between United States and international sales may fluctuate from year to year, we expect
revenue from customers outside the United States to continue to comprise a significant portion of our total revenue on a long-term
basis.
Cost of goods sold. Cost of goods sold for the years ended December 31, 2015 and 2014 was $803.5 million and $780.3
million, respectively. The increase is primarily due to the increase in revenues year over year as discussed above and changes in
product mix.
Cost of goods sold in 2014 was $780.3 million, compared to cost of goods sold of $759.4 million in 2013. The year over year
increase in cost of goods sold primarily relates to the higher year over year revenues and changes in product mix. For the years
ended December 31, 2014 and 2013, cost of goods sold included $0.6 million and $1.7 million, respectively, of inventory write
downs related to our restructuring activities.
Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold
in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside
processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages
and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection
costs.
Gross profit. Gross profit for the year ended December 31, 2015 was $753.6 million compared to $750.4 million in 2014.
Gross margin, defined as gross profit divided by revenue, decreased slightly from 49.0 percent in 2014 to 48.4 percent in 2015
primarily due to changes in product mix and the negative impact of year over year changes in foreign currency rates.
Gross profit for the year ended December 31, 2014 was $750.4 million compared to $737.0 million in 2013. Gross margin
decreased from 49.3 percent in 2013 to 49.0 percent in 2014.
Research and development. Research and development expenses were $132.9 million, or 8.5 percent of revenue, in 2015,
compared to $142.8 million, or 9.3 percent of revenue, in 2014, and $147.7 million, or 9.9 percent of revenue, in 2013.
We believe that spending levels are sufficient to support the development of new products and the continued growth of the
business. We expect research and development expenses to be approximately 8 to 10 percent of revenue on a long-term basis.
Selling, general and administrative expenses. Selling, general and administrative expenses were $313.5 million, or 20.1
percent of revenue, in 2015 compared to $332.0 million, or 21.7 percent of revenue, in 2014 and $322.7 million, or 21.6 percent
of revenue, in 2013. The decrease in selling, general and administrative expenses in 2015 compared to 2014 was primarily due to
a $15.6 million decrease in corporate expenses primarily related to 2014 legal expenses incurred for litigation matters and costs
of a regulatory settlement. The increase in selling, general and administrative expenses in 2014 compared to 2013 was primarily
due to increases in marketing spending and a $13.8 million increase in corporate expenses due to the 2014 factors previously
mentioned. While selling, general and administrative expenses may be affected in the future by acquisitions with different cost
structures, we anticipate selling, general and administrative expenses to increase at a slower rate than revenue in our existing
businesses.
36
Restructuring expenses. During the years ended December 31, 2015, 2014 and 2013, we recorded net pre-tax restructuring
expenses totaling $1.4 million, $17.0 million and $27.5 million, respectively. Of the restructuring expenses recorded in 2014, $16.4
million was recorded in operating expenses and $0.6 million was recorded in costs of goods sold. Of the restructuring expenses
recorded in 2013, $25.8 million was recorded in operating expenses and $1.7 million was included in costs of goods sold. In the
fourth quarter of 2013, we initiated a realignment plan that included closing six not-to-scale sites in the United States and Europe and
a transfer of those operations to larger facilities. We also consolidated our optics and laser manufacturing businesses to better
realize the benefits of vertical integration in these areas. The benefits from these actions are reflected in our operating results. As
of December 31, 2015, we have completed the majority of the actions in our realignment plan.
Interest expense. Interest expense totaled $14.1 million, $14.6 million and $14.1 million for the years ended December 31,
2015, 2014 and 2013, respectively. Interest expense is primarily attributable to the $250 million aggregate principal amount of
3.75 percent senior unsecured notes due September 1, 2016 and the amortization of the costs related to the issuance of the notes
and the $150 million term loan that was drawn on April 5, 2013.
Other (income) expense, net. Other income totaled $12.6 million, $3.5 million and $1.3 million for the years ended December
31, 2015, 2014 and 2013, respectively. The increase in other income during the year ended December 31, 2015 is primarily attributed
to the gain on the sale of our cost basis investment in a private technology company.
Income taxes. Our income tax provision was $63.8 million, $49.3 million and $52.0 million in 2015, 2014 and 2013,
respectively. The effective tax rates for 2015, 2014 and 2013 were 20.9 percent, 19.7 percent and 22.7 percent, respectively. The
mix in taxable income between our United States and international operations has a significant impact on our annual income tax
provision and effective tax rates. Our effective tax rate is lower than the United States federal tax rate of 35 percent because of
lower foreign tax rates, the effect of foreign, federal and state tax credits and other discrete items. In 2015, the discrete items
included a $12.1 million release of a previously recorded tax valuation allowance, and in 2014, the discrete items included a $9.4
million release of previously recorded unrecognized tax benefits that were no longer required due to closure of the applicable
statute. We expect the effective tax rate for 2016 to be approximately 26 percent excluding discrete items.
At December 31, 2015, we had United States tax net operating loss carry-forwards totaling approximately $4.6 million which
expire between 2019 and 2031. In addition, we have various state net operating loss carry-forwards totaling approximately $39.2
million which expire between 2016 and 2033. The federal and state net operating losses were primarily generated by ICx
Technologies, Inc. prior to being acquired by us in 2010. Finally, we have various foreign net operating loss carry-forwards totaling
approximately $71.1 million, a portion of which expire between 2018 and 2033 and a portion of which have an indefinite carry-
forward period.
Tax benefits as described above are recorded as assets when the benefits are more likely than not to be recognized. To the
extent that we assess the realization of such assets to not be more likely than not, a valuation allowance is required to be recorded.
As of December 31, 2015, we have determined that a valuation allowance against our deferred tax assets of $2.6 million is required,
primarily related to certain acquired net operating losses. A review of all available positive and negative evidence is considered,
including past and future performance, the market environment in which we operate, utilization of tax attributes in the past, length
of carry-back and carry-forward periods, and evaluation of potential tax planning strategies, when evaluating whether the deferred
tax assets will be realized.
On January 11, 2016, the European Commission announced a decision concluding that certain rules under Belgian tax
legislation are deemed to be incompatible with European Union regulations on state aid. As a result of this decision, the European
Commission has directed the Belgian Government to recover past taxes from certain entities, reflective of disallowed state aid,
which the Company expects to impact one of its subsidiaries covering a three-year period which concluded with the expiration of
an agreement in July 2015. Negotiations are ongoing between the Belgian Government and the European Commission to agree
on a methodology to calculate the applicable amounts for each company impacted by the decision. Although the Company has
not received a request for payment or other official notice, the Company has evaluated the potential impact of the European
Commission's decision in accordance with FASB ASC Topic 740, "Income Taxes," noting the recent decision could significantly
increase the Company's unrecognized tax benefits within the next twelve months. However, due to the ongoing negotiations and
uncertainty surrounding the calculation methodology and litigation process, the Company is currently unable to estimate the range
of the potential increase. While the Company is unable to estimate the range of potential impact on unrecognized tax benefits,
such impact could be material to the 2016 tax provision.
37
Segment Operating Results
We have six operating segments. Effective January 1, 2015, the Personal Vision Systems Product line was transferred from
the OEM & Emerging Markets segment to the Surveillance segment. The results for those two segments for the years ended
December 31, 2014 and 2013 have been reclassified to conform to the presentation for the year ended December 31, 2015. The
following discusses the operating results of each of our segments for that three year period.
Surveillance
Surveillance operating results are as follows (in millions, except percentages):
Year Ended December 31,
2015
2014
2013
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
503.0
145.6
29.0%
309
(as
reclassified)
520.0
$
127.2
24.5%
297
(as
reclassified)
554.6
$
135.6
24.4%
282
Surveillance revenue decreased by 3.3 percent in 2015 compared to 2014, primarily due to the continued reductions in demand
from United States government funded customers and decreases in airborne and integrated systems product line revenues, partially
offset by an increase in revenues in the land product line. Earnings from operations increased by 14.5 percent primarily due to
lower operating expenses and higher gross margins, partially offset by the decrease in revenues. During the year ended December
31, 2015, Surveillance had restructuring charges of $0.2 million, compared to $5.2 million in 2014.
Revenue decreased by 6.2 percent in 2014 compared to 2013, primarily due to the reductions in demand from United States
government funded customers. Earnings from operations decreased by 6.1 percent primarily due to the lower revenues, partially
offset by cost savings generated as a result of restructuring activities. In 2013, Surveillance had restructuring charges of $5.4
million.
Instruments
Instruments operating results are as follows (in millions, except percentages):
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
$
2015
347.5
112.4
32.3%
27
2014
354.1
99.0
27.9%
35
$
2013
337.5
81.1
24.0%
27
Instruments segment revenue for the year ended December 31, 2015 decreased by 1.9 percent compared to the year ended
December 31, 2014. The year over year decrease in revenue was primarily due to a revenue decline in the Americas region, partially
offset by an increase in the Asia Pacific region; on a product line basis, declines in our higher end thermography and in our optical
gas imaging product lines were partially offset by increases in our science, test and measurement, and fire product lines. Revenues
for the year ended December 31, 2015 were also negatively impacted by year over year changes in currency exchange rates. On
a constant currency basis, Instruments revenues in 2015 increased by 4.9 percent compared to 2014. The increase in earnings from
operations for the year ended December 31, 2015 compared to the year ended December 31, 2014 is primarily due to lower
restructuring expenses and costs savings associated with restructuring activities. As a large portion of segment expenses are
incurred in Europe, the segment experienced a favorable impact on its operating expenses from the changes in foreign currency
rates which largely offset the associated decline in revenues in that region. During the year ended December 31, 2015, Instrument
had restructuring charges of $1.2 million compared to $11.0 million in the year ended December 31, 2014.
38
Instruments segment revenue for the year ended December 31, 2014 increased by 4.9 percent, compared to the year ended
December 31, 2013. The year over year increase in revenue is primarily due to increased deliveries in most geographic regions
and across most product lines, particularly for products introduced late in 2013 and in 2014. The increase in earnings from
operations for the year ended December 31, 2014 compared to 2013 is primarily due to higher revenues, lower restructuring
expenses and cost savings generated from those restructuring activities. During 2013, the segment incurred restructuring charges
of $15.5 million.
Security
Security operating results are as follows (in millions, except percentages):
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
226.6
2014
179.1
$
2013
141.0
$
28.1
12.4%
16
24.9
13.9%
18
17.3
12.3%
10
Security segment revenue for the year ended December 31, 2015 increased by 26.5 percent over the year ended December
31, 2014. The increase was primarily due to increased deliveries across all product families and in the Americas and Europe
geographic regions. The increase of earnings from operations of 13.1 percent was primarily due to the increase in revenues,
partially offset by increases in sales and marketing support operating expenses.
Security segment revenue for the year ended December 31, 2014 increased by 27.0 percent compared to the prior year primarily
due to increased deliveries in all product families and expanded distribution. The increase in earnings from operations in 2014 of
43.4 percent over 2013 was primarily due to the increase in year over year revenues, partially offset by increased marketing,
customer technical support and product development expenses. The increase in backlog was primarily due to an increase in orders
from international customers which often have longer delivery times.
OEM & Emerging Markets
OEM & Emerging Markets operating results are as follows (in millions, except percentages):
Year Ended December 31,
2015
2014
2013
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
186.7
41.1
22.0%
140
(as
reclassified)
199.1
$
50.2
25.2%
129
(as
reclassified)
184.0
$
39.3
21.3%
129
OEM & Emerging Markets segment revenue decreased by 6.2 percent in 2015 compared to 2014, primarily due to the loss
of approximately $8.8 million in 2014 revenue from our former optical components group which was sold in August 2014 and the
negative impacts of changes in currency exchange rates. Earnings from operations declined in 2015 compared to 2014 primarily
due to the decrease in revenue and lower gross margins, partially offset by lower operating expenses.
Revenue increased by 8.2 percent in 2014 compared to 2013, primarily due to increased deliveries to customers in the United
States, particularly of uncooled camera cores and newly introduced mobile accessories. Earnings from operations increased by
28.0 percent due to the increase in revenues and cost savings from restructuring activities.
39
Maritime
Maritime operating results are as follows (in millions, except percentages):
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
$
2015
177.9
13.6
7.6%
28
$
2014
192.6
24.5
12.7%
17
2013
189.1
22.3
11.8%
11
Maritime segment revenue for the year ended December 31, 2015 decreased by 7.6 percent compared to 2014 primarily due
to the negative impact of year over year changes in currency exchange rates in the Europe and Asia Pacific regions. On a constant
currency basis, 2015 revenue increased by 2.2 percent compared to 2014. Since the majority of the segment's costs of goods sold
are incurred in United States dollars, those costs did not receive the favorable impact of changes in currency exchange rates.
Consequently, the decrease in earnings from operations in 2015 compared to 2014 was primarily due to the revenue decline.
Maritime segment revenue for the year ended December 31, 2014 increased by 1.9 percent compared to the same period of
2013 primarily due to higher deliveries in Europe and year over year unit volume increases from Raymarine-branded product lines.
Detection
Detection operating results are as follows (in millions, except percentages):
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
115.3
2014
2013
$
85.7
$
90.2
26.9
23.3%
82
11.0
12.8%
51
8.9
9.9%
30
Detection segment revenue for the year ended December 31, 2015 increased by 34.5 percent compared to the prior year. The
increase in revenue was primarily due to increased deliveries of our CBRNE threat response systems and related spare parts and
services against orders received in the second half of 2014 on a large program with the United States government. The increase
in earnings from operations and operating margin were primarily due to the increases in revenues and higher gross margins. The
increase in backlog was primarily due to additional orders for our CBRNE threat response systems that were received in the first
and fourth quarters of 2015.
Detection segment revenue for the year ended December 31, 2014 decreased by 5.0 percent compared to 2013. The decline
in year over year revenue in 2014 compared to 2013 was primarily due to reduced deliveries to United States customers across
most product lines. The increase in earnings from operations in 2014 was primarily due to realizing the benefit in 2014 from
restructuring measures taken in 2013. The increase in backlog was due to a large contract with the United States government that
had deliveries in 2015.
40
Liquidity and Capital Resources
At December 31, 2015, we had a total of $472.8 million in cash and cash equivalents, $129.6 million of which was in the
United States and $343.2 million at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 2014 of
$531.4 million, of which $164.1 million was in the United States and $367.3 million at our foreign subsidiaries. We intend to
indefinitely reinvest the cash at our foreign subsidiaries in operations and other activities outside the United States. The decrease
in cash and cash equivalents in 2015 was primarily due to $123.2 million spent for the repurchase of our common stock, $92.3
million spent on the acquisition of DVTEL, Inc., $68.2 million spent on capital expenditures and dividends paid of $61.4 million,
partially offset by cash provided from operations of $275.8 million.
Cash provided by operating activities in 2015 totaled $275.8 million compared to $226.2 million in 2014 and $355.0 million
in 2013. The increase in cash provided from operations in 2015 compared to 2014 was primarily due to the increase in net earnings.
The decrease in cash provided from operations in 2014 compared to 2013 was primarily related to lower net collections of accounts
receivable.
Cash used for investing activities for the year ended December 31, 2015 totaled $134.8 million, consisting of $92.3 million,
net of cash acquired, for the acquisition of DVTEL, Inc. and capital expenditures of $68.2 million, partially offset by $25.6 million
of proceeds from the sale of an investment in a third party. Cash used for investing activities for the year ended December 31,
2014 totaled $49.3 million, consisting of capital expenditures of $61.3 million, offset by $12.0 million of proceeds from the sale
of certain tangible assets and intellectual property related to the design and manufacturing of non-thermal micro-optics. Capital
expenditures in 2015 and 2014 included $33.0 million and $19.1 million, respectively, for building improvements for our new
facility in Goleta, California. Cash used for investing activities for the year ended December 31, 2013 totaled $72.1 million,
primarily consisting of capital expenditures of $52.1 million and $20.1 million for business acquisitions. Capital expenditures in
2013 included equipment purchases in the OEM & Emerging Markets segment related to the development of our new Lepton
camera core.
Cash used by financing activities for the years ended December 31, 2015 and 2014 totaled $166.5 million and $152.0 million,
respectively, primarily consisting of the repurchase of shares of our common stock and the payment of dividends, partially offset
by proceeds from shares issued pursuant to stock-based compensation plans. Cash used in financing activities for the year ended
December 31, 2013 totaled $66.1 million, primarily consisting of the payment of dividends and repurchases of our common stock,
offset by net borrowings of $138.8 million against our term loan facility.
On February 8, 2011, we signed a Credit Agreement (“Credit Agreement”) with Bank of America, N.A., U.S. Bank National
Association, JPMorgan Chase Bank N.A. and other Lenders. The Credit Agreement provides for a $200 million, five-year revolving
line of credit. On April 5, 2013, the Credit Agreement was amended to extend the maturity of the revolving credit facility from
February 8, 2016 to April 5, 2018 in addition to incorporating a $150 million term loan facility maturing April 5, 2019. We have
the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the revolving
line of credit under the Credit Agreement by an additional $150 million at any time prior to April 5, 2018. The Credit Agreement
allows us to borrow in United States dollars, euros, Swedish kronor, British pound sterling, Japanese yen, Canadian dollars,
Australian dollars and other agreed upon currencies. The Credit Agreement requires us to pay a commitment fee on the amount
of unused revolving commitments at a rate, based on the Company’s total leverage ratio, which ranges from 0.25 percent to 0.40
percent per annum. The Credit Agreement contains two financial covenants that require the maintenance of a total leverage ratio
and an interest coverage ratio with which we were in compliance at December 31, 2015. The five-year revolving line of credit
available under the Credit Agreement and the term loan facility thereunder are not secured by any of our assets.
As noted above, the Credit Agreement amendment of April 5, 2013 incorporated a $150 million term loan facility that matures
on April 5, 2019. On April 5, 2013 we drew down $150 million under the term loan facility, electing one-month LIBOR as the
basis for the interest rate. Interest is accrued at LIBOR plus the scheduled spread and is paid monthly. By entering into interest
rate swap agreements, we have effectively fixed the basis for calculating the interest rate on the term loan. The effective interest
rate paid is equal to the fixed rate in the swap agreements plus the credit spread then in effect. At December 31, 2015, the effective
interest rate on the term loan was 2.49 percent per annum. Principal payments on the term loan of $3.75 million are made in
quarterly installments which commenced on June 30, 2013 and will continue through December 31, 2018 with the final maturity
payment on the term loan including any accrued interest due on April 5, 2019.
At December 31, 2015, we had no revolving loans outstanding under the Credit Agreement and the commitment fee on the
amount of unused revolving credit was 0.30 percent per annum. We had $30.1 million and $44.0 million of letters of credit
outstanding under the Credit Agreement at December 31, 2015 and 2014, respectively, which reduced the total available revolving
credit under the Credit Agreement.
41
On August 19, 2011, the Company issued $250 million aggregate principal amount of its 3.75 percent senior unsecured notes
due September 1, 2016 (the "Notes"). The net proceeds from the issuance of the Notes were approximately $247.7 million, after
deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest is payable
on the Notes semi-annually in arrears on March 1 and September 1. The proceeds from the Notes have been used for general
corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of our common
stock. We expect to refinance these Notes in 2016.
United States income taxes have not been provided for on accumulated earnings of certain subsidiaries outside of the United
States as we currently intend to reinvest the earnings in operations outside the United States indefinitely. Should we subsequently
elect to repatriate such foreign earnings, we would need to accrue and pay United States income taxes, thereby reducing the amount
of our cash.
We believe that our existing cash combined with the cash we anticipate generating from operating activities, and our available
credit facilities and financing available from other sources, including the expected refinancing of our Notes, will be sufficient to
meet our cash requirements for the next twelve months. We do not have any significant commitments nor are we aware of any
significant events or conditions that are likely to have a material impact on our liquidity or capital resources.
Off-Balance Sheet Arrangements
As of December 31, 2015, we leased our non-owned facilities under operating lease agreements. We also leased certain
operating machinery and equipment and office equipment under operating lease agreements. Except for these operating lease
agreements, we do not have any off-balance sheet arrangements that have or are likely to have a material current or future effect
on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
As of December 31, 2015, our contractual obligations were as follows (in thousands):
Long-term debt, including interest. . . . . . $
Operating leases . . . . . . . . . . . . . . . . . . . .
Licensing rights . . . . . . . . . . . . . . . . . . . .
Post-retirement obligations . . . . . . . . . . .
Other obligations . . . . . . . . . . . . . . . . . . .
$
Payments Due by Period
Total
372,001
14,246
1,650
12,503
6
400,406
Less than
1 Year
273,824
5,148
550
432
5
279,959
$
$
$
$
1 – 3
Years
3 – 5
Years
More than
5 Years
34,013
6,078
1,100
816
1
42,008
$
$
64,163
2,601
—
784
—
67,548
$
$
—
419
—
10,471
—
10,890
Principal and interest on long-term debt, operating leases and licensing rights obligations are based upon contractual terms.
Actual payments may differ in terms of both timing and amounts.
The Company cannot make a reasonably reliable estimate of the period of potential cash settlement of its unrecognized tax
benefits of $15.0 million and, therefore, has not included the unrecognized tax benefits in the table of significant contractual
obligations as of December 31, 2015. For further detail on unrecognized tax benefits, see Note 14 to the Consolidated Financial
Statements in Item 8. We did not include approximately $30.1 million of standby letters of credit and performance bonds due to
the unlikely event of payment, if any, of amounts under those arrangements.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements in Item 8 for a discussion of recent accounting pronouncements.
42
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
We have assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates.
Similarly, certain revenues from products sold in countries outside the United States and costs associated with non-United States
operations are denominated in foreign currencies. For more information on our foreign currency translation, see Note 1 to the
Consolidated Financial Statements in Item 8. Assets and liabilities located outside the United States are primarily located in Europe.
Our investments in subsidiaries outside the United States with functional currencies other than the United States dollar are considered
long-term. We currently engage in forward currency exchange contracts and other similar hedging activities to reduce our economic
exposure to changes in exchange rates. At December 31, 2015, exchange contracts with a notional amount of approximately $91.9
million were outstanding. Because we market, sell and license our products throughout the world, we could be adversely affected
by weak economic conditions in international markets that could reduce demand for our products.
Our net investment in subsidiaries outside the United States, translated into United States dollars using the period-end
exchange rates, was approximately $874.0 million at December 31, 2015. The potential loss in fair value resulting from a
hypothetical 10 percent adverse change in foreign exchange rates would be approximately $87.4 million at December 31, 2015.
The increase in the potential loss in fair value is primarily due to the increase in the net investment of subsidiaries outside the
United States. We have no plans to liquidate any of our subsidiaries outside the United States, and therefore, foreign exchange rate
gains or losses on our international investments are reflected as a cumulative translation adjustment and do not increase or reduce
our reported net earnings.
Interest Rate Risk
Our exposure to changes in market interest rates relates primarily to interest paid on our floating rate long-term debt. Our
floating rate long-term debt consists of amounts borrowed under our term loan facility that bears interest at the one-month LIBOR
rate plus a scheduled spread. Fluctuations in market interest rates will cause interest expense increases or decreases on such long-
term debt.
As our risk management objectives include mitigating the risk of changes in cash flows attributable to changes in the designated
one-month LIBOR rate for the term loan facility, we entered into two interest rate swaps for the aggregate notional amount borrowed
under the term loan facility and fixed interest rates of 1.016 percent and 0.97 percent effective at the time the term loan was drawn
to hedge this exposure. Changes in the cash flows of the interest rate swaps are expected to exactly offset the changes in cash flows
attributable to fluctuations in the one-month LIBOR based interest payments. The net effect of these swap agreements is to convert
the floating interest rate basis to fixed rates of 1.016 percent and 0.97 percent.
See Liquidity and Capital Resources in Item 7 and Note 3, Note 9, and Note 11 to the Consolidated Financial Statements in
Item 8, for additional information on the Company's interest rate risk.
43
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item includes the following financial information:
Statement
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013 . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2015 and 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013. . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 . . . . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
45
46
47
48
49
50
51
79
44
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders of FLIR Systems, Inc.:
We have audited the accompanying consolidated balance sheets of FLIR Systems, Inc. (an Oregon Corporation) and
subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of FLIR Systems, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
FLIR Systems, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ KPMG LLP
Portland, Oregon
February 26, 2016
45
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
2015
2014
2013
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,557,067
803,506
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,530,654
780,281
$ 1,496,372
759,362
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
753,561
750,373
737,010
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,892
313,544
1,361
447,797
305,764
14,086
(1,167)
(12,601)
305,446
63,760
142,751
331,995
16,383
491,129
259,244
14,593
(1,405)
(3,473)
249,529
49,268
147,696
322,739
25,832
496,267
240,743
14,091
(1,058)
(1,276)
228,986
51,971
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
241,686
$
200,261
$
177,015
Net earnings per share:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.73
1.72
$
$
1.42
1.39
$
$
1.24
1.22
The accompanying notes are an integral part of these consolidated financial statements.
46
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 241,686
Other comprehensive (loss) income, net of tax:
$ 200,261
$ 177,015
Year Ended December 31,
2015
2014
2013
Change in minimum liability for pension plans, net of tax effects of
$238, $(27) and $1,682, respectively . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment on interest rate swap contracts . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . .
2,961
1,660
11,838
Total other comprehensive (loss) income. . . . . . . . . . . . . . . . . . . . . . $ (61,717) $ (89,409) $ 16,459
$ 193,474
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179,969
(212)
(735)
(88,462)
661
(602)
(61,776)
$ 110,852
The accompanying notes are an integral part of these consolidated financial statements.
47
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
December 31,
2014
(As
reclassified)
2015
Current assets:
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
472,785
326,098
393,092
95,539
1,287,514
272,629
55,429
596,316
141,302
53,210
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,406,400
$
531,374
354,658
320,605
93,691
1,300,328
247,094
54,102
553,335
133,212
61,240
$ 2,349,311
Current liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
$
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and related liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued product warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advance payments from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion, long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,540
31,933
54,806
13,406
33,848
40,930
201
5,987
264,694
585,345
93,750
3,623
10,457
63,710
98,173
27,878
62,065
13,538
28,276
51,810
4,586
8,231
15,000
309,557
357,986
9,193
11,096
51,706
Commitments and contingencies (Notes 12 and 13)
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at December 31,
2015 or 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.01 par value, 500,000 shares authorized, 137,350 and 139,579 shares issued
at December 31, 2015 and 2014, respectively, and additional paid-in capital . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,374
1,773,267
(125,126)
1,649,515
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,406,400
—
—
1,396
1,671,786
(63,409)
1,609,773
$ 2,349,311
The accompanying notes are an integral part of these consolidated financial statements.
48
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Common Stock and
Additional
Paid-in Capital
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Earnings
(Loss)
Total
Shareholders'
Equity
Balance, December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145,814
$
171,546
$ 1,418,814
$
9,541
$ 1,599,901
Net earnings for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit of common stock options exercised . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued pursuant to stock-based compensation plans, net .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit of common stock options exercised . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued pursuant to stock-based compensation plans, net .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit of common stock options exercised . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued pursuant to stock-based compensation plans, net .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(5,988)
956
—
—
—
140,782
—
—
(4,243)
3,040
—
—
—
139,579
—
—
(4,169)
1,940
—
—
—
137,350
—
551
(162,078)
4,849
28,087
—
—
42,955
—
12,751
(122,851)
37,774
30,767
—
—
1,396
177,015
—
—
—
—
(51,404)
—
1,544,425
200,261
—
(16,387)
—
—
(56,513)
—
1,671,786
—
—
—
—
—
—
16,459
26,000
—
—
—
—
—
—
(89,409)
(63,409)
177,015
551
(162,078)
4,849
28,087
(51,404)
16,459
1,613,380
200,261
12,751
(139,238)
37,774
30,767
(56,513)
(89,409)
1,609,773
—
1,611
(44,387)
17,071
25,683
—
—
1,374
241,686
—
(78,806)
—
—
(61,399)
—
$ 1,773,267
$
241,686
—
1,611
—
(123,193)
—
17,071
—
25,683
—
(61,399)
—
(61,717)
(61,717)
(125,126) $ 1,649,515
$
The accompanying notes are an integral part of these consolidated financial statements.
49
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income items not affecting operating cash flows: . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of certain assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in accrued payroll and other liabilities . . . . . . . . . . . . . . .
Decrease in accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in pension and other long-term liabilities. . . . . . . . . . . . . .
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH USED BY INVESTING ACTIVITIES:
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of certain assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH USED BY FINANCING ACTIVITIES:
Net proceeds of long-term debt, including current portion . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from shares issued pursuant to stock-based compensation plans . . . . . .
Excess tax benefit of stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2013
241,686
$
200,261
$
177,015
49,534
2,863
25,748
(19,166)
7,722
28,258
(74,816)
1,858
(4,333)
38,660
3,503
(20,072)
(9,319)
3,688
275,814
(68,234)
(92,260)
25,649
(134,845)
—
(15,000)
(123,193)
(61,399)
24,835
8,243
(24)
(166,538)
57,245
(1,242)
30,788
(4,129)
(791)
(76,705)
11,363
5,754
(24,261)
15,040
93
17,240
(8,501)
4,089
226,244
(61,262)
—
12,000
(49,262)
—
(15,000)
(139,238)
(56,513)
47,581
11,161
(18)
(152,027)
62,796
(2,709)
27,823
—
4,564
48,640
35,181
5,434
(1,520)
(8,617)
(659)
36,017
(18,898)
(10,102)
354,965
(52,061)
(20,073)
—
(72,134)
150,000
(11,250)
(162,078)
(51,404)
8,650
1,069
(1,100)
(66,113)
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(33,020)
(36,057)
4,019
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(58,589)
531,374
472,785
$
(11,102)
542,476
531,374
$
220,737
321,739
542,476
The accompanying notes are an integral part of these consolidated financial statements.
50
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Nature of Business and Significant Accounting Policies
FLIR Systems, Inc. (the "Company") is a world leader in sensor systems that enhance perception and awareness. The Company
was founded in 1978 and has since become a premier designer, manufacturer, and marketer of thermal imaging and other sensing
products and systems. The Company’s advanced sensors and integrated sensor systems enable the gathering and analysis of critical
information through a wide variety of applications in commercial, industrial, and government markets worldwide.
The Company’s goal is to both enable its customers to benefit from the valuable information produced by advanced sensing
technologies and to deliver sustained superior financial performance for its shareholders. The Company creates value for its
customers by providing advanced surveillance and tactical defense capabilities, improving personal and public safety and security,
facilitating air, ground, and maritime navigation, enhancing enjoyment of the outdoors, providing infrastructure inefficiency
information, conveying pre-emptive structural deficiency data, displaying process irregularities, and enabling commercial business
opportunities through its continual support and development of new thermal imaging data and analytics applications. The
Company’s business model meets the needs of a multitude of customers—it sells off-the-shelf products to a wide variety of markets
in an efficient, timely, and affordable manner as well as offers a variety of system configurations to suit specific customer
requirements. Centered on the design of products for low cost manufacturing and high volume distribution, the Company’s
commercial operating model has been developed over time and provides it with a unique ability to adapt to market changes and
meet its customers’ needs.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
All intercompany accounts and transactions were eliminated.
Reclassification
As a result of the retrospective adoption of Accounting Standards Update No. 2015-17, "Balance Sheet Classification of
Deferred Taxes," the Company made certain reclassifications to the prior year's deferred tax assets to conform to the balance sheet
presentation as of December 31, 2015. These reclassifications had no effect on consolidated financial position, shareholders' equity
or net cash flows for any of the periods presented. See "Recent accounting pronouncements" below for additional information.
Foreign currency translation
The assets and liabilities of the Company’s subsidiaries outside the United States are translated into United States dollars at
current exchange rates in effect at the balance sheet date. Revenues and expenses are translated at monthly average exchange rates.
Resulting translation adjustments are reflected in accumulated other comprehensive earnings (loss) within shareholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in currencies other than the
functional currency are reflected as other (income) expense, net, in the Consolidated Statements of Income as incurred.
The cumulative translation adjustment included in accumulated other comprehensive earnings (loss) is a loss of $123.7
million and a loss of $62.0 million at December 31, 2015 and 2014, respectively. Transaction gains and losses included in other
(income) expense, net, are a net loss of $2.5 million, a net gain of $0.2 million, and a net loss of $0.3 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
Revenue recognition
Revenue is recognized when persuasive evidence of an arrangement exists, upon delivery of the product to the customer at
a fixed or determinable price with a reasonable assurance of collection, passage of title and risk of loss to the customer as indicated
by the contractual terms and fulfillment of all significant obligations.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Revenue recognition - (Continued)
The Company designs, markets and sells products primarily as commercial, off-the-shelf products. Certain customers request
different system configurations, based on standard options or accessories that the Company offers. In general, revenue arrangements
do not involve acceptance provisions based upon customer specified acceptance criteria. In those limited circumstances when
customer specified acceptance criteria exist, revenue is deferred until customer acceptance if the Company cannot demonstrate
the system meets those specifications prior to shipment. For any contracts with multiple elements (i.e., training, installation,
additional parts, etc.) the Company allocates revenue among the deliverables primarily based upon objective and reliable evidence
of fair value of each element in the arrangement. If objective and reliable evidence of fair value of any element is not available,
the Company uses an estimated selling price for purposes of allocating the total arrangement consideration among the elements.
Credit is not extended to customers and revenue is not recognized until the Company has determined that the risk of uncollectability
is minimal.
The Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance
of the Company’s products over a specified period of time, generally twelve to twenty-four months, at no cost to its customers.
Warranty liabilities are established at the time that revenue is recognized at levels that represent the Company’s estimate of the
costs that will be incurred to fulfill those warranty requirements.
Provisions for estimated losses on sales or related receivables are recorded when identified. Revenue includes certain shipping
and handling costs and is stated net of representative commissions and sales taxes. Service revenue is deferred and recognized
over the contract period, as is the case for extended warranty contracts, or recognized as services are provided.
Cost of goods sold
Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold
in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside
processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages
and fringe benefits, operating supplies, depreciation, occupancy costs, and purchasing, receiving and inspection costs.
Research and development
Expenditures for research and development activities are expensed as incurred.
Cash equivalents
The Company considers short-term investments that are highly liquid, readily convertible into cash and have maturities of
less than three months when purchased to be cash equivalents. Cash equivalents at December 31, 2015 and 2014 were $29.0 million
and $29.8 million, respectively, which were primarily investments in money market funds.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at the amounts the Company expects to collect. Credit limits are established through a process
of reviewing the financial history and stability of each customer. The Company regularly evaluates the collectability of its trade
receivables balances based on a combination of factors. If it is determined that a customer will be unable to fully meet its financial
obligation, the Company records a specific allowance to reduce the related receivable to the amount expected to be recovered. In
addition, the Company also records an allowance for all other customers based on certain other factors including the length of
time the receivables are past due and historical collection experience with individual customers.
Inventories
Inventories are stated at the lower of cost or market and include materials, labor, and manufacturing overhead. Cost is
determined based on a currently adjusted standard cost basis that approximates actual manufacturing cost on a first-in, first-out
basis.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Inventories - (Continued)
Inventory write-downs are recorded when conditions exist to indicate that inventories are likely to be in excess of anticipated
demand or are obsolete based upon the Company’s assumptions about future demand for its products and market conditions. The
Company regularly evaluates its ability to realize the value of inventories based on a combination of factors including the following:
historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new
product introductions. When recorded, write-downs reduce the carrying value of the Company’s inventories to their net realizable
value and create a new cost-basis in the inventories. Write-downs are reflected in cost of goods sold in the Consolidated Statements
of Income.
Demonstration units
The Company’s products which are being used as demonstration units are stated at the lower of cost or market and are
included in prepaid expenses and other current assets in the Consolidated Balance Sheets. Demonstration units are available for
sale and the Company periodically evaluates them as to marketability and realizable values. The carrying value of demonstration
units was $36.8 million and $39.6 million at December 31, 2015 and 2014, respectively.
Property and equipment
Property and equipment are stated at cost and are depreciated using a straight-line methodology over their estimated useful
lives. Repairs and maintenance are charged to expense as incurred.
Goodwill
Goodwill is reviewed during the third quarter of each year, or more frequently if warranted, for impairment to determine if
events or changes in business conditions indicate that the carrying value may not be recoverable. The Company did not recognize
any impairment charges on goodwill during the years ended December 31, 2015, 2014 and 2013. See Note 7, "Goodwill," for
additional information.
Intangible assets
Intangible assets are amortized using a straight-line methodology over their estimated useful lives. Intangible assets with
indefinite useful lives are evaluated annually for impairment, or more frequently if required. The Company did not recognize any
impairment charges on intangible assets with indefinite lives during the years ended December 31, 2015, 2014 and 2013.
Impairment of long-lived assets
Long-lived asset groups are reviewed for impairment when circumstances indicate that the carrying amounts may not be
recoverable. Impairment exists when the carrying value is greater than the expected undiscounted future cash flows expected to
be provided by the asset group. If impairment exists, the asset group is written down to its fair value. The Company did not recognize
any impairment charges on long-lived assets during the years ended December 31, 2015, 2014 and 2013.
Advertising costs
Advertising costs, which are included in selling, general and administrative expenses, are expensed as incurred. Advertising
costs for the years ended December 31, 2015, 2014 and 2013 were $18.7 million, $12.6 million and $10.7 million, respectively.
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Cost-basis investments
The Company has private company investments, which consist of investments for which the Company does not have the
ability to exercise significant influence, and are accounted for under the cost method. The investments are carried at cost and
adjusted only when the Company believes that events have occurred that are likely to have a significant other-than-temporary
adverse effect on the estimated fair value of the investments. If no such events have occurred, the fair value of the investments is
not calculated as it is not practicable to do so. The carrying value of those investments was $5.2 million and $13.5 million at
December 31, 2015 and 2014, respectively. The investments are included in other assets in the Consolidated Balance Sheets.
During the fourth quarter of 2015, the Company sold its investment in a private technology company that had a cost basis of $8.3
million for a total sales price of $28.5 million. As a result of the sale, the Company recorded a pre-tax gain of $20.2 million within
other (income) expense, net on the Consolidated Statement of Income and recorded cash receipts of $25.6 million as a cash inflow
from investing activities. The remaining $2.9 million receivable is recorded in other assets in the Consolidated Balance Sheet at
December 31, 2015.
Contingencies
The Company is subject to the possibility of loss contingencies arising in the normal course of business. An estimated loss
is accrued when the Company determines that it is probable that an asset has been impaired or a liability has been incurred and
the amount can be reasonably estimated. The Company regularly evaluates current available information to determine whether
such accruals and disclosures should be adjusted.
Earnings per share
Basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed similar to basic earnings per share except that the weighted shares outstanding are increased
to include additional shares from the assumed exercise of stock options, if dilutive, and the assumed issuance of shares upon vesting
of restricted stock awards.
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):
Year Ended December 31,
2015
2014
2013
Numerator for earnings per share:
Net earnings for basic and diluted earnings per share . . . . . . . . . . . $
241,686
$
200,261
$
177,015
Denominator for earnings per share:
Weighted average number of common shares outstanding . . . . . . .
Assumed exercise of stock options and vesting of restricted stock
awards, net of shares assumed reacquired under the treasury
stock method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,353
141,143
142,446
1,421
140,774
2,426
143,569
2,149
144,595
The effect of stock-based compensation awards for the years ended December 31, 2015, 2014 and 2013 that aggregated
354,000, 171,000 and 549,000 shares, respectively, have been excluded for purposes of diluted earnings per share since the effect
of their inclusion would have been anti-dilutive.
Supplemental cash flow disclosure (in thousands)
Cash paid for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,039
68,534
$
$
13,410
47,434
$
$
12,922
88,277
Year Ended December 31,
2015
2014
2013
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Stock-based compensation
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards and shares
expected to be issued under the Company's employee stock purchase plan. Nonvested stock awards (referred to as restricted stock
unit awards) are valued at the fair market value of the Company's stock, discounted for expected dividends, on the date of grant,
except for market-based restricted stock units for which the fair value is determined on the date of grant using a lattice-based
option-pricing valuation model that incorporates a Monte-Carlo simulation. The Company recognizes the compensation expense
for all stock-based compensation awards on a straight-line basis over the requisite service period of each award.
The following table sets forth the stock-based compensation expense and related tax benefit recognized in the Consolidated
Statements of Income for the years ended December 31, 2015, 2014 and 2013 (in thousands):
Year Ended December 31,
2015
2014
2013
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense before income taxes . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense after income taxes . . . $
3,001
4,694
18,053
25,748
(7,441)
18,307
$
$
2,706
5,218
22,864
30,788
(7,475)
23,313
$
$
2,591
4,938
20,294
27,823
(8,598)
19,225
Stock-based compensation expense capitalized in the Consolidated Balance Sheets as of December 31, 2015, 2014 and 2013
is as follows (in thousands):
December 31,
2015
2014
2013
Capitalized in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
691
$
713
$
734
As of December 31, 2015, the Company had approximately $37.0 million of total unrecognized stock-based compensation
costs, net of estimated forfeitures, to be recognized over a weighted average period of 1.92 years.
The fair value of the stock-based awards granted in the years ended December 31, 2015, 2014 and 2013 was estimated with
the following weighted-average assumptions:
Stock option awards:
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2%
1.4%
4.1 years
26.6%
1.0%
1.2%
4.4 years
28.7%
0.3%
1.5%
4.3 years
33.7%
2015
2014
2013
Market-based restricted stock awards:
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility of S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.9%
0.0%
4.0 years
27.5%
23.4%
—
—
—
—
—
0.3%
0.0%
2.2 years
28.8%
18.1%
Employee stock purchase plan:
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4%
1.5%
6 months
21.5%
0.3%
1.2%
6 months
23.9%
0.1%
1.4%
6 months
28.1%
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Stock-based compensation - (Continued)
The Company uses the United States Treasury (constant maturity) interest rate on the date of grant as the risk-free interest
rate and uses historical volatility as the expected volatility. The Company’s determination of expected term is based on an analysis
of historical and expected exercise patterns. In 2015, 2014 and 2013, all stock options granted were time-based options. The
Company uses an estimated forfeiture rate of 5 percent of the stock-compensation expense of non-executive employees based on
an analysis of historical and expected forfeitures.
During the years ended December 31, 2015, 2014 and 2013, the Company granted approximately 804,000, 685,000 and
1,173,000 time-vested restricted stock units, respectively. The fair value of time-vested restricted stock units is fixed and determined
on the date of grant based upon the Company's stock price on the date of grant. The weighted average fair values of the time-
vested restricted stock units granted during the years ended December 31, 2015, 2014 and 2013 were $26.30, $32.80 and $23.98,
respectively.
During the year ended December 31, 2015, the Company granted approximately 128,000 market-based restricted stock units.
These units may be earned based upon the Company's total shareholder return compared to the total shareholder return over a three
year period of the component company at the 60th percentile level in the S&P 500 Index. Shares vested under the market-based
restricted stock unit awards must be held by the participant for a period of one year from the vest date. The fair value of the market-
based restricted stock units granted during the year ended December 31, 2015 was $25.55. The total fair value of the restricted
stock unit awards granted during the year ended December 31, 2015 in the table below of $27.2 million includes $3.3 million of
grant date fair value associated with the market-based restricted stock units.
The weighted-average fair value of stock-based compensation awards granted and vested, and the intrinsic value of options
exercised during the period were (in thousands, except per share amounts):
Years Ended December 31,
2015
2014
2013
Stock option awards:
Weighted average grant date fair value per share . . . . . . . . . . . . . . . $
Total fair value of awards granted. . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total fair value of awards vested . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . $
5.60
4,170
4,290
15,585
Restricted stock unit awards:
Weighted average grant date fair value per share . . . . . . . . . . . . . . . $
Total fair value of awards granted. . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total fair value of awards vested . . . . . . . . . . . . . . . . . . . . . . . . . . . $
29.12
27,150
24,458
Employee stock purchase plan:
Weighted average grant date fair value per share . . . . . . . . . . . . . . . $
Total fair value of shares estimated to be issued. . . . . . . . . . . . . . . . $
5.83
951
$
$
$
$
$
$
$
$
$
7.41
4,947
4,662
35,663
32.80
22,484
30,277
7.38
1,144
$
$
$
$
$
$
$
$
$
5.92
6,095
5,059
4,642
23.94
28,239
13,846
5.94
1,169
The total amount of cash received from the exercise of stock options in the years ended December 31, 2015, 2014 and 2013
was $20.8 million, $44.2 million and $4.6 million, respectively, and the related tax benefit realized from the exercise of the stock
options was $3.9 million, $12.8 million and $0.6 million, respectively.
The Company elected to adopt the “long-haul” method to calculate the historical pool of windfall tax benefits, which calculates
on a grant by grant basis, the windfall or excess tax benefit that arose upon the exercise of each stock option, based on a comparison
to the total tax deduction to the “as-if” deferred tax asset that would have been recorded had the Company followed the recognition
provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718,
“Compensation-Stock Compensation.” Additionally, the Company elected to adopt the “tax-law ordering” method of measuring
the timing in which tax deductions on stock option exercises should be recognized in the consolidated financial statements.
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Concentration of risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts
receivable. Concentration of credit risk with respect to accounts receivable is limited because a relatively large number of
geographically diverse customers make up the Company’s customer base, thus diversifying the trade credit risk. The Company
controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs credit evaluations
for all new customers and requires letters of credit, bank guarantees and advanced payments, if deemed necessary.
A substantial portion of the Company’s revenue is derived from sales to United States and foreign government agencies (see
Note 17, "Operating Segments and Related Information"). The Company also purchases certain key components from sole or
limited source suppliers.
The Company maintains cash deposits with major banks that from time to time may exceed federally insured limits. The
Company periodically assesses the financial condition of the institutions and instruments in which it invests, and adjusts its
investment balances to mitigate the risk of principal loss.
Use of estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires
management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. Significant estimates and judgments made by management of the Company include matters such as collectability of accounts
receivable, realizability of inventories, recoverability of deferred tax assets, impairment tests of goodwill, intangible assets and
other long-lived assets, recognition and measurement of loss contingencies and adequacy of warranty accruals. Actual results could
differ from those estimates. The Company believes that the estimates used are reasonable.
Accumulated other comprehensive earnings (loss)
Accumulated other comprehensive earnings (loss) includes cumulative translation adjustments, fair value adjustments on
cash flow hedges and changes in minimum liability for pension plans. Foreign currency translation adjustments included in
comprehensive income were not tax affected as investments in international affiliates are deemed to be indefinite in duration.
The following table sets forth the changes in the balances of each component of accumulated other comprehensive earnings
(loss) for the year ended December 31, 2015:
Pension
Plans
Items
Cash
Flow
Hedge
Items
Foreign
Currency
Items
Total
December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,378) $
925
$ (61,956) $
(63,409)
Other comprehensive income (loss) before reclassifications, net of tax
Amounts reclassified from accumulated other comprehensive
earnings (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income (loss), net of tax . . . .
Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500
161
661
$ (1,717) $
(1,135)
(61,776)
(62,411)
533
(602)
323
—
(61,776)
694
(61,717)
$ (123,732) $ (125,126)
The amounts reclassified from accumulated other comprehensive earnings (loss) for pension plan items have been recorded
in selling, general and administrative expenses and amounts reclassified for cash flow hedge items have been recorded to interest
expense in the Company's Consolidated Statement of Income for the year ended December 31, 2015.
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09,
"Revenue from Contracts with Customers" ("ASU 2014-09") which establishes new guidance under which companies will
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides for additional
disclosure requirements. While ASU 2014-09 was to be effective for annual periods and interim periods beginning after
December 15, 2016, on July 9, 2015, the FASB approved the deferral of the effective date to periods beginning on or after December
15, 2017. Accordingly, the Company currently intends to adopt ASU 2014-09 on January 1, 2018, and is currently evaluating the
impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Accounting for Share-Based Payments When
the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period" ("ASU 2014-12")
which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated
as a performance condition. ASU 2014-12 is effective for annual and interim periods within the annual period beginning after
December 15, 2015. Accordingly, the Company currently intends to adopt ASU 2014-12 on January 1, 2016, and does not expect
the adoption of ASU 2014-12 to have a material impact on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements—
Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" ("ASU
2014-15"). Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and
to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning
after December 15, 2016. Accordingly, the Company currently intends to adopt ASU 2014-15 on January 1, 2017, and does not
expect the adoption of ASU 2014-15 to have any impact on its consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, "Interest-Imputation of Interest (Subtopic
835-30)" ("ASU 2015-03"), which simplifies the presentation of debt issuance costs by requiring that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. ASU 2015-03 is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2015, with early adoption permitted and should be applied retrospectively. The Company adopted
ASU 2015-03 effective as of January 1, 2015 and the adoption of ASU 2015-03 did not have a material impact on its consolidated
financial statements.
In July 2015, the FASB issued FASB Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the
Measurement of Inventory" ("ASU 2015-11"). The amendments in this update require inventory to be measured at the lower of
cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with
earlier application permitted. The Company currently intends to adopt ASU 2015-11 on January 1, 2017, and does not expect the
adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No 2015-16, "Business Combinations (Topic
805)" ("ASU 2015-16"), which requires that an acquirer recognize adjustments to provisional amounts that are identified during
the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for
financial statements issued for fiscal years and interim periods beginning after December 15, 2015, with early adoption permitted,
and is to be applied on a prospective basis. Effective October 1, 2015, the Company adopted ASU 2015-16. The adoption of ASU
2015-16 did not have a material impact on the Company's consolidated financial statements.
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 1.
Nature of Business and Significant Accounting Policies—(Continued)
Recent accounting pronouncements - (Continued)
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred
Taxes" ("ASU 2015-17"). This standard requires that deferred tax liabilities and assets be classified as noncurrent on the balance
sheet. It is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. Effective
December 31, 2015, the Company retrospectively adopted this standard, which resulted in the reclassification of $34.2 million
from current assets to deferred income taxes, net in non-current assets and $4.7 million from current assets to deferred income
taxes in non-current liabilities on the Consolidated Balance Sheet as of December 31, 2014.
In January 2016, the FASB issued Accounting Standards Update 2016-01, "Financial Instruments – Overall: Recognition
and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The pronouncement revises the classification
and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial
liabilities measured at fair value. ASU 2016-01 requires the change in fair value of many equity investments to be recognized in
net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption
permitted. The Company currently intends to adopt ASU 2016-01 on January 1, 2018, and is currently evaluating the potential
effects of adopting the provisions of ASU 2016-01.
Note 2.
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”:
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities,
interest rates, prepayment speeds and credit risk; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own
assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing
in those securities.
The Company had $29.0 million and $29.8 million of cash equivalents at December 31, 2015 and 2014, respectively, which
were primarily investments in money market funds. The Company has categorized its cash equivalents as a Level 1 financial asset,
measured at fair value based on quoted prices in active markets of identical assets. All cash equivalents are in instruments that
are convertible to cash daily. The fair value of the Company’s forward currency contracts and interest rate swap contracts as of
December 31, 2015 and 2014 are disclosed in Note 3, "Derivative Financial Instruments," and based on Level 2 inputs. The fair
value of the Company’s senior unsecured notes as described in Note 11, "Long-Term Debt," is approximately $254.1 million based
upon Level 2 inputs at December 31, 2015. The fair value of the Company's term loan, also described in Note 11, approximates
the carrying value due to the variable market rate used to calculate interest payments. The Company does not have any other
significant financial assets or liabilities that are measured at fair value.
Note 3.
Derivative Financial Instruments
Foreign Currency Exchange Rate Risk
The Company’s foreign businesses enter into contracts with customers and vendors that are denominated in currencies other
than their functional currencies. To protect the functional currency equivalent cash flows associated with certain of these contracts,
the Company enters into foreign currency forward contracts. The Company’s activities involving foreign currency forward contracts
are designed to hedge the changes in the functional currency equivalent cash flows due to movements in foreign exchange rates
compared to the functional currency. The Company manages exposure to counterparty non-performance credit risk by entering
into foreign currency forward contracts only with major financial institutions that are expected to fully perform under the terms
of such contracts. 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. The net amount of the gains and losses related to derivative
instruments recorded in other (income) expense, net for the year ended December 31, 2015, 2014 and 2013 were a loss of $6.7
million, a loss of $8.3 million and a gain of $4.6 million, respectively.
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 3.
Derivative Financial Instruments - (Continued)
Foreign Currency Exchange Rate Risk - (Continued)
In general, these gains and losses are offset in the Consolidated Statements of Income by the reciprocal gains and losses from
the underlying assets or liabilities which originally gave rise to the exposure.
Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent the Company's
total exposure to foreign currency gains or losses. The table below presents the net notional amounts of the Company’s outstanding
foreign currency forward contracts by currency at December 31, 2015 and 2014 (in thousands):
Swedish kroner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Canadian dollar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
British pound sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brazilian real. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2015
59,198
10,799
10,203
6,440
2,342
2,124
281
526
91,913
$
$
2014
67,809
17,446
14,928
2,449
6,566
3,718
5,391
701
119,008
At December 31, 2015, the Company’s foreign currency forward contracts, in general, had maturities of six months or less.
The carrying amount of the foreign exchange contracts included in the Consolidated Balance Sheets are as follows (in
thousands):
Foreign exchange contracts . . . . . . . . . . . $
767
$
1,314
$
112
$
3,247
December 31, 2015
December 31, 2014
Other Current
Assets
Other Current
Liabilities
Other Current
Assets
Other Current
Liabilities
Interest Rate Swap Contracts
The Company's outstanding debt at December 31, 2015 consists of fixed rate notes and a floating rate term loan. The Company
maintains its floating rate revolver for flexibility to fund working capital needs and for other uses of cash. Interest expense on the
Company's floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR (also known as
the Eurocurrency rate). Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given
amount of floating rate debt.
The Company is managing its interest rate risk related to floating rate debt through interest rate swaps in which the Company
receives floating rate payments and makes fixed rate payments. The impact of the interest rate swaps is to fix the floating rate basis
for the calculation of interest on the term loan at the levels indicated in the table below. The effective interest rate paid is equal to
the fixed rates shown below plus the credit spread then in effect. At December 31, 2015, the effective interest rate on the term loan
was 2.49 percent. As of December 31, 2015, the following interest rate swaps were outstanding:
Contract Date
March 15, 2013 . . . . . . . . . . .
March 29, 2013 . . . . . . . . . . .
Notional Amount
(in millions)
Fixed Rate
Effective Date
$
$
54.4
54.4
1.02%
0.97%
April 5, 2013
April 5, 2013
Maturity Date
March 31, 2019
March 31, 2019
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 3.
Derivative Financial Instruments - (Continued)
Interest Rate Swap Contracts - (Continued)
These interest rate swaps are cash flow hedges and are recorded as an asset or liability in the Company's Consolidated Balance
Sheets at fair value. Fair value adjustments are recorded as an adjustment to accumulated other comprehensive earnings (loss),
except that any gains and losses on ineffectiveness of the interest rate swaps would be recorded as an adjustment to other (income)
expense, net. The net fair value carrying amount of the Company's interest rate swaps was $0.3 million, of which $0.5 million and
$0.2 million have been recorded to other assets and other current liabilities, respectively, in the Consolidated Balance Sheet as of
December 31, 2015. The amount recognized in other comprehensive income (loss) during the year ended December 31, 2015 was
a loss of $0.6 million, which is net of tax effects.
Note 4.
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts. The following table summarizes the Company’s allowance
for doubtful accounts and the activity for 2015, 2014 and 2013 (in thousands):
Year Ended December 31,
2015
2014
2013
Allowance for doubtful accounts, beginning of year . . . . . . . . . . . . $
Charges to costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs of uncollectible accounts, net of recoveries . . . . . . .
Currency translation adjustments. . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts, end of year . . . . . . . . . . . . . . . . . $
8,014
807
(1,568)
(400)
6,853
$
$
7,674
1,723
(961)
(422)
8,014
$
$
6,574
1,571
(505)
34
7,674
Note 5.
Inventories
Inventories consist of the following (in thousands):
Raw material and subassemblies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Work-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2015
2014
216,107
38,639
138,346
393,092
$
$
181,618
37,139
101,848
320,605
Note 6.
Property and Equipment
Property and equipment are summarized as follows (in thousands):
Estimated
Useful Life
December 31,
2015
2014
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 years
3 to 7 years
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 10 years
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
22,972
163,420
241,310
98,308
526,010
(253,381)
272,629
$
$
24,536
133,152
236,267
101,289
495,244
(248,150)
247,094
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 was $32.5 million, $34.6 million and $35.9
million, respectively. Property and equipment, net, as of December 31, 2015, includes land and a building valued at approximately
$2.2 million that are held for sale.
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 7.
Goodwill
The carrying value of goodwill and the activity for the two year period ending December 31, 2015 are as follows (in thousands):
Balance, December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 575,701
(21,411)
(955)
553,335
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill from acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . .
57,992
(15,011)
Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 596,316
During the year ended December 31, 2015, the Company recorded $58.0 million of goodwill in connection with the
preliminary purchase price allocation associated with its acquisition of DVTEL, Inc. ("DVTEL"). See Note 18, "Business
Acquisitions," for additional information. Other activity in the year ended December 31, 2014 is a reduction in goodwill associated
with the Company's sale of certain tangible assets and intellectual property related to the design and manufacturing of non-thermal
micro-optics out of the OEM & Emerging Markets segment.
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 these assets exceeds their fair value. During the third quarter of 2015, the Company
completed its annual review of goodwill and determined that no impairment of its recorded goodwill was necessary. As of
December 31, 2015, there had been no triggering events or indicators of impairment that would require an updated impairment
review.
Note 8.
Intangible Assets
Intangible assets are summarized as follows (in thousands):
Product technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and trade name portfolios . . . . . . . . . . . . . . . . . . . . . . .
Trade name portfolio not subject to amortization . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired identifiable intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net acquired identifiable intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Weighted
Average
Estimated
Useful Life
10 years
12 years
14 years
Indefinite
n/a
8 years
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired in-place leases and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net acquired in-place leases and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 years
7 years
62
December 31,
2015
2014
$
76,182
69,272
7,540
37,673
2,250
1,474
194,391
(58,173)
136,218
6,104
(1,671)
4,433
67,620
80,206
7,160
38,317
550
21,012
214,865
(87,997)
126,868
9,905
(4,544)
5,361
2,080
(1,429)
651
141,302
$
9,309
(8,326)
983
133,212
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 8.
Intangible Assets - (Continued)
Intangible assets are summarized as follows (in thousands):
During the year ended December 31, 2015, the Company acquired $27.4 million of identifiable intangible assets as part of
the acquisition of DVTEL, as described in Note 18, "Business Acquisitions." During the year ended December 31, 2014, the
Company purchased certain patents for $5.8 million.
The aggregate amortization expense recorded in 2015, 2014 and 2013 was $16.4 million, $21.1 million and $24.7 million,
respectively. For intangible assets recorded at December 31, 2015, the estimated future aggregate amortization expense for the
years ending December 31, 2016 through 2020 is approximately (in thousands):
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,708
14,964
13,129
12,375
10,682
Note 9.
Credit Agreement
On February 8, 2011, the Company entered into a Credit Agreement (“Credit Agreement”) with Bank of America, N.A.,
U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders. The Credit Agreement provides for a $200 million,
five-year revolving line of credit. On April 5, 2013, the Credit Agreement was amended to extend the maturity of the revolving
credit facility from April 8, 2016 to April 5, 2018 in addition to incorporating a $150 million term loan facility maturing April 5,
2019. The amendment also incorporated a revised schedule of fees and interest rate spreads. The Company has the right, subject
to certain conditions including approval of additional commitments by qualified lenders, to increase the revolving line of credit
under the Credit Agreement by an additional $150 million at any time prior to April 5, 2018. The Credit Agreement allows the
Company and certain designated subsidiaries to borrow in United States dollars, euros, Swedish kronor, British pound sterling,
Japanese yen, Canadian dollars, Australian dollars and other agreed upon currencies. Borrowing rates under the Credit Agreement
are determined at the Company’s option at the time of each borrowing and are generally based on either the prime lending rate of
Bank of America, N.A. or the rate of interest paid for deposits in the relevant currency, plus a specified spread based on an established
consolidated total leverage ratio pricing grid, which specified margins ranging from 0.25 percent to 2.25 percent per annum based
on the type of loan and the total leverage ratio of the Company. Including the respective spreads, the one-month LIBOR interest
rate was 1.924 percent per annum and the prime lending rate was 3.50 percent per annum at December 31, 2015. The Credit
Agreement requires the Company to pay a commitment fee on the amount of unused revolving commitments at a rate, based on
the Company’s total leverage ratio, which commitment fee rate ranges from 0.25 percent to 0.40 percent of unused revolving
commitments. At December 31, 2015, the commitment fee rate was 0.30 percent per annum. The Credit Agreement contains two
financial covenants that require the maintenance of a total leverage ratio and an interest coverage ratio, with which the Company
was in compliance at December 31, 2015. The credit facilities available under the Credit Agreement are unsecured. At December 31,
2015, the Company had no revolving loans outstanding under the Credit Agreement and had $30.1 million of letters of credit
outstanding, which reduces the total available revolving credit under the Credit Agreement.
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 10.
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 for 2015, 2014 and 2013 (in thousands):
Year Ended December 31,
2015
2014
2013
Accrued product warranties, beginning of year . . . . . . . . . . . . . . . . . . . . $
Amounts paid for warranty services. . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty provisions for products sold . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments and other . . . . . . . . . . . . . . . . . . . .
Accrued product warranties, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . $
16,175
(12,821)
13,074
395
(309)
16,514
Current accrued product warranties, end of year. . . . . . . . . . . . . . . . . . . . $
Long-term accrued product warranties, end of year . . . . . . . . . . . . . . . . . $
13,406
3,108
$
$
$
$
17,732
(10,267)
9,880
—
(1,170)
16,175
13,538
2,637
$
$
$
$
16,152
(10,372)
10,917
—
1,035
17,732
14,665
3,067
Note 11.
Long-Term Debt
Long-term debt consists of the following (in thousands):
Unsecured notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discounts and issuance costs of unsecured notes . . . . . . . . . . . . . . .
$
Current portion, long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
250,000
108,750
(306)
358,444
264,694
93,750
$
$
$
$
250,000
123,750
(764)
372,986
15,000
357,986
December 31,
2015
2014
In August 2011, the Company issued $250 million aggregate principal amount of its 3.75 percent senior unsecured notes due
September 1, 2016 (the “Notes”). The net proceeds from the issuance of the Notes were approximately $247.7 million, after
deducting underwriting fees and other offering expenses, which are being amortized over a period of five years. Interest is payable
on the Notes semiannually in arrears on March 1 and September 1. The proceeds from the Notes have been used for general
corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of the
Company’s common stock.
On April 5, 2013, the Company borrowed $150 million under the term loan facility incorporated in the Credit Agreement.
Principal payments on the term loan of $3.75 million are made quarterly and commenced on June 30, 2013 and will continue
through December 31, 2018 with final maturity payment in respect of the term loan, including any interest due, on April 5, 2019.
Interest is accrued at a one-month LIBOR rate, plus the scheduled spread and paid monthly. See Note 3, "Derivative Financial
Instruments - Interest rate swap contracts" for additional information on the effective interest rate on the term loan at December
31, 2015.
Note 12.
Commitments
The Company leases some of its primary facilities under various operating leases that expire in 2015 through 2023. The
Company also leases certain operating machinery and equipment and office equipment under operating lease agreements. Total
net rent expense for the years ended December 31, 2015, 2014 and 2013 amounted to $12.2 million, $14.0 million and $18.3
million, respectively.
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 12.
Commitments - (Continued)
The future minimum obligations under all non-cancelable leases and other contractual obligations are as follows (in
thousands):
Net
Operating
Leases
Other
Contractual
Obligations
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,148
3,464
2,614
1,611
990
419
14,246
$
$
555
551
550
—
—
—
1,656
Note 13.
Contingencies
FLIR Systems, Inc. and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.) (together,
the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007 in the United States
District Court for the Eastern District of Texas. Raytheon's complaint, as amended, asserted claims for tortious interference, patent
infringement, trade secret misappropriation, unfair competition, breach of contract and fraudulent concealment. The FLIR Parties
filed an answer to the complaint on September 2, 2008, in which they denied all material allegations. On October 27, 2010, the
FLIR Parties and Raytheon entered into a settlement agreement that resolved the patent infringement claims (the "Patent Claims")
pursuant to which the FLIR Parties paid $3 million to Raytheon and entitles the FLIR Parties to certain license rights in the patents
that were the subject of the Patent Claims. On October 28, 2014, a four-week trial began with respect to Raytheon's remaining
claims of misappropriations of trade secrets and claims related to 31 alleged trade secrets. On November 24, 2014, a jury in the
United States District Court for the Eastern District of Texas rejected Raytheon’s claims and determined that 27 of the alleged
trade secrets were not in fact trade secrets and that neither Indigo, prior to its acquisition by FLIR Systems, Inc., nor FLIR Systems,
Inc. infringed any of the trade secrets claimed and awarded Raytheon no damages. The court has yet to rule on any post-trial
motion seeking to modify the jury verdict or on the FLIR Parties' motion for an award of attorney’s fees in the amount of $28
million as a prevailing party under the Texas Theft Liability Act. The matter remains ongoing and is subject to appeal and the
Company is unable to estimate the amount or range of potential loss or recovery, if any, which might result if the final determination
of this matter is favorable or unfavorable, but an adverse ruling on the merits of the original claims against the FLIR Parties, while
remote, could be material.
On October 22, 2014, the Company initially contacted the United States Department of State Office of Defense Trade Controls
Compliance (“DDTC”), pursuant to International Traffic in Arms Regulation (“ITAR”) § 127.12(c), regarding the unauthorized
export of technical data and defense services to dual and third country nationals in at least four facilities of the Company. On April
27, 2015, the Company submitted its initial report to DDTC regarding the details of the issues raised in the October 22, 2014
submission. DDTC subsequently notified the Company that it was considering administrative proceedings under Part 128 of ITAR
and requested a tolling agreement, which the Company executed on June 16, 2015. DDTC continues its review and the Company
is unable to reasonably estimate the time it may take to resolve the matter or the amount or range of potential loss, penalty or other
government action, if any, that may be incurred in connection with this matter. However, an unfavorable outcome could potentially
be material to the financial condition and results of operations of the Company in the period in which such an outcome becomes
estimable or known.
The Company is also subject to other legal proceedings, claims and litigation arising in the ordinary course of business. The
Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can
be reasonably estimated. The Company believes it has recorded adequate provisions for any probable and estimable losses. While
the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve such
matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 14.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events and basis
differences that have been recognized in the Company’s financial statements and tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the financial statement carrying amount and the tax basis of
assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse.
Pre-tax earnings by significant geographical locations are as follows (in thousands):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
The provisions for income taxes are as follows (in thousands):
Current tax expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2015
2014
2013
146,940
158,506
305,446
$
$
113,967
135,562
249,529
$
$
118,269
110,717
228,986
Year Ended December 31,
2015
2014
2013
35,029
6,074
19,884
60,987
10,752
1,052
(9,031)
2,773
63,760
$
$
30,224
5,511
11,389
47,124
1,207
(1,115)
2,052
2,144
49,268
$
$
38,249
4,413
13,483
56,145
(252)
(335)
(3,587)
(4,174)
51,971
As described in Note 1, "Nature of Business and Significant Accounting Policies", the Company has elected to retrospectively
adopt FASB ASU 2015-17 which requires deferred tax assets and liabilities to be recorded as non-current. This adoption resulted
in the reclassification of $34.2 million from current assets to deferred income taxes, net in other assets and $4.7 million from
current assets to deferred income taxes in other non-current liabilities on the Consolidated Balance Sheet as of December 31, 2014.
Net deferred tax assets (liabilities) were classified on the balance sheet as follows (in thousands):
Deferred tax assets, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2014
(As
reclassified)
54,102
(9,193)
44,909
13,277
$
$
2015
55,429
(3,623)
51,806
2,607
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 14.
Income Taxes—(Continued)
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities
were as follows (in thousands):
December 31,
2015
2014
Deferred tax assets:
Accrued liabilities and allowances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tax credit and loss carry-forwards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
27,170
29,297
15,628
10,494
6,184
1,373
90,146
(2,607)
87,539
(26,996)
(6,612)
(2,125)
(35,733)
51,806
$
34,389
25,858
19,530
10,565
4,608
4,334
99,284
(13,277)
86,007
(34,737)
(4,553)
(1,808)
(41,098)
44,909
The provision for income taxes differs from the amount of tax determined by applying the applicable United States statutory
federal income tax rate to pretax income as a result of the following differences:
Statutory federal tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in rates resulting from:
Foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign, federal and state income tax credits . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2015
2014
2013
35.0%
35.0%
35.0%
(7.8)
(2.1)
2.4
—
(6.4)
(0.2)
20.9%
(12.7)
(1.7)
2.1
—
(0.1)
(2.9)
19.7%
(11.6)
(2.2)
1.0
1.1
—
(0.6)
22.7%
The Company's foreign tax rate differential is primarily the result of a three-year agreement in Belgium, which expired on
July 31, 2015, as well as the impact of lower foreign statutory rates.
At December 31, 2015, the Company had United States tax net operating loss carry-forwards totaling approximately $4.6
million which expire between 2019 and 2031. In addition, the Company has various state net operating loss carry-forwards totaling
approximately $39.2 million which expire between 2016 and 2033. The federal and state net operating losses were primarily
generated by ICx Technologies, prior to its acquisition by the Company in 2010. Finally, the Company has various foreign net
operating loss carry-forwards totaling approximately $71.1 million, a portion of which expire between 2018 and 2033, and a portion
of which have an indefinite carry-forward period.
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 14.
Income Taxes—(Continued)
The tax benefits described above are accounted for using the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax basis of the assets and liabilities. To the extent that management assesses the realization of such assets to not be more
likely than not, a valuation allowance is required to be recorded. As of December 31, 2015, the Company has determined that a
valuation allowance against its deferred tax assets of $2.6 million is required, primarily related to certain acquired net operating
losses. A review of all available positive and negative evidence is considered, including past and future performance, the market
environment in which the Company operates, utilization of tax attributes in the past, length of carry-back and carry-forward periods,
and evaluation of potential tax planning strategies, when evaluating the realizability of deferred tax assets. The Company believes
that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred
tax assets.
United States income taxes have not been provided on accumulated undistributed earnings of certain subsidiaries outside
the United States, as the Company intends to reinvest the earnings in operations outside the United States indefinitely. As of
December 31, 2015, the cumulative amount of earnings upon which United States income taxes have not been provided is
approximately $722 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not
practicable.
The following table summarizes the activity related to unrecognized tax benefits, including amounts accrued for potential
interest and penalties (in thousands):
Year Ended December 31,
2015
2014
2013
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,401
1,446
299
(724)
(1,455)
—
14,967
$
$
29,533
1,457
12
(781)
(5,165)
(9,655)
15,401
$
$
35,143
979
714
(2,736)
(2,012)
(2,555)
29,533
The unrecognized tax benefits at December 31, 2015 relate to the United States, United Kingdom and various other foreign
jurisdictions, all of which would affect the Company’s effective tax rate if recognized.
On January 11, 2016, the European Commission announced a decision concluding that certain rules under Belgian tax
legislation are deemed to be incompatible with European Union regulations on state aid. As a result of this decision, the European
Commission has directed the Belgian Government to recover past taxes from certain entities, reflective of disallowed state aid,
which the Company expects to impact one of its subsidiaries covering a three-year period which concluded with the expiration of
an agreement in July 2015. Negotiations are ongoing between the Belgian Government and the European Commission to agree
on a methodology to calculate the applicable amounts for each company impacted by the decision. Although the Company has
not received a request for payment or other official notice, the Company has evaluated the potential impact of the European
Commission's decision in accordance with FASB ASC Topic 740, "Income Taxes," noting the recent decision could significantly
increase the Company's unrecognized tax benefits within the next twelve months. However, due to the ongoing negotiations and
uncertainty surrounding the calculation methodology and litigation process, the Company is currently unable to estimate the range
of the potential increase.
The Company classifies interest and penalties related to unrecognized tax benefits in income tax provision. As of
December 31, 2015, the Company had $1.1 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.
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 14.
Income Taxes—(Continued)
The Company files United States federal, state and foreign income tax returns in jurisdictions with varying statutes of
limitations. The Company currently has the following tax years open to examination by major taxing jurisdictions:
United States Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State of California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State of Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State of Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sweden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Years:
2012 - 2014
2012 - 2014
2011 - 2014
2012 - 2014
2011 - 2014
2011 - 2014
2011 - 2014
Note 15.
Stock-based Compensation
Stock Incentive Plans
The Company has a stock-based compensation program that provides equity incentives for employees, consultants and
directors. This program includes incentive and non-statutory stock options and nonvested stock awards (referred to as restricted
stock unit awards) 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.
The Company has granted time-based options, time-based restricted stock unit awards, and market-based restricted stock
unit awards. Options generally expire ten years from 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.
Shares issued as a result of stock option exercises and the distribution of vested restricted stock units are new shares.
The Company also has stock options and restricted stock unit awards issued as replacement awards in connection with the
acquisition of ICx Technologies in 2010.
Information with respect to stock option activity for 2015 is as follows:
Shares
(in thousands)
Weighted
Average
Exercise
Price
Outstanding at December 31, 2014 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . .
Exercisable at December 31, 2015 . . . . . . . . . . . . . . . . . .
Vested and expected to vest at December 31, 2015 . . . . .
5,571
745
(1,182)
(386)
4,748
3,621
4,691
$
$
$
$
25.14
30.82
17.67
30.83
27.49
26.58
27.45
Weighted
Average
Remaining
Contractual
Term
5.0
Aggregate
Intrinsic
Value
(in thousands)
5.5
4.5
5.5
$
$
$
13,475
12,631
13,433
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 15.
Stock-based Compensation - (Continued)
Stock Incentive Plans - (Continued)
Information with respect to restricted stock unit activity for 2015 is as follows:
Shares
(in thousands)
Weighted
Average Grant
Date Fair
Value
Outstanding at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested and distributed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,414
932
(788)
(852)
1,706
$
$
22.83
29.12
26.30
14.97
28.89
As of December 31, 2015, there were 12,569,000 shares of common stock reserved for future issuance under the stock
incentive plans.
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 Company reserved 5,000,000 shares of common stock for issuance under the ESPP.
There were 165,000 shares issued at the average purchase price of $24.36 during 2015 and 3,310,000 shares remained
available under the ESPP at December 31, 2015 for future issuance. Shares issued for ESPP purchases are new shares.
Note 16.
Other Employee Benefit Plans
Employee 401(k) Plans
The Company has a 401(k) Savings and Retirement Plan (the “Plan”) to provide for voluntary salary deferral contributions
on a pre-tax basis for employees within the United States in accordance with Section 401(k) of the Internal Revenue Code of 1986,
as amended. The Plan allows for contributions by the Company. The Company made and expensed matching contributions of $7.5
million, $6.9 million and $4.9 million during the years ended December 31, 2015, 2014 and 2013, respectively.
Pension Plans
The Company previously offered most of the employees outside the United States participation in a defined benefit pension
plan that has been curtailed. In addition, the Company provides a Supplemental Executive Retirement Plan (the “SERP”) for certain
officers of the Company based in the United States.
The Company has recorded changes to the minimum pension liability to accumulated other comprehensive earnings (loss)
and the estimated benefit to be paid in 2016 has been reported in other current liabilities. The remaining obligations are recorded
in pension and other long-term liabilities. The measurement date used for the pension plans is December 31.
Amounts recognized in other comprehensive (loss) income during the years ended December 31, 2015, 2014 and 2013, net
of tax, are as follows (in thousands):
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
70
Year Ended December 31,
2015
2014
2013
500
161
661
$
$
(372) $
160
(212) $
2,665
296
2,961
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 16.
Other Employee Benefit Plans - (Continued)
Pension Plans - (Continued)
Components of accumulated other comprehensive earnings (loss) related to the Company’s pension plans as of December 31,
2015 and 2014 are as follows (in thousands):
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2015
2014
(1,708) $
(9)
(1,717) $
(2,208)
(170)
(2,378)
A summary of the components of the net periodic pension expense for the benefit obligation and fund assets of the plans is
as follows (in thousands):
Year Ended December 31,
2015
2014
Change in benefit obligation:
Benefit obligation at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of plan assets at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unfunded status at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized in the Consolidated Balance Sheets:
$
11,813
156
353
(199)
(312)
(385)
11,426
$
— $
$
11,426
12,551
166
444
890
(1,338)
(900)
11,813
—
11,813
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
307
11,119
$
$
335
11,478
The weighted average assumptions used are as follows:
Year Ended December 31,
2015
2014
Net periodic benefit cost:
SERP:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of increase in compensation levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.75%
3.00%
4.75%
3.00%
Defined benefit pension plan for employees outside the United States:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.60%
1.90%
Funded status and projected benefit obligation:
SERP:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of increase in compensation levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.00%
3.00%
3.75%
3.00%
Defined benefit pension plan for employees outside the United States:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.60%
1.90%
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 16.
Other Employee Benefit Plans - (Continued)
Pension Plans - (Continued)
The discount rates used are based upon publicly listed indices for instruments with average maturities estimated to be
consistent with the respective obligations.
A pension liability of $2.8 million and $3.6 million as of December 31, 2015 and 2014, respectively, has been recognized
for the pension plans representing the excess of the unfunded accumulated benefit obligation over the accrued pension costs.
Benefits expected to be paid under the plans are approximately (in thousands):
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Five years thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
307
291
275
272
262
10,002
11,409
Components of net periodic benefit cost are as follows (in thousands):
Service costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
156
353
513
—
1,022
$
$
166
444
279
163
1,052
$
$
254
883
1,111
3,305
5,553
Year Ended December 31,
2015
2014
2013
Components of net periodic benefit cost expected to be recognized from amounts in accumulated other comprehensive
earnings (loss) during the year ending December 31, 2016 are as follows (in thousands):
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
148
24
172
Year Ending
December 31, 2016
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 17.
Operating Segments and Related Information
Operating Segments
The Company has six reporting 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. Effective January 1, 2015,
the Personal Vision Systems product line was transferred from the OEM & Emerging Markets segment to the Surveillance segment.
This product line includes hand-held and weapon-mounted thermal imaging systems for use by consumers. Accordingly, prior
period segment financial information in the tables below has been reclassified for the applicable prior periods for comparative
purposes. This reclassification had no impact on consolidated revenue or earnings (loss) from operations.
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 and video recording systems for use in commercial, critical
infrastructure, and home security applications. Products include thermal and visible-spectrum cameras, digital and networked
video recorders, and related software and accessories that enable the efficient and effective safeguarding of assets at all hours of
the day and through adverse weather conditions.
OEM & Emerging Markets
The OEM & Emerging Markets segment develops and manufactures thermal imaging camera cores and components that are
utilized by third parties to create thermal and other types of imaging systems. The segment also develops and manufactures
intelligent traffic monitoring and signal control systems as well as 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 threats for military force protection,
homeland security, and commercial applications.
The accounting policies of each of the segments are the same. The Company’s President and Chief Executive Officer evaluates
the performance of each segment based upon its revenue and earnings from operations. On a consolidated basis, these amounts
represent revenue and earnings from operations as represented in the Consolidated Statements of Income. Other consists of corporate
expenses and certain other operating expenses not allocated to the operating segments for management reporting purposes.
Intersegment revenues are recorded at cost and are eliminated in consolidation.
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.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 17.
Operating Segments and Related Information—(Continued)
Operating Segments - (Continued)
Operating segment information is as follows (in thousands):
Year Ended December 31,
2015
2014
(as reclassified)
2013
(as reclassified)
Revenue—External Customers:
Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OEM & Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maritime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
503,045
347,476
226,575
186,722
177,948
115,301
$ 1,557,067
$
519,982
354,124
179,090
199,096
192,636
85,726
$ 1,530,654
$
554,567
337,531
141,005
183,975
189,076
90,218
$ 1,496,372
Revenue—Intersegments:
Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OEM & Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maritime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10,761
9,951
12,033
33,059
2,108
—
(67,912)
$
7,209
1,793
11,017
21,856
2,936
95
(44,906)
$
— $
— $
Earnings (loss) from operations:
Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OEM & Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maritime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
145,637
112,353
28,140
41,065
13,611
26,904
(61,945)
305,764
$
$
127,222
98,954
24,871
50,249
24,494
10,958
(77,504)
259,244
$
$
5,928
7,312
—
25,063
—
1,730
(40,033)
—
135,550
81,070
17,340
39,269
22,287
8,888
(63,661)
240,743
Segment assets (accounts receivable, net and inventories):
Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OEM & Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maritime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2014
(as
reclassified)
$
$
309,473
119,629
59,182
79,053
67,775
40,151
675,263
2015
286,058
130,135
105,509
93,925
73,506
30,057
719,190
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 17.
Operating Segments and Related Information—(Continued)
Operating Segments - (Continued)
Segment goodwill:
Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OEM & Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maritime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2014
(as
reclassified)
$
$
121,268
155,527
45,710
72,687
109,980
48,163
553,335
2015
120,145
149,582
101,955
69,973
106,549
48,112
596,316
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):
Year Ended December 31,
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle East/Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada/Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
822,892
339,544
185,046
125,760
83,825
$ 1,557,067
2014
(as
reclassified)
783,685
$
350,118
164,633
138,186
94,032
$ 1,530,654
2013
(as
reclassified)
755,640
$
370,800
154,111
59,917
155,904
$ 1,496,372
Prior year revenue by geographical area in the table above has been reclassified to conform to the presentation provided for
the year ended December 31, 2015.
Long-lived assets are comprised 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):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
666,759
383,501
13,197
$ 1,063,457
2014
623,522
319,661
51,698
994,881
$
$
December 31,
Major Customers
Revenue derived from major customers is as follows (in thousands):
United States government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
309,948
$
310,431
$
354,902
Year Ended December 31,
2015
2014
2013
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 18.
Business Acquisitions
On November 30, 2015, the Company acquired 100% of the outstanding stock of DVTEL, a provider of software and hardware
technologies for advanced video surveillance, for approximately $97.5 million in cash, subject to customary post-closing
adjustments. The excess of the purchase price over the preliminary net tangible and identifiable intangible assets has been recorded
as goodwill within the Company's Security segment and is subject to the final determination on the valuation of assets acquired
and liabilities assumed.
The preliminary allocation of the purchase price for DVTEL is as follows (in thousands):
Cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other tangible assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,232
5,160
1,727
27,380
57,992
97,492
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, income taxes (including uncertain tax positions)
and certain other tangible assets and liabilities. The final allocation of the purchase price to the assets acquired and liabilities
assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of
the fair value of liabilities assumed are finalized during the year ended December 31, 2016. The preliminary goodwill of $58.0
million represents future economic benefits expected to arise from synergies from combining operations and the ability of DVTEL
to provide the Company domain knowledge and distribution channels in adjacent security markets.
The Company made an election under Section 338 of the Internal Revenue Code of 1986, as amended, which resulted in
tax-deductible goodwill related to the acquisition of DVTEL. The Company estimates that the tax-deductible goodwill and
intangibles resulting from the election will be approximately $24.8 million, to be amortized for United States tax purposes over a
15 year period. The value of tax-deductible goodwill and intangibles differs from the amounts listed in the preliminary purchase
price allocation above as the impact of the elections made under Section 338 only affects United States income taxes for the
goodwill and intangibles that are owned by the Company's United States subsidiaries.
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):
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Useful Life
Amount
7.5 years $
10.0 years
indefinite
1.0 year
$
21,500
3,800
1,700
380
27,380
Preliminary acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology,
customer relationships, and in-process research and development. Developed technology represents completed software related
to internal and external software platforms. In-process research and development represents the value assigned to acquired research
and development projects that, as of the acquisition date, had not established technological feasibility and had no alternative future
use. The in-process research and development intangible assets are capitalized and accounted for as indefinite-lived intangible
assets and are subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each
project and launch of the product, we will make a separate determination of useful life of the in-process research and development
intangible assets and the related amortization will be recorded as an expense over the estimated useful life of the specific projects.
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 18.
Business Acquisitions - (Continued)
An average 10-year useful life for customer relationships has been estimated based on the projected economic benefits
associated with this asset. The average 10-year estimated useful life represents the approximate point in the projection period in
which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates.
The developed technology, customer relationships, and in-process research and development were valued using the multi-
period excess earnings method.
The operating results of DVTEL are included in the Company's results of operations since the date of acquisition and are
not material.
This acquisition is not significant as defined in Regulation S-X under the Securities Exchange Act of 1934, nor is it significant
compared to the Company's overall results of operations. Consequently, no pro forma financial information is provided.
Note 19.
Shareholders’ Equity
On February 5, 2013, the Company’s Board of Directors authorized the repurchase of up to 25.0 million shares of the
Company’s outstanding shares of common stock in the open market or through privately negotiated transactions. This authorization
expired on February 6, 2015. On February 5, 2015, the Company's Board of Directors authorized the repurchase of up to 15.0
million shares of common stock in the open market or through privately negotiated transactions. This authorization will expire on
February 5, 2017.
Under these authorizations, the Company has repurchased 4,169,000 shares for a total of $123.2 million, 4,243,000 shares
for a total of $139.2 million and 5,988,000 shares for a total of $162.1 million during the years ended December 31, 2015, 2014
and 2013, respectively. As of December 31, 2015, there were 10,831,000 shares remaining under the February 2015 authorization
that may be repurchased.
During the year ended December 31, 2015, the Company paid dividends quarterly at the rate of $0.11 per share for a total
of $61.4 million. During the year ended December 31, 2014, the Company paid dividends quarterly at the rate of $0.10 per share
for a total of $56.5 million. During the year ended December 31, 2013, the Company paid dividends quarterly at the rate of $0.09
per share for a total of $51.4 million.
Note 20.
Restructuring Costs
During the years ended December 31, 2015, 2014 and 2013, the Company recorded net pre-tax restructuring expenses totaling
$1.4 million, $17.0 million and $27.5 million, respectively. In 2013, the Company initiated a realignment plan that included closing
six not-to-scale sites in the United States and Europe and a transfer of those operations to the Company's larger facilities. The
Company also consolidated its optics and laser manufacturing businesses to better realize the benefits of vertical integration in
these areas.
The Company recorded the restructuring expenses in the segments as follows (in thousands):
Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OEM & Emerging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maritime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2015
2014
2013
226
1,170
—
(22)
—
(13)
—
1,361
$
$
5,232 $
10,998
—
170
(90)
544
120
16,974 $
5,359
15,541
327
1,502
361
4,222
209
27,521
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FLIR SYSTEMS, INC.
Note 20.
Restructuring Costs - (Continued)
Restructuring expenses were recorded in the Consolidated Statements of Income as follows (in thousands):
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restructuring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2015
2014
2013
— $
1,361
1,361
$
591 $
16,383
16,974 $
1,689
25,832
27,521
The following table summarizes the activity by cost type (in thousands):
Severance
2013 restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014 restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $
Utilization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
19,866
(1,675)
18,191
11,860
(19,110)
10,941
924
(8,409)
3,456
Inventory
write downs
1,689
(1,689)
$
$
$
— $
590
$
(590)
—
—
—
— $
Facilities Exit,
Lease
Terminations &
Other
5,966
(2,296)
3,670
4,524
(6,709)
1,485
437
(1,601)
321
$
$
$
Total
27,521
(5,660)
21,861
16,974
(26,409)
12,426
1,361
(10,010)
3,777
Note 21.
Subsequent Events
On February 4, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.12 per share on its common
stock, payable on March 4, 2016, to shareholders of record as of the close of business on February 19, 2016. The total cash payment
of this dividend will be approximately $16.5 million.
78
QUARTERLY FINANCIAL DATA (UNAUDITED)
FLIR SYSTEMS, INC.
(In thousands, except per share data)
Q1
Q2
Q3
Q4
2015
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
344,517
175,897
47,910
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . $
0.34
0.34
2014
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
351,542
168,532
29,894
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . $
0.21
0.21
$
$
$
$
$
$
392,975
189,615
50,500
0.36
0.36
369,380
182,718
44,758
0.32
0.31
$
$
$
$
$
$
381,928
180,739
73,072
0.52
0.52
375,366
184,386
52,857
0.37
0.37
$
$
$
$
$
$
437,647
207,310
70,204
0.51
0.51
434,366
214,737
72,752
0.52
0.51
_______________
(1)
(2)
(3)
2015 Net earnings includes restructuring expenses of $0.3 million reported in the first quarter, $0.5 million reported in the second quarter, $0.3
million reported in the third quarter and $0.3 million reported in the fourth quarter.
2014 Gross profit includes restructuring expenses of $0.6 million reported in the fourth quarter.
2014 Net earnings includes restructuring expenses of $8.4 million reported in the first quarter, $3.5 million reported in the second quarter, $4.1
million reported in the third quarter and $1.0 million reported in the fourth quarter.
The sum of the quarterly earnings per share does not always equal the annual earnings per share as a result of the computation
of quarterly versus annual average shares outstanding.
79
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2015, the Company completed its annual evaluation, under the supervision and with the participation
of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under
the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal control over financial
reporting that occurred during the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable
assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).
Based on our evaluation using the Internal Control—Integrated Framework (2013), our management concluded that our
internal control over financial reporting was effective as of December 31, 2015.
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the Company’s internal
control over financial reporting as of December 31, 2015, which is included elsewhere in this Form 10-K.
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders of FLIR Systems, Inc.:
We have audited FLIR Systems, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). FLIR Systems, Inc.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, FLIR Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of FLIR Systems, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2015, and our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Portland, Oregon
February 26, 2016
81
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to directors and executive officers of the Company is included under “Election of Directors,”
“Management,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance and Related Matters” and
“Audit Committee Report” in the Company’s definitive proxy statement for its 2016 Annual Meeting of Shareholders and is
incorporated herein by reference.
The Company has adopted a Code of Ethics for Senior Financial Officers (the “Code of Ethics”) that applies to the Company’s
Chief Executive Officer, Chief Financial Officer, Controller and persons performing similar duties. The Code of Ethics is publicly
available on the Company’s website (www.flir.com) in the Governance area of the Investor Relations segment of the website.
None of the material on the Company’s website is part of this Annual Report. If there is any waiver from or amendment to any
provision of the Code of Ethics for the Company’s Chief Executive Officer, Chief Financial Officer, Controller and persons
performing similar duties, the Company will disclose the nature of such waiver or amendment on its website.
ITEM 11.
EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under “Compensation Discussion and Analysis,”
“Compensation Committee Report,” “Compensation of Named Executive Officers,” and “Director Compensation” in the
Company’s definitive proxy statement for its 2016 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management is included under “Stock Owned
by Management” and “Stock Owned by Principal Shareholders” in the Company’s definitive proxy statement for its 2016 Annual
Meeting of Shareholders and is incorporated herein by reference. Information with respect to equity compensation plans is included
under “Equity Compensation Plan Information” in the Company’s definitive proxy statement for its 2016 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information with respect to certain relationships and related transactions is included under “Certain Relationships and Related
Transactions” in the Company’s definitive proxy statement for its 2016 Annual Meeting of Shareholders and is incorporated herein
by reference. Information with respect to Director independence is included under “Corporate Governance and Related Matters
—Board of Directors Committees” in the Company’s definitive proxy statement for its 2016 Annual Meeting of Shareholders and
is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services is included under “Ratification of Appointment of the
Information Concerning the Independent Registered Public Accounting Firm and Related Information—Fees Paid to KPMG LLP”
in the Company’s definitive proxy statement for its 2016 Annual Meeting of Shareholders and is incorporated herein by reference.
82
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The financial statements are included in Item 8 above.
(a)(2) Financial Statement Schedules
No schedules are included because the required information is inapplicable, not required or are presented in the financial
statements or the related notes thereto.
(a)(3) Exhibits
Numbe
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Description
Second Restated Articles of Incorporation of FLIR Systems, Inc., as amended through May 12, 2008 (incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-K filed on February 27, 2009).
Fifth Amendment to Second Restated Articles of Incorporation of FLIR Systems, Inc. as amended on April 25, 2013
(incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed on August 8, 2013).
Second Restated Bylaws of FLIR Systems, Inc., as amended through October 23, 2013 (incorporated by reference to Exhibit
3.1 to the Current Report on Form 8-K filed on October 30, 2013).
Indenture, dated August 19, 2011, between FLIR Systems, Inc. and U.S. Bank National Association, as trustee (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on August 19, 2011).
First Supplemental Indenture, dated August 19, 2011, between FLIR Systems, Inc. and U.S. Bank National Association, as
trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on August 19, 2011).
Form of 3.750% Note due September 1, 2016 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-
K filed on August 19, 2011).
Second Supplemental Indenture, dated January 30, 2012, between FLIR Commercial Systems, Inc., FLIR Government
Systems, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.4 to the Annual Report
on Form 10-K filed on February 29, 2012).
Third Supplemental Indenture, dated December 31, 2014, between FLIR Surveillance, Inc. and U.S. Bank National
Association, as trustee.
FLIR Systems, Inc. 2002 Stock Incentive Plan, amended October 23, 2013 (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q filed on November 8, 2013).(1)
FLIR Systems, Inc. 2002 Stock Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on February 10, 2005).(1)
Form of 2007 Executive Bonus Plan Performance Award Agreement dated as of March 14, 2007 (incorporated by reference
to Exhibit 10.18 to the Annual Report on Form 10-K filed on March 16, 2007).(1)
Form of Stock Option Agreement for 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 on the Current
Report on Form 8-K filed on May 4, 2007). (1)
Form of Deferred Stock Agreement for 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 on the Current
Report on Form 8-K filed on May 4, 2007). (1)
FLIR Systems, Inc. 2009 Employee Stock Purchase Plan (incorporated by reference to Exhibit A to the Definitive Proxy
Statement on Schedule 14A filed on March 20, 2009)(1)
Amended and Restated FLIR Systems, Inc. Supplemental Executive Retirement Plan, as amended and restated on October
22, 2009 (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed on February 26, 2010).(1)
Credit Agreement by and among FLIR Systems, Inc. and certain subsidiaries of FLIR Systems, Inc., as borrowers, Bank
of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders identified therein as of
February 8, 2011 (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K filed on March 1, 2011).
First Amendment to Credit Agreement by and among FLIR Systems, Inc. and certain subsidiaries of FLIR Systems, Inc.,
as borrowers, Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders
dated August 9, 2011 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 12,
2011).
Joinder Agreement to the Credit Agreement by and among FLIR Commercial Systems, Inc., FLIR Government Systems,
Inc and Bank of America, N.A. dated January 30, 2012 (incorporated by reference to Exhibit 10.13 to the Annual Report
on Form 10-K filed on February 29, 2012).
FLIR Systems, Inc. 2011 Stock Incentive Plan (incorporated by reference to the Definitive Proxy Statement on Schedule
14A filed on March 18, 2011).(1)
83
10.13
10.14
10.12
Form of Stock Option Agreement (Time-Based Vesting) for the 2011 Stock Incentive Plan, amended May 11, 2015
(incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on August 5, 2015). (1)
Form of Stock Option Agreement (Time-Based Vesting - Outside Directors) for the 2011 Stock Incentive Plan, amended
May 11, 2015 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on August 5, 2015).
Form of Restricted Stock Unit Agreement (Performance-Based Vesting) for the 2011 Stock Incentive Plan, amended May
11, 2015(incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K filed on February 29, 2012). (1)
Form of Restricted Stock Unit Agreement (Time-Based Vesting) for the 2011 Stock Incentive Plan, amended May 11, 2015
(incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on August 5, 2015). (1)
Form of Restricted Stock Unit Agreement (Market-Based Vesting) for the 2011 Stock Incentive Plan, amended May 11,
2015 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed on August 5, 2015). (1)
10.17 Third Amendment to Credit Agreement by and among FLIR Systems, Inc. and certain subsidiaries of FLIR Systems, Inc.,
as borrowers, Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders
dated April 5, 2013 (incorporated by reference to Exhibit 10.1 on the Quarterly Report on Form 10-Q filed on May 8, 2013).
10.16
10.15
10.18 Annex I to Third Amendment to Credit Agreement dated as of April 5, 2013 (incorporated by reference to Exhibit 10.2 on
the Quarterly Report on Form 10-Q/A filed on August 29, 2013).
10.19 Letter Agreement, dated as of April 26, 2013, by and between FLIR Systems, Inc. and Earl R. Lewis (incorporated by
reference to the Current Report on Form 8-K filed on May 1, 2013).(1)
10.20 Executive Employment Agreement between FLIR Systems, Inc. and Andrew C. Teich dated as of May 2, 2013 (incorporated
by reference to the Current Report on Form 8-K/A filed on May 3, 2013).(1)
10.22
10.21 Amended and Restated Change of Control Agreement between FLIR Systems, Inc. and Andrew C. Teich dated as of
November 6, 2013 (incorporated by reference to Exhibit 10.3 on the Quarterly Report on Form 10-Q filed on November
8, 2013).(1)
FLIR Systems, Inc. 2011 Stock Incentive Plan, amended April 25, 2014 (incorporated by reference to the Definitive Proxy
Statement on Schedule 14A filed on March 14, 2014).(1)
FLIR Systems, Inc. 2012 Executive Bonus Plan(1)
Joinder Agreement to the Credit Agreement by and between FLIR Surveillance, Inc. and Bank of America, N.A. dated
December 31, 2014.
10.23
10.24
10.25
Fourth Amendment to Credit Agreement by and among FLIR Systems, Inc., the subsidiaries of FLIR Systems, Inc. party
thereto, Bank of America, N.A. and the other lenders party thereto, dated as of October 27, 2015 (incorporated by
reference to the Quarterly Report on Form 10-Q filed on November 9, 2015).
10.26 Executive Employment Agreement by and between FLIR Systems, Inc. and Amit Singhi, dated as of August 12, 2015
(incorporated by reference to the Current Report on Form 8-K filed on August 12, 2015).(1)
10.27 Change of Control Agreement by and between FLIR Systems, Inc. and Amit Singhi, dated as of August 12, 2015 (incorporated
by reference to the Current Report on Form 8-K filed on August 12, 2015).(1)
Subsidiaries of FLIR Systems, Inc.
21.0
23.0 Consent of KPMG LLP.
31.1
31.2
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
101.I XBRL Instance Document
101.S XBRL Taxonomy Extension Schema Document
101.C XBRL Taxonomy Extension Calculation Linkbase Document
101.D XBRL Taxonomy Extension Definition Linkbase Document
101.L XBRL Taxonomy Extension Label Linkbase Document
101.P XBRL Taxonomy Extension Presentation Linkbase Document
(1) This exhibit constitutes a management contract or compensatory plan or arrangement.
84
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 26th day of February 2016.
SIGNATURES
FLIR SYSTEMS, INC.
(Registrant)
By:
/S/ AMIT SINGHI
Amit Singhi
Sr. Vice President, Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated on February 26, 2016.
Signature
Title
/S/ ANDREW C. TEICH
President, Chief Executive Officer and Director
Andrew C. Teich
/S/ AMIT SINGHI
Amit Singhi
Sr. Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
/S/ DAVID A. MUESSLE
David A. Muessle
Vice President and Corporate Controller
(Principal Accounting Officer)
/S/ EARL R. LEWIS
Chairman of the Board of Directors
Earl R. Lewis
/S/ JOHN D. CARTER
Director
John D. Carter
/S/ WILLIAM W. CROUCH
Director
William W. Crouch
/S/ CATHERINE A. HALLIGAN
Director
Catherine A. Halligan
/S/ ANGUS L. MACDONALD
Director
Angus L. Macdonald
/S/ MICHAEL T. SMITH
Director
Michael T. Smith
/S/ CATHY A. STAUFFER
Cathy A. Stauffer
Director
/S/ JOHN W. WOOD, JR.
Director
John W. Wood, Jr.
/S/ STEVEN E. WYNNE
Director
Steven E. Wynne
85