UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 20192020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from             to             
Commission file number 000-21918
FLIR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
OregonDelaware 93-0708501
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
    
27700 SW Parkway Avenue, 97070
Wilsonville,Oregon 
(Address of principal executive offices) (Zip Code)
(503) 498-3547
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueFLIRNASDAQGlobal Select Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
   Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of July 26, 2019,31, 2020, there were 135,606,071131,121,965 shares of the registrant’s common stock, $0.01 par value, outstanding.



INDEX
 
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenue$481,998
 $452,707
 $926,734
 $892,325
Cost of goods sold248,378
 220,156
 459,455
 441,860
Gross profit233,620
 232,551
 467,279
 450,465
Operating expenses:       
Research and development53,021
 46,429
 101,019
 90,990
Selling, general and administrative116,862
 97,456
 221,441
 205,139
Loss on sale of business
 
 
 10,178
Total operating expenses169,883
 143,885
 322,460
 306,307
Earnings from operations63,737
 88,666
 144,819
 144,158
Interest expense7,272
 3,992
 12,788
 8,044
Interest income(438) (656) (1,495) (1,612)
Other (income) expense, net(1,220) 2,377
 646
 158
Earnings before income taxes58,123
 82,953
 132,880
 137,568
Income tax provision12,005
 11,390
 25,014
 26,810
Net earnings$46,118
 $71,563
 $107,866
 $110,758
        
Net earnings per share:       
Basic$0.34
 $0.52
 $0.80
 $0.80
Diluted$0.34
 $0.51
 $0.79
 $0.79
        
Weighted average shares outstanding:       
Basic135,519
 137,749
 135,530
 138,124
Diluted137,084
 140,149
 137,105
 140,564










FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

 Three Months Ended June 30,
Six Months Ended June 30,
 2020
2019
2020
2019
Revenue$482,015
 $481,998
 $932,938
 $926,734
Cost of goods sold229,815
 248,590
 461,370
 459,465
Gross profit252,200
 233,408
 471,568
 467,269
Operating expenses:       
Research and development56,012
 52,957
 109,859
 100,637
Selling, general and administrative88,676
 113,713
 204,918
 218,203
Restructuring expenses7,702
 3,001
 28,486
 3,610
Total operating expenses152,390
 169,671
 343,263
 322,450
Earnings from operations99,810
 63,737
 128,305
 144,819
Interest expense6,962
 7,272
 13,923
 12,788
Interest income(127) (438) (476) (1,495)
Other expense (income), net11,081
 (1,220) 9,766
 646
Earnings before income taxes81,894
 58,123
 105,092
 132,880
Income tax provision20,637
 12,005
 28,411
 25,014
Net earnings$61,257
 $46,118
 $76,681
 $107,866
        
Net earnings per share:       
Basic$0.47
 $0.34
 $0.58
 $0.80
Diluted$0.47
 $0.34
 $0.57
 $0.79
        
Weighted average shares outstanding:       
Basic130,831
 135,519
 132,213
 135,530
Diluted131,687
 137,084
 133,389
 137,105










FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 20182020 2019 2020 2019
Net earnings$46,118
 $71,563
 $107,866
 $110,758
$61,257
 $46,118
 $76,681
 $107,866
Other comprehensive (loss) income, net of tax:       
Fair value adjustment on interest rate swap contracts(779) 
 (1,586) 
Amount reclassified to earnings4
 
 4
 
Other comprehensive income (loss), net of tax:       
Fair value adjustment on derivatives instruments designated as hedges (1)
408
 (779) 3,161
 (1,586)
Unrealized gain on available-for-sale investments
 4
 
 4
Foreign currency translation adjustments4,664
 (45,541) (2,776) (31,604)(2,740) 4,664
 (23,025) (2,776)
Total other comprehensive income (loss)3,889
 (45,541) (4,358) (31,604)(2,332) 3,889
 (19,864) (4,358)
Comprehensive income$50,007
 $26,022
 $103,508
 $79,154
$58,925
 $50,007
 $56,817
 $103,508

_________________________

(1) The tax effects on interest rate swap contracts for the three months ended June 30, 2020 and 2019 were $0.1 million and $0.3 million, respectively. The tax effects on interest rate swap contracts for the six months ended June 30, 2020 and 2019 were $0.5 million and $0.5 million, respectively.



































FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
(Unaudited)
 June 30, December 31,
 2019 2018
ASSETS   
Current assets:   
Cash and cash equivalents$268,885
 $512,144
Accounts receivable, net356,991
 323,746
Inventories394,743
 352,107
Prepaid expenses and other current assets110,103
 104,650
Total current assets1,130,722
 1,292,647
Property and equipment, net251,684
 247,407
Deferred income taxes, net98,330
 100,620
Goodwill1,352,198
 904,571
Intangible assets, net273,225
 146,845
Other assets138,527
 89,152
          Total assets$3,244,686
 $2,781,242
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$132,294
 $95,496
Deferred revenue36,601
 32,703
Accrued payroll and related liabilities62,085
 81,118
Accrued product warranties14,478
 15,204
Advance payments from customers23,370
 19,691
Accrued expenses47,492
 41,761
Accrued income taxes
 13,855
Other current liabilities29,156
 16,186
Credit facility100,000
 
Current portion, long-term debt12,493
 
Total current liabilities457,969
 316,014
Long-term debt654,858
 421,948
Deferred income taxes46,940
 22,927
Accrued income taxes75,669
 76,435
Pension and other long-term liabilities97,359
 67,132
Shareholders’ equity:   
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2019, and December 31, 2018
 
Common stock, $0.01 par value, 500,000 shares authorized, 135,597 and 135,516 shares issued at June 30, 2019, and December 31, 2018, respectively, and additional paid-in capital1,356
 1,355
Retained earnings2,063,985
 2,024,523
Accumulated other comprehensive loss(153,450) (149,092)
Total shareholders’ equity1,911,891
 1,876,786
          Total liabilities and shareholders' equity$3,244,686
 $2,781,242


FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
(Unaudited)
 June 30, December 31,
 2020 2019
ASSETS   
Current assets:   
Cash and cash equivalents$332,958
 $284,592
Accounts receivable, net304,981
 318,652
Inventories433,908
 388,762
Prepaid expenses and other current assets114,429
 116,728
Total current assets1,186,276
 1,108,734
Property and equipment, net255,770
 255,905
Deferred income taxes, net41,393
 39,983
Goodwill1,340,989
 1,364,596
Intangible assets, net222,123
 247,514
Other assets110,746
 120,809
          Total assets$3,157,297
 $3,137,541
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$147,487
 $158,033
Deferred revenue30,319
 28,587
Accrued payroll and related liabilities79,981
 72,476
Accrued product warranties15,887
 14,611
Advance payments from customers14,142
 28,005
Accrued expenses32,892
 40,815
Accrued income taxes24,273
 14,735
Other current liabilities34,721
 27,349
Credit facility191,000
 16,000
Long-term debt, current portion12,465
 12,444
Total current liabilities583,167
 413,055
Long-term debt, net of current portion643,265
 648,419
Deferred income taxes40,405
 53,544
Accrued income taxes57,243
 55,514
Other long-term liabilities82,516
 95,576
Shareholders’ equity:   
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2020, and December 31, 2019
 
Common stock, $0.01 par value, 500,000 shares authorized, 131,106 and 134,394 shares issued at June 30, 2020, and December 31, 2019, respectively, and additional paid-in capital10,778
 16,692
Retained earnings1,925,732
 2,020,686
Accumulated other comprehensive loss(185,809) (165,945)
Total shareholders’ equity1,750,701
 1,871,433
          Total liabilities and shareholders' equity$3,157,297
 $3,137,541

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except for per share amounts)
(Unaudited)

  Common Stock and
Additional
Paid-in Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Earnings (Loss)
 Total
Shareholders'
Equity
Balance, December 31, 2019 $16,692
 $2,020,686
 $(165,945) $1,871,433
Net earnings 
 15,424
 
 15,424
Repurchase of common stock (23,371) (126,629) 
 (150,000)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes 580
 
 
 580
Stock-based compensation 7,403
 
 
 7,403
Dividends paid of $0.17 per share 
 (22,728) 
 (22,728)
Other comprehensive loss, net of taxes 
 
 (17,532) (17,532)
Balance, March 31, 2020 1,304
 1,886,753
 (183,477) 1,704,580
Net earnings 
 61,257
 
 61,257
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes (3,341) 
 
 (3,341)
Stock-based compensation 12,815
 
 
 12,815
Dividends paid of $0.17 per share 
 (22,278) 
 (22,278)
Other comprehensive loss, net of taxes 
 
 (2,332) (2,332)
Balance, June 30, 2020 $10,778
 $1,925,732
 $(185,809) $1,750,701

For the three months ended June 30, 2019:
  Common Stock and
Additional
Paid-in Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Earnings (Loss)
 Total
Shareholders'
Equity
         
Balance, March 31, 2019 $1,354
 $2,058,680
 $(157,339) $1,902,695
         
Net earnings 
 46,118
 
 46,118
Repurchase of common stock (7,218) (17,780) 
 (24,998)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes (1,704) 
 
 (1,704)
Stock-based compensation 8,924
 
 
 8,924
Dividends paid:        
Common stock, $0.17/share 
 (23,033) 
 (23,033)
Other comprehensive (loss) earnings:        
Fair value adjustment on interest rate swap contracts 
 
 (779) (779)
Amount reclassified to earnings 
 
 4
 4
Foreign currency translation adjustment 
 
 4,664
 4,664
Balance, June 30, 2019 $1,356
 $2,063,985
 $(153,450) $1,911,891


For the six months ended June 30, 2019:
  Common Stock and
Additional
Paid-in Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Earnings (Loss)
 Total
Shareholders'
Equity
         
Balance, December 31, 2018 $1,355
 $2,024,523
 $(149,092) $1,876,786
         
Opening balance adjustment(1)
 
 3,439
 
 3,439
Net earnings 
 107,866
 
 107,866
Repurchase of common stock (24,217) (25,779) 
 (49,996)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes 7,004
 
 
 7,004
Stock-based compensation 17,214
 
 
 17,214
Dividends paid:        
Common stock, $0.17/share 
 (46,064) 
 (46,064)
Other comprehensive (loss) earnings:        
Fair value adjustment on interest rate swap contracts 
 
 (1,586) (1,586)
Amount reclassified to earnings 
 
 4
 4
Foreign currency translation adjustment 
 
 (2,776) (2,776)
Balance, June 30, 2019 $1,356
 $2,063,985
 $(153,450) $1,911,891
  Common Stock and
Additional
Paid-in Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Earnings (Loss)
 Total
Shareholders'
Equity
Balance, December 31, 2018 $1,355
 $2,024,523
 $(149,092) $1,876,786
Adjustment of DTA under ASU 2016-16(1)
 
 3,439
 
 3,439
Net earnings 
 61,748
 
 61,748
Repurchase of common stock (16,999) (7,999) 
 (24,998)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes 8,709
 
 
 8,709
Stock-based compensation 8,289
 
 
 8,289
Dividends paid of $0.17 per share 
 (23,031) 
 (23,031)
Other comprehensive loss, net of taxes 
 
 (8,247) (8,247)
Balance, March 31, 2019 1,354
 2,058,680
 (157,339) 1,902,695
Net earnings 
 46,118
 
 46,118
Repurchase of common stock (7,218) (17,780) 
 (24,998)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes (1,704) 
 
 (1,704)
Stock-based compensation 8,924
 
 
 8,924
Dividends paid of $0.17 per share 
 (23,033) 
 (23,033)
Other comprehensive income, net of taxes 
 
 3,889
 3,889
Balance, June 30, 2019 $1,356
 $2,063,985
 $(153,450) $1,911,891
_________________________
(1) The Company recorded an immaterial correction which increased both retained earnings and deferred income taxes related to the Company's adoption of Accounting Standards Update 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16") during the year ended December 31, 2018.






FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for per share amounts)
(Unaudited)


For the three months ended June 30, 2018:
  Common Stock and
Additional
Paid-in Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Earnings (Loss)
 Total
Shareholders'
Equity
         
Balance, March 31, 2018 $5,364
 $1,953,999
 $(99,423) $1,859,940
         
Net earnings 
 71,563
 
 71,563
Repurchase of common stock (5,002) 
 
 (5,002)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes 1,545
 
 
 1,545
Stock-based compensation 8,481
 
 
 8,481
Dividends paid:        
Common stock, $0.16/share 
 (22,098) 
 (22,098)
Other comprehensive income:        
Foreign currency translation adjustment 
 
 (45,541) (45,541)
Balance, June 30, 2018 $10,388
 $2,003,464
 $(144,964) $1,868,888


For the six months ended June 30, 2018:
  Common Stock and
Additional
Paid-in Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Earnings (Loss)
 Total
Shareholders'
Equity
         
Balance, December 31, 2017 $91,162
 $1,856,756
 $(113,360) $1,834,558
         
Adoption of ASC 606 and ASU 2016-16(1)
 
 80,280
 
 80,280
Net earnings 
 110,758
 
 110,758
Repurchase of common stock (99,957) 
 
 (99,957)
Common stock issued pursuant to stock-based compensation plans, net of shares withheld for taxes 4,777
 
 
 4,777
Stock-based compensation 14,406
 
 
 14,406
Dividends paid:        
Common stock, $0.16/share 
 (44,330) 
 (44,330)
Other comprehensive income:        
Foreign currency translation adjustment 
   (31,604) (31,604)
Balance, June 30, 2018 $10,388
 $2,003,464
 $(144,964) $1,868,888
_________________________
(1) The Company adopted Accounting Standards Update 2014-09 "Revenue - Revenue from Contracts with Customers" ("ASU 606") and ASU 2016-16 on January 1, 2018, on a modified retrospective method.





.

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 Six Months Ended June 30,
 2019 2018
CASH PROVIDED BY OPERATING ACTIVITIES:   
Net earnings$107,866
 $110,758
Adjustments to reconcile net earnings to net cash provided by operating activities:   
Depreciation and amortization48,915
 33,055
Stock-based compensation arrangements17,278
 14,400
Deferred income taxes2,187
 3,189
Other, net(3,620) (6,844)
(Decrease) increase in cash, net of acquisitions, resulting from changes in:   
Accounts receivable(19,128) 49,623
Inventories(23,604) (13,640)
Prepaid expenses and other current assets(11,487) 1,645
Other assets3,612
 (1,717)
Accounts payable26,446
 (11,093)
Deferred revenue1,863
 2,731
Accrued payroll and other liabilities(13,273) (11,123)
Accrued income taxes(7,885) (33,078)
Pension and other long-term liabilities(5,869) 15,438
Net cash provided by operating activities123,301
 153,344
CASH FLOWS FROM INVESTING ACTIVITIES:   
Additions to property and equipment, net(17,781) (13,435)
Proceeds from sale of assets2,973
 
Proceeds from sale of business
 25,920
Business acquisitions, net of cash acquired(602,456) (14,195)
Other investments(5,000) (9,500)
Net cash (used) provided by investing activities(622,264) (11,210)
CASH FLOWS FROM FINANCING ACTIVITIES:   
Net proceeds from credit facility and long-term debt, including current portion723,054
 
Repayment of credit facility(378,095) 
Repurchase of common stock(49,996) (99,957)
Dividends paid(46,064) (44,330)
Proceeds from shares issued pursuant to stock-based compensation plans17,350
 16,890
Tax paid for net share exercises and issuance of vested restricted stock units(10,346) (12,113)
Other financing activities(522) (11)
Net cash provided (used) by financing activities255,381
 (139,521)
Effect of exchange rate changes on cash, cash equivalents and restricted cash323
 (13,761)
Net decrease in cash and cash equivalents(243,259) (11,148)
Cash and cash equivalents, beginning of year512,144
 519,090
Cash and cash equivalents, end of period$268,885
 $507,942

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 Six Months Ended June 30,
 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net earnings$76,681
 $107,866
Adjustments to reconcile net earnings to net cash provided by operating activities:   
Depreciation and amortization47,750
 48,915
Stock-based compensation20,887
 17,278
Loss on disposal of assets3,585
 
Minority interest impairment charges4,803
 
Deferred income taxes(513) 2,187
Other, net3,218
 (3,620)
Increase (decrease) in cash, net of acquisitions, resulting from changes in:   
Accounts receivable11,263
 (19,128)
Inventories(46,764) (23,604)
Prepaid expenses and other current assets1,596
 (11,487)
Other assets5,679
 3,612
Accounts payable(10,480) 26,446
Deferred revenue1,898
 1,863
Accrued payroll and other liabilities(8,207) (13,273)
Accrued income taxes12,116
 (7,885)
Other long-term liabilities(9,497) (5,869)
Net cash provided by operating activities114,015

123,301
CASH FLOWS FROM INVESTING ACTIVITIES:   
Additions to property and equipment, net(27,242) (17,781)
Proceeds from sale of assets
 2,973
Business acquisitions, net of cash acquired
 (602,456)
Minority interest and other investments304
 (5,000)
Net cash used in investing activities(26,938)
(622,264)
CASH FLOWS FROM FINANCING ACTIVITIES:   
Net proceeds from credit facility and long-term debt, including current portion175,000
 723,054
Repayment of credit facility and long-term debt(6,135) (378,095)
Repurchase of common stock(150,000) (49,996)
Dividends paid(45,006) (46,064)
Proceeds from shares issued pursuant to stock-based compensation plans7,309
 17,350
Tax paid for net share exercises and issuance of vested restricted stock units(10,071) (10,346)
Other financing activities
 (522)
Net cash (used in) provided by financing activities(28,903)
255,381
Effect of exchange rate changes on cash and cash equivalents(9,808) 323
Net increase (decrease) in cash and cash equivalents48,366

(243,259)
Cash and cash equivalents, beginning of year284,592
 512,144
Cash and cash equivalents, end of period$332,958
 $268,885


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

Note 1.
Basis of Presentation and Accounting Standards Updates
The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
The accompanying consolidated financial statements include the accounts of FLIR Systems, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2019.2020.
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, "Leases2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASC 842"ASU 2016-13" or "Topic 326").: Effective January 1, 2019, the Company adopted ASC 842 and all the related amendments using the modified retrospective method, using the permitted practical expedients, to those contracts still outstanding as of January 1, 2019. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The most significant impact was the recognition, on a discounted basis, of right-of-use (ROU) assets totaling approximately $31.9 million and lease liabilities totaling approximately $34.2 million under non-cancelable operating leases as of January 1, 2019 and the related new required disclosures. The standard did not have an impact on the Company's consolidated income statements or consolidated statements of cash flows. For additional disclosures required under the new standard, see Note 9, "Leases" of the Notes to the Consolidated Financial Statements.
FASB ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). Effective January 1, 2019,2020, the Company adopted ASU 2017-04. The amendments in this update simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment also requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of2016-13 using a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.modified-retrospective approach. The standard did not have an impact onchanges the Company's consolidatedway entities recognize impairment of many financial statements.
FASB ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassificationassets by requiring immediate recognition of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). Effective January 1, 2019, the Company adopted ASU 2018-02. The standard allows companiesestimated credit losses expected to reclassify stranded tax effects in Accumulated other comprehensive earnings (loss) that have been caused by the Tax Cuts and Jobs Act of 2017 (the Act) to Retained earningsfor each period in which the effectoccur over their remaining life. Adoption of the change in the U.S. federal corporate income tax rate is recorded. However, the FASB made the reclassification optional. As a result, the Company assessed the impact of the ASU on its financial statements and did not exercise the option to reclassify the stranded tax effects caused by the Act.
FASB ASU No. 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting" ("ASU 2018-07"). Effective January 1, 2019, the Company adopted ASU 2018-07. The standard more closely aligns the accounting for employee and nonemployee share-based payments. The standard did not have a material impact on the Company's consolidated financial statements.
FASB ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" ("ASU 2018-18"): Effective January 1, 2020, the Company adopted ASU 2018-18. The standard clarifies that certain transactions between collaborative arrangement participants should be accounted for under ASC 606, when one participant is a customer, and specifies that a distinct good or service is the unit of account for evaluating whether the transaction is with a customer. The standard also provides guidance on presentation of transactions not in the scope of ASC 606. Adoption of the standard did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 including recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods. The ASU 2019-12 also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company plans to adopt the standard as of January 1, 2021 and is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which temporarily simplifies the accounting for contract modifications, including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference interest rates. For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of the transition from LIBOR to alternative reference interest rates as well as the impact it may have on its consolidated financial statements.
Reclassifications
The Company made certain reclassifications to the prior years' financial statements and notes to the consolidated financial statements to conform them to the presentation as of and for the three and six months ended June 30, 2020. These reclassifications had no effect on consolidated financial position, net earnings, shareholders' equity, or disclosures.net cash flows for any of the periods presented.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 1.Basis of Presentation - (Continued)
Recently Adopted Accounting Pronouncements - (Continued)
FASB ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”). Effective January 1, 2019, the Company adopted ASU 2018-15. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The standard did not have a material impact on the Company’s consolidated financial statements.

Note 2.
Revenue
Revenue Recognition
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. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company regularly enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In such situations, contract values are allocated to each performance obligation based on its relative estimated standalone selling price. The vast majority of the Company's revenues are recognized at a point in time when goods are transferred to a customer. However, for certain contracts that include highly customized components, if performance does not create an asset with an alternative use and termination for convenience clauses provide an enforceable right to payment for performance completed to date, revenue is recognized over time as the performance obligation is satisfied.
Revenue includes certain shipping and handling costs and is stated net of third partythird-party agency fees. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment costcosts and are included in cost of goods sold. Revenue is recognized net of allowances for returns and net of taxes collected from customers which are subsequently remitted to governmental authorities.
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. Service revenue is deferred and recognized over the contract period, as is the case for extended warranty contracts, or recognized as services are provided.
See Note 19,17, "Operating Segments and Related Information - Revenue and Long-Lived Assets by Geographic Area" for information related to the Company’s revenues disaggregated by significant geographical region and operating segment.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables and deferred revenue and advance payments from customers on the Consolidated Balance Sheets. Contract assets and liabilities are reported on a contract-by-contract basis. The Company had no material deferred contract costs recorded on the Consolidated Balance SheetSheets as of June 30, 2020 and December 31, 2019.
Contract assets: The Company recognizes unbilled receivables as contract assets when the Company has rights to consideration for work completed but has not yet billed at the reporting date. Unbilled receivables are included within accounts receivable, net on the Consolidated Balance Sheets. The balance of unbilled receivables as of June 30, 20192020 and December 31, 20182019 were $12.3$23.3 million and $10.5$9.4 million, respectively.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 2.Revenue - (Continued)
Contract Balances
Contract Liabilitiesliabilities: The Company records contract liabilities when cash payments are received or due in advance of the Company's performance. Contract liabilities include deferred revenue and advance payments from customers. Contract liabilities are classified as either current or long-term in the Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. As of June 30, 20192020 and December 31, 2018,2019, contract liability balances totaled $73.5$56.6 million and $66.4$69.1 million, respectively. These balances included amounts classified as long-term as of June 30, 20192020 and December 31, 2018 and2019 which were $13.5$12.1 million and $14.0$12.5 million, respectively, and are included within pension and other long-term liabilities in the accompanying Consolidated Balance Sheets. Approximately $35.9$37.8 million of revenue recognized during the six month periodmonths ended June 30, 20192020 was included in the combined opening contract liability balances.balances as of December 31, 2019.

Remaining Performance Obligations
Remaining performance obligations represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. While the remaining performance obligation disclosure is similar in concept to backlog, the definition of remaining performance obligations excludes contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of cancellation or termination is remote. The Company has elected to exclude contracts with customers with an original term of one year or less from remaining performance obligations while these contracts are included within backlog.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 2.Revenue- (Continued)
Remaining Performance Obligations - (Continued)
As of June 30, 2019,2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $144.8$245.6 million. The Company expects to recognize revenue on approximately 7284 percent of the remaining performance obligations over the next twelve months, and the remainder recognized thereafter.

Note 3.
Stock-based Compensation
Stock Incentive Plans
The Company has a stock-based compensation program that provides equity incentives for employees, consultants and directors. This program includes incentive and non-statutory stock options and non-vested stock awards (referred to as restricted stock unit awards) granted under two plans: the FLIR Systems, Inc. 2002 Stock Incentive Plan (the “2002 Plan”) and the FLIR Systems, Inc. 2011 Stock Incentive Plan, as amended (the “2011 Plan”). The Company has discontinued issuing awards out of the 2002 Plan, but previously-grantedpreviously granted awards under the 2002 Plan remain outstanding.
The Company has granted time-based options, time-based restricted stock unit awards, market-based restricted stock unit awards and performance-based restricted stock unit awards. Options generally expire ten years from the grant date. Time-based options and restricted stock unit awards generally vest over a three year period. Market-based restricted stock unit awards were earned based upon the Company's total shareholder return compared to the total shareholder return of the component company at the 60th percentile level in the S&P 500 Index over a three year period. Performance-based restricted stock unit awards granted during the year ended December 31, 2016 were earned based upon the Company's return on invested capital over a three year period. Performance-based restricted stock unit awards granted during the year ended December 31, 2017 may bewere earned based upon the Company's operating margin performance over a three yearthree-year period. Performance-based restricted stock unit awards granted during the yearyears ended December 31, 2018 and during the quarter ended June 30, 2019 may be earned based upon a combination of the Company's revenue and operating performance over a three yearthree-year period. Certain shares vested under the performance-based restricted stock unit awards and the market-based restricted stock unit awards must be held by the participant for a period of one year from the vest date.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the “ESPP”) which allows employees to purchase shares of the Company’s common stock at 85 percent of the fair market value at the lower of either the date of enrollment or the purchase date. The ESPP provides for six-month offerings commencing on May 1 and November 1 of each year with purchases on April 30 and October 31 of each year. Shares purchased under the 2009 ESPP must be held by employees for a period of at least 18 months after the date of purchase. On April 19, 2019, the Company's shareholders approved the FLIR Systems, Inc. 2019 Employee Stock Purchase Plan ("2019 ESPP"). The final purchase under the 2009 ESPP was on April 30, 2019 and the first offering under the 2019 ESPP commenced on May 1, 2019.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 3.        Stock-based Compensation - (Continued)
The following table sets forth the stock-based compensation expense recognized in the Consolidated Statements of Income (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 20182020 2019 2020 2019
Cost of goods sold$709
 $775
 $1,556
 $1,470
$1,668
 $709
 $2,735
 $1,556
Research and development1,951
 1,638
 3,631
 3,047
2,277
 1,951
 3,954
 3,631
Selling, general and administrative6,528
 6,056
 12,091
 9,883
9,296
 6,528
 14,198
 12,091
Stock-based compensation expense before income taxes$9,188
 $8,469
 $17,278
 $14,400
$13,241
 $9,188
 $20,887
 $17,278

Stock-based compensation expense capitalized in the Consolidated Balance Sheets is as follows (in thousands):
 June 30,
 2019 2018
Capitalized in inventory$1,016
 $1,068
 June 30,
 2020 2019
Capitalized in inventory$453
 $1,016

As of June 30, 2019,2020, the Company had approximately $75.8$70.9 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of approximately two2.1 years.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 4.
Net Earnings Per Share
The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands): 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 20182020 2019 2020 2019
Numerator for earnings per share:              
Net earnings for basic and diluted earnings per share$46,118
 $71,563
 $107,866
 $110,758
$61,257
 $46,118
 $76,681
 $107,866
Denominator for earnings per share:              
Weighted average number of common shares outstanding135,519
 137,749
 135,530
 138,124
130,831
 135,519
 132,213
 135,530
Assumed exercise of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method1,565
 2,400
 1,575
 2,440
856
 1,565
 1,176
 1,575
Diluted shares outstanding137,084
 140,149
 137,105
 140,564
131,687
 137,084
 133,389
 137,105

The effect of stock-based compensation awards for the three and six months ended June 30, 2019, which in the aggregate consisted of 52,0002020 that aggregated approximately 1,082,000 and 192,000570,000 shares, respectively; six months ended June 30, 2018, which in aggregate consisted of 89,000 shares, haverespectively, has been excluded for purposes of diluted earnings per share since the effect of their inclusion would have been anti-dilutive. There were no shares excludedThe effect of stock-based compensation awards for the three and six months ended June 30, 2018.2019 that aggregated approximately 52,000 and 192,000 shares, respectively, has been excluded for purposes of diluted earnings per share since the effect of their inclusion would have been anti-dilutive.

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

Note 5.
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, credit risk, and observable market prices for identical instruments that are traded in less active markets; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Company had $1.3 million and $200.0approximately $0.7 million of cash equivalents at June 30, 20192020 and December 31, 2018, respectively,2019, which were primarily investments in money market funds and overnight deposits. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets. All cash equivalents are in instruments that are convertible to cash daily. The fair value of the Company’s foreign currencyderivative contracts as of June 30, 20192020 and December 31, 2018, and the interest rate swap contract as of June 30, 2019 are disclosed in Note 6, "Derivative Financial Instruments," and are based on Level 2 inputs. The fair value of the Company's borrowings under the Credit Agreement as described in Note 13, "Credit Agreement,"Debt," as of June 30, 20192020 approximates the carrying value. The fair value of the Company’s senior unsecured notes as described in Note 14, "Long-Term Debt,13, "Debt," is approximately $430.6was $432.3 million and $418.8$430.1 million based upon Level 2 inputs at June 30, 20192020 and December 31, 2018,2019, respectively. The fair value of observable price changes related to the Company's minority interest equity investments are based on Level 3 inputs. During the three months ended June 30, 2020, the Company recognized impairments of $4.8 million associated with its equity minority investments which are included in other expense (income), net in the Consolidated Statements of Income. The Company does not have any other significant financial assets or liabilities that are measured at fair value.
See the discussion of accounting guidance for fair value measurements and the factors used in determining the fair value of financial assets and liabilities as reported in Note 1, "Nature of Business and Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 6.        Derivative Financial Instruments
The Company's financial position and results of operations are subject to certain financial market risks. The Company regularly assesses these risks and has established risk management practices designed to mitigate the impact of certain foreign currency exchange rate and interest rate risk exposures. The Company does not engage in speculative trading in any financial market.
Foreign Currency Exchange Rate RiskContracts
The Company enters into foreignuses currency forward contracts, not formally designated as hedges, to manage the consolidated exchange rate risk associated with the remeasurement of certain non-functional currency denominated monetary assets and liabilities.liabilities primarily by subsidiaries that use U.S. dollars, European euros, Canadian dollars, Swedish kronor, Norwegian kroner, Brazilian real and British pound sterling as their functional currency. Changes in fair value of foreign currency forward contracts are recognized in incomeother (income) expense, net at the end of each reporting period based on the difference between the contract rate and the spot rate.period. 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. The net amount of the gains and losses related to derivative instruments recorded in other (income) expense, net for the three and six months ended June 30, 2019 were net losses of $0.6 million and $0.3 million, respectively. The net losses for the three and six month and 2018 were $4.0 million and $8.6 million, respectively.
The table below presents the net notional amounts of the Company’s outstanding foreign currency forward contracts by currency (in thousands):
 June 30, December 31,
 2019 2018
European euro$71,168
 $61,452
Canadian dollar19,441
 19,685
British pound sterling11,570
 609
Brazilian real8,518
 8,598
Swedish kronor5,963
 3,608
Norwegian kroner4,295
 
Australian dollar1,054
 1,131
Other743
 813
 $122,752
 $95,896

At June 30, 2019,2020, the Company’s foreign currency forward contracts, in general,not formally designated as hedges, had maturities of three months or less.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 6.        Derivative Financial Instruments - (Continued)
Foreign Currency Exchange Rate Risk - (Continued)
In addition, the Company manages the risk of changes in the fair value of certain monetary liabilities attributable to changes in exchange rates. The carrying amountsCompany manages these risks by using currency forward contracts formally designated and effective as fair value hedges. Hedge effectiveness is generally determined by evaluating the alignment of the foreign exchange contractshedging instrument's critical terms with the critical terms of the hedged item. The forward points attributable to the hedging instruments are excluded from the assessment of effectiveness and amortized to other expense (income), net using a systematic and rational methodology. Differences between the change in fair value of the excluded component and amounts recognized under the systematic and rational method are recognized in other comprehensive income. The change in fair value of the hedging instruments attributable to the hedged risk is reported in other expense (income), net. The change in fair value of the hedged item attributable to the hedged risk is reported as an adjustment to its carrying value and also included in other expense (income), net. At June 30, 2020, the Consolidated Balance Sheets areCompany’s foreign currency forward contracts formally designated as follows (in thousands):fair value hedges had maturities of three years or less.
 June 30, 2019 December 31, 2018
 Prepaid Expenses and Other Current Assets Other Current Liabilities Prepaid Expenses and Other Current Assets Other Current Liabilities
Foreign exchange contracts$1,690
 $647
 $431
 $951


Interest Rate Swap Contracts
The Company's outstanding debt at June 30, 20192020 consists of fixed rate notes and an unsecured credit facility consisting of aan unsecured revolving loan facility, aan unsecured U.S. dollar term loan facility and aan unsecured Swedish kronor term loan, facility, all of which accrue interest at a floating rate. As discussed in Note 13, "Credit Agreement,"Debt," interest expense on the Company's floating rate debt is calculated based on a fixed spread over the applicable Eurocurrency rate (e.g. LIBOR). subject to a floor of zero percent. 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 certain floating rate debt through a floored amortizingan interest rate swap (“floored swap”) in which the Company receives floating rate payments subject to a floor of zero percent and makes fixed rate payments. The impact of the floored swap is to fix the floating rate basis for the calculation of interest on the unsecured Swedish kronor term loan at the levels indicated in the table below.0.590 percent. The effective interest rate paid is equal to the fixed rates shown below plus the applicable spread then in effect. At June 30, 2019, the effective interest rate on the Swedish kronor term loan which includes the impact of the floored swap was 1.840 percent.
As of June 30, 2019, the following floored swap was outstanding:
Effective Date Current Notional Amount (in millions Swedish Kronor) Fixed Rate Maturity Date
March 29, 2019
 1,372.8 0.59% 
March 31, 2024

The floored swap is designated and effective as a cash flow hedge with individual swap cash flows recorded as an asset or liability in the Company's Consolidated Balance Sheets at fair value. Hedge effectiveness is generally determined by evaluating the alignment of the hedging instrument's critical terms with the critical terms of the hedged item. Fair value adjustments are recorded as an adjustment to accumulated other comprehensive earnings, except that any gains and losses on ineffectiveness of the floored swap would be recorded as an adjustment to other expense (income), net. The net fair value carrying amount of the Company's floored swap was an unrealized loss of $2.1 million, which has been recorded in prepaid expenses and other current assets, other current liabilities and pension and other long-term liabilities in the Consolidated Balance Sheet as of June 30, 2019.
income. All of the Company's derivative counterparties have investment grade credit ratings. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering events such as a bankruptcy or major default of one of the counterparties to the transaction. The Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
The following table presents the gross notional amounts of outstanding derivative instruments (in thousands):
 June 30, 2020 December 31, 2019
Derivative instruments designated as cash flow hedges:   
Interest Rate Swap$139,971
 $143,302
Derivative instruments designated as fair value hedges:   
Currency Forward Contracts283,333
 340,000
Derivative instruments not formally designated as hedges:   
Currency Forward Contracts188,968
 104,835
    

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


Note 6.        Derivative Financial Instruments - (Continued)
Interest Rate Swap - (Continued)
The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):
    June 30, December 31,
  Classification 2020 2019
Derivative instruments designated as cash flow hedges:    
Derivative instruments in asset positions:    
Interest Rate Swap Prepaid expense and other current assets $740
 $404
Derivative instruments in liability positions:    
Interest Rate Swap Other current liabilities 818
 453
Interest Rate Swap Other long-term liabilities 1,851
 1,012
Derivative instruments designated as fair value hedges:    
Derivative instruments in asset positions:    
Currency forward contracts Prepaid expenses and other current assets 926
 
Currency forward contracts Other assets 3,298
 
Derivative instruments in liability positions:    
Currency forward contracts Other current liabilities 
 454
Currency forward contracts Other long-term liabilities 
 1,189
Derivative instruments not formally designated as hedges:    
Derivative instruments in asset positions:    
Currency forward contracts Prepaid expenses and other current assets 1,734
 3,010
Derivative instruments in liability positions:    
Currency forward contracts Other current liabilities 430
 391

The following table presents the statement of income classification of derivative instruments (in thousands):
    Three Months Ended June 30, Six Months Ended June 30,
  Classification 2020 2019 2020 2019
Derivative instruments designated as cash flow hedges:        
Loss recognized in other comprehensive (income) loss, net of tax Accumulated other comprehensive loss $329
 $779
 $650
 $1,586
Loss reclassified from other comprehensive (income) loss to earnings for the effective portion Interest expense 104
 220
 275
 220
Derivative instruments designated as fair value hedges:        
Loss recognized in earnings for effective portion Other expense (income), net 23,325
 
 559
 
Gain recognized in income for amount excluded from effectiveness testing Other expense (income), net (1,049) 
 (2,188) 
Loss (gain) recognized in other comprehensive (income) loss, net of tax Accumulated other comprehensive loss (income) 59
 
 (3,811) 
Derivative instruments not formally designated as hedges:        
Loss (gain) recognized in earnings Other expense (income), net 6,113
 (583) (6,777) (292)

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


Note 7.
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accountscredit losses of $5.9$7.4 million and $4.3$6.1 million at June 30, 20192020 and December 31, 2018,2019, respectively.

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

Note 8.
Inventories
Inventories consist of the following (in thousands):
June 30, December 31,June 30, December 31,
2019 20182020 2019
Raw material and subassemblies$220,526
 $214,164
$239,092
 $224,239
Work-in-progress50,179
 43,096
62,108
 44,344
Finished goods124,038
 94,847
132,708
 120,179
$394,743
 $352,107
$433,908
 $388,762


Note 9.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in other assets, other current liabilities, and pension and other long-term liabilities on the consolidated balance sheets.Consolidated Balance Sheets. The Company does not have any finance leases at June 30, 2019.
Operating lease right-of-use assets ("ROU assets") represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of minimum fixed lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include prepaid lease payments made prior to commencement of the lease plus initial capitalized direct costs and exclude tenant improvement allowances. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum fixed lease payments is recognized on a straight-line basis over the lease term.
The Company has elected to apply the short-term lease exemption in accordance with guidance, and therefore, short-term leases (leases with a term of twelve months or less) are not recorded on the balance sheet. The Company has only a small number of leases that qualify for the exemption and the amount of its remaining short-term lease commitments is not significant.2020.
Most of the Company’s operating leases are for buildings, warehouses and office space. These leases have remaining lease terms of approximately one year to ten years.
The components of lease expense waswere as follows (in thousands):
 Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
    
Operating lease expense$2,837
 $5,472
Short-term lease expense327
 573
Variable lease expense602
 1,116
Total lease expense$3,766
 $7,161
Supplemental cash flow information related to operating leases (in thousands):
 Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
    
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases$2,761
 $5,183
Right-of-use assets obtained in exchange for lease obligations:   
Operating leases$7,086
 $7,386
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Operating lease expense$3,045
 $2,837
 $6,067
 $5,472
Short-term lease expense26
 327
 53
 573
Variable lease expense546
 602
 1,116
 1,116
Total lease expense$3,617
 $3,766
 $7,236
 $7,161
Supplemental balance sheet information related to operating leases (in thousands):
 June 30, 2019
Operating lease right-of-use assets$33,527
Operating lease liabilities$37,091


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

Note 9.
Leases - (Continued)
As of June 30, 2019, the weighted average remaining lease term for operating leases was 5.6 years and the weighted average discount rate was 4.03% percent.
Maturities of lease liabilities as of June 30, 2019 wereis as follows (in thousands):
Six months ending December 31, 2019$4,964
20209,628
20218,693
20225,671
20233,409
20242,260
Thereafter7,518
Total lease payments42,143
Less: imputed interest(5,052)
Present value of lease liabilities$37,091
The Company's future minimum lease commitments, net of sub-lease rental income, as of December 31, 2018, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows:
 
Net
Operating
Leases
2019$10,561
20208,270
20217,283
20224,894
20232,934
Thereafter5,911
Total minimum payments$39,853
 June 30, 2020December 31, 2019
Operating lease right-of-use assets$30,341
$35,479
Operating lease liabilities$34,016
$39,291


Note 10.        Property and Equipment
Property and equipment are net of accumulated depreciation of $349.2$389.1 million and $333.4$370.1 million at June 30, 20192020 and December 31, 2018,2019, respectively. Depreciation expense for the three months ended June 30, 2020 and 2019 was $11.2 million and $10.8 million, respectively. Depreciation expense for the six months ended June 30, 2020 and 2019 was $23.0 million and $21.2 million, respectively.

Note 11.
Goodwill
In the first quarter of 2020, the Company completed a business reorganization as part of its “Project Be Ready” restructuring plan which resulted in identification of two reportable segments (Industrial Technologies and Defense Technologies). The carrying value of goodwillCompany commenced operating and reporting under the activity for the six months ended June 30, 2019 are as follows (in thousands):
Balance, December 31, 2018$904,571
Goodwill from acquisitions447,283
Currency translation adjustments344
Balance, June 30, 2019$1,352,198

new organization structure effective January 1, 2020. See Note 19, “Restructuring” for further information on Project Be Ready and Note 17, "Operating Segments and Related Information" for additional information on the two new reportable operating segments. Goodwill was allocated to identified reporting units using a relative fair value approach. In conjunction with the change in reportable segments, the Company evaluated goodwill for impairment, both before and after the segment change and determined that goodwill was not impaired.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 11.Goodwill - (Continued)
The following table presents changes in the carrying value of goodwill and the activity by operating segments.reportable segment for the six months ended June 30, 2020 (in thousands):
  Industrial Technologies Defense Technologies Consolidated
Balance, December 31, 2019 $635,899
 $728,697
 $1,364,596
Goodwill from acquisitions 
 (12,617) (12,617)
Currency translation adjustments (2,478) (8,512) (10,990)
Balance, June 30, 2020 $633,421
 $707,568
 $1,340,989

The Company reviews its goodwill for impairment annually during the third quarter, or more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value.
See Note 20,18, "Business Acquisitions and Divestitures"Acquisitions" for additional information on goodwill from acquisitions.

Note 12.        Intangible Assets
Intangible assets are net of accumulated amortization of $123.7$151.0 million and $97.7$129.9 million at June 30, 20192020 and December 31, 2018,2019, respectively. The aggregate amortization expense for the three months ended June 30, 2020 and 2019 was $11.8 million and $21.1 million, respectively. The aggregate amortization expense for the six months ended June 30, 2020 and 2019 was $23.7 million and $27.0 million, respectively.

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

Note 13.
Credit AgreementDebt
The Company's debt consists of the following (in thousands):
 June 30, December 31,
 2020 2019
Unsecured notes$425,000
 $425,000
Credit Agreement (term loans)233,721
 239,552
Credit Agreement (revolving credit facility)191,000
 16,000
Unamortized discounts and issuance costs(2,991) (3,689)
Total debt$846,730
 $676,863
Less: Credit facility191,000
 16,000
Less: Long-term debt, current portion12,465
 12,444
Long-term debt, net of current portion$643,265
 $648,419

In June 2016, the Company issued $425.0 million aggregate principal amount of its 3.125 percent senior unsecured notes due June 15, 2021 (the “2021 Notes”). The net proceeds from the issuance of the 2021 Notes were approximately $421.0 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2021 Notes is payable semiannually in arrears on December 15 and June 15. The proceeds from the 2021 Notes were used for general corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock.
On March 29, 2019, the Company entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., MUFG Union Bank, N.A., and the other lenders party thereto. The Credit Agreement amended and restated the Company's existing Amended and Restated Credit Agreement, dated as of May 31, 2016 ("Existing Credit Agreement"). The Credit Agreement provides for a $650.0 million unsecured revolving credit facility, a $100.0 million unsecured term loan facility available in U.S. dollars amortizing at 5.05.000 percent per annum, and a $150.0 million unsecured term loan facility available in Swedish kronor amortizing at 5.0 percent per annum. The Credit Agreement has a term of five years and matures on March 29, 2024. In connection with the closing of the Credit Agreement, the Company made an initial borrowing of $100.0 million in revolving loans, $100.0 million in term loans in U.S. dollars, and the equivalent of $150.0 million in term loans in Swedish kronor. Additionally, the Companykronor and repaid in full all outstanding amounts consistingunder its prior credit agreement.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 13.        Debt - (Continued)
The Company has the right, subject to certain conditions, including approval of additional commitments by qualified lenders, to increase the availability under the revolving credit facility by an additional $200.0 million until March 29, 2024. The Credit Agreement allows the Company and certain designated subsidiaries to borrow in United States dollars, European euros, Swedish kronor, British pound sterling, Japanese yen, Canadian dollars, Australian dollars, and other agreed upon currencies. Interest rates under the Credit Agreement are determined from the type and tenor of the borrowing and includes loans based on the published term Eurocurrency rate (e.g. LIBOR) in which the loan is denominated. The Eurocurrency rate loans have a floor of zero percent and an aggregate principalapplicable margin that ranges from 1.000 percent to 1.375 percent depending on the Company’s consolidated total leverage ratio. At June 30, 2020, the borrowing rate on the revolving loan was 1.553 percent per annum, the borrowing rate on the U.S. dollar term loan was 1.683 percent per annum and the borrowing rate on the Swedish kronor term loan was 1.444 percent per annum.
The Credit Agreement requires the Company to pay a commitment fee on the amount of $375.0 million,unused revolving commitments at a rate, based on our consolidated total leverage ratio, which ranges from 0.125 percent to 0.200 percent of unused revolving commitments. At June 30, 2020, the commitment fee on the amount of unused revolving credit was 0.200 percent per annum. The Credit Agreement contains one financial covenant that requires maintenance of a consolidated total leverage ratio with which the Company was in compliance at June 30, 2020.
The facilities available under the ExistingCredit Agreement are unsecured. The Credit Agreement also contains language providing for the adoption of a LIBOR successor rate in anticipation of the possibility of LIBOR benchmark reform, consistent with market practice. The Company is engaged in regular dialogue with its lenders and derivatives counterparties to keep apprised of the proposed successor rates in each of the jurisdictions in which there may have a need to execute a financial transaction. Although progress has been made by the various working groups, the Company believes it is too early to accurately assess any financial impact of the LIBOR benchmark reform.
To manage the interest rate risk arising from the variability in interest expense attributable to amounts drawn under the Swedish kronor term loan facility, the Company entered into a floored interest rate swap with a Swedish kronor notional amount initially equivalent to $150.0 million. The interest rate swap was designated, and effective, as a cash flow hedge.
At June 30, 2020, the Company had $10.8 million of letters of credit outstanding, which reduces the total available revolving credit under the Credit Agreement.

On January 11, 2019, a standby letter of credit, not to exceed Swedish kronor 2.2 billion, was issued under a new bilateral letter of credit reimbursement agreement ("L/C Agreement") to secure a payment guarantee required by the Swedish Tax Authorities in order to grant the original respite from paying the tax reassessment described in Note 14.        Long-Term Debt
Long-term debt consists of the following (in thousands):
 June 30, December 31,
 2019 2018
Unsecured notes$425,000
 $425,000
Credit Agreement246,735
 
Unamortized discounts and issuance costs of unsecured notes(4,384) (3,052)
 $667,351
 $421,948
Current portion, long-term debt$12,493
 $
Long-term debt$654,858
 $421,948
In June 2016, the Company issued $425.0 million aggregate principal amount of its 3.125 percent senior unsecured notes due June 15, 2021 (the “2016 Notes”).16, "Income Taxes." The net proceeds from the issuance of the 2016 Notes were approximately $421.0 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2016 Notes is payable semiannually in arrears on December 15 and June 15. The proceeds from the 2016 Notes were used to repay the principaloutstanding amount of the notesL/C Agreement was equivalent to approximately $238.2 million at June 30, 2020. While outstanding in July 2016amounts under the L/C Agreement do not reduce the available revolving credit from the Credit Agreement, they are considered indebtedness and are being used for general corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchasesinfluence the incremental debt capacity governed by our Credit Agreement covenants. The standby letter of credit was further amended on April 24, 2020 to reflect the Company’s common stock.
As discussed in Note 13, "Credit Agreement," on March 29, 2019, the Company made an initial borrowing of $100.0 million in term loans in U.S. dollars, and the equivalent of $150.0 million in term loans in Swedish kronor. Both term loans amortize at 5.0 percent per annum with the current portion included in current liabilities.new respite.

Note 15.14.
Accrued Product Warranties
The following table summarizes the Company’s warranty liability and activity (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Accrued product warranties, beginning of period$19,058
 $18,513
 $18,583
 $18,052
Amounts paid for warranty services(4,354) (5,198) (7,130) (8,477)
Warranty provisions for products sold3,793
 5,366
 6,207
 8,902
Business acquisition25
 
 899
 
Currency translation adjustments and other19
 (182) (18) 22
Accrued product warranties, end of period$18,541
 $18,499
 $18,541
 $18,499
        
Current accrued product warranties, end of period    $14,478
 $15,148
Long-term accrued product warranties, end of period    $4,063
 $3,351

 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Accrued product warranties, beginning of period$19,809
 $19,058
 $19,143
 $18,583
Amounts paid for warranty services(1,803) (4,354) (3,806) (7,130)
Warranty provisions for products sold2,229
 3,793
 5,089
 6,207
Business acquisition
 25
 
 899
Currency translation adjustments and other113
 19
 (78) (18)
Accrued product warranties, end of period$20,348
 $18,541
 $20,348
 $18,541
        
Current accrued product warranties, end of period    $15,887
 $14,478
Long-term accrued product warranties, end of period    $4,461
 $4,063
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 16.
Shareholders' Equity
On February 7, 2019, the Company's Board of Directors authorized the repurchase of up
Note 14.        Accrued Product Warranties - (Continued)
The Company generally provides a twelve to 15.0 million shares of the Company's outstanding common stock. This authorization expires in February 2021. During the six months ended June 30, 2019, the Company repurchased 1.0 million shares of the Company's common stock through open market transactions under the 2019 authorization.
On June 7, 2019, the Company paid a dividend of $0.17 per sharetwenty-four-month warranty on its outstanding common stock toproducts. A provision for the shareholdersestimated future costs of record as ofwarranty, based upon historical cost and product performance experience, is recorded when revenue is recognized. Long-term accrued product warranties are included in other long-term liabilities on the close of business on May 24, 2019. The total cash payments for dividends during the six months ended June 30, 2019 were $46.1 million.Consolidated Balance Sheets.

Note 17.15.
Contingencies
Matters Involving the United States Department of State and Department of Commerce
On April 24, 2018, the Company entered into a Consent Agreement with the United States Department of State's Directorate of Defense Trade Controls (“DDTC”) to resolve allegations regarding the unauthorized export of technical data and defense services to dual and third country nationals from certain Company facilities, the failure to properly use and manage export licenses and export authorizations, and failures to report certain payments under 22 CFR Part 130 in potential violation of the International Traffic in Arms Regulation (“ITAR”). The Consent Agreement has a four-year term and provides for: (i) a civil penalty of $30.0 million with $15.0 million of this amount suspended on the condition that the funds have or will be used for Department-approved Consent Agreement remedial compliance measures, (ii) the appointment of an external Special Compliance Official to oversee compliance with the Consent Agreement and the ITAR; (iii) two external audits of the Company’s ITAR compliance program; and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures, and training. During the three-month period ended March 31, 2018, the Company recorded a $15.0 million charge for the portion of the penalty that is not subject to suspension. In April 2018, 2019, and 2020, the Company paid $1.0 million, $3.5 million and $3.5 million, respectively, of the $15.0 million charge and as of March 31, 2019,June 30, 2020, the remaining amountamounts payable of $3.5 million and $10.5$3.5 million hashave been recorded in other current liabilities and pension and other long-term liabilities, respectively. The remaining $14.0$7.0 million is payable in annual installments of $3.5 million through April 2022. The Company expects recent and future investments in remedial compliance measures will be sufficient to cover the $15.0 million suspension amount.
As part of the Consent Agreement, DDTC acknowledged that the Company voluntarily disclosed certain of the alleged Arms Export Control Act and ITAR violations, which were resolved pursuant to the Consent Agreement, cooperated in the DDTC's review, and instituted a number of compliance program improvements.
In May 2017, the Company submitted an initial notification to DDTC regarding potential violations related to certain export classifications obtained through the commodity jurisdiction process and a final voluntary disclosure in August 2017. The Company also submitted a voluntary self-disclosure regarding the same matter with the United States Department of Commerce Bureau of Industry and Security ("BIS"). This matter remains under review by DDTC, BIS and the Department of Justice ("DOJ"). DDTC and BIS both acknowledged the submissions, and at the request of the agencies, the Company executed tolling agreements for this matter.matter with each of DDTC, BIS and DOJ. The DDTC and DOJ tolling agreement hasagreements have lapsed; FLIR is in discussion with DOJ on resolving the matter. The Company executed a tolling agreement with BIS, and has extended the agreement, suspending the statute of limitations through NovemberSeptember 1, 2019. The Company also executed a tolling agreement with the Department of Justice ("DOJ"), suspending the statute of limitations with the DOJ through December 1, 2019. This matter remains under review by DDTC, DOJ, and BIS.2020.
In June 2017, BIS informed the Company of additional export licensing requirements that restrict the Company’s ability to sell certain thermal products without a license to customers in China not identified on a list maintained by the United States Department of Commerce. This action was precipitated by concerns of sale without a license or potential diversion of some of the Company's products to prohibited end users and to countries subject to economic and other sanctions implemented by the United States. BIS subsequently favorably modified these restrictions to reduce the applicability of the restrictions to sales of FLIR's Tau camera cores (as opposed to finished products containing Tau camera cores) to customers in China not identified on a list maintained by the United States Department of Commerce and persons in a country other than those in EARthe Export Administration Regulations ("EAR") Country Group A:5 (Supplement No. 1 to Part 740 of the EAR). If the Company is found to have violated applicable rules and regulations with respect to customers and limitations on the export and end use of the Company’s products, the Company could be subject to substantial fines and penalties, suspension of existing licenses or other authorizations and/or loss or suspension of export privileges.
TheAt this time, based on available information regarding these proceedings, the Company is unable to reasonably estimate the time it may take to resolve these matters or the amount or range of potential loss, penalty or other government action, if any, that may be incurred in connection with these matters. However, an unfavorable outcome could result in substantial fines and penalties or loss or suspension of export privileges or of particular authorizations that could be material to the Company’s financial position, results of operations or cash flows in and following the period in which such an outcome becomes estimable or known.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.Contingencies - (Continued)

Note 15.        Contingencies - (Continued)
SkyWatch Product Quality Matters
In March 2016, the Company learned of potential quality concerns with respect to as many as 315 Level III and Level IV SkyWatch Surveillance Towers sold by FLIR and companies acquired by FLIR from 2002 through 2014. The Company notified customers who purchased the affected SkyWatch Towers of the potential concerns and, as a precautionary measure, also temporarily suspended production of all Level III and Level IV SkyWatch Towers pending the completion of its review and the implementation of any necessary remedial measures. The Company identified the cause of these quality issues, notified customers of their option to request repair and modification of their in-field units, and has begun in-field repairs of identified affected units.
While there still remains uncertainty related to estimating the costs associated with a potential remedy and number of units which may require such remedy, the Company currently estimates the range of potential loss on remaining units to be between $5.1$3.0 million and $11.7$9.6 million. As no single amount within the range is a better estimate than any other amount within the range, the Company has recorded an accrual of $5.1$3.0 million in other current liabilities as of June 30, 2019.2020. Factors underlying this estimated range of loss may change from time to time, and actual results may vary significantly from this estimate.
Shareholder Derivative Lawsuit
In October 2018,June 2020, a shareholder filed a derivative lawsuit in the Circuit Court of Chancery for the State of Oregon for the County of Multnomah under the caption Stein v. Carter, et al.,Delaware, Case No. 18CV46824,2020-0464, against the Company, as a nominal defendant, and certain current and former directors of the Company. Pointing to the Company’s 2015 settlement with the United States Securities and Exchange Commission of alleged United States Foreign Corrupt Practices Act violations and 2018 settlement with United States Department of State of alleged export control violations, the complaint alleges that the Company’s directors breached their fiduciary duties by failing to ensure that the Company had internal controls in place that would have prevented the alleged underlying misconduct and these settlements. The complaint also asserts claims for, among other matters, corporate waste and unjust enrichment, and seeks unspecified monetary damages from the individual defendants, injunctive relief, disgorgement of director compensation, and attorneys’ fees and costs. Because the complaint is derivative in nature, it does not seek monetary damages from the Company. However, the Company may be required to advance, and ultimately be responsible for, the legal fees and costs incurred by the individual defendants.
On January 16, 2019, the defendants moved The Company expects to dismiss the complaint. On March 21, 2019, instead of opposing the defendants' motion, the plaintiff filed an amended complaint. On April 25, 2019, the defendants moved to dismiss the amended complaint. On July 22, 2019, after complete briefing and oral argument, the court granted the defendants’file a motion to dismiss the amended complaint without prejudice and with leave to amend. On July 29, 2019, the plaintiff informed the court that the plaintiff would not file a second amended complaint. The court has indicated that it will enter an order of judgment and dismissal without prejudice which is expected in the third quarter of 2019.2020.
Other Matters
The Company is also subject to other legal and administrative proceedings, investigations, claims and litigation arising in the ordinary course of business not specifically identified above. In these identified matters and others not specifically identified, the Company records a liability with respect to a matter when management believes it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of the loss. The Company believes it has recorded adequate provisions for any probable and estimable losses for matters in existence on the date hereof. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. While the outcome of each of these matters is currently not determinable,cannot be predicted with certainty, the Company does not expectbelieves the probability is remote that the ultimate resolutionoutcome of any such mattereach of these matters will individually have a material adverse effect on the Company’s financial position, results of operations or cash flows. The costs to resolve all such matters may in the aggregate have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 16.
Income Taxes
The provision for income taxes was as follows (in thousands, except percentages):
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Income tax provision$20,637
 $12,005
 $28,411
 $25,014
Effective tax rate25.2% 20.7% 27.0% 18.8%

The effective tax rate for the three and six months ended June 30, 2020 is higher than the United States Federal tax rate of 21.0 percent mainly due to non-recognition of the tax benefit of current year operating losses of a foreign subsidiary, an increase in unrecognized tax benefits related to positions taken on prior year tax returns, the addition of valuation allowance against deferred tax assets related to minority investments, and state taxes. These amounts were offset partially by benefits related to US export sales and research credits.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 18.
Income Taxes
The provision for income taxes was as follows:
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Income tax provision$12,005
 $11,390
 $25,014
 $26,810
Effective tax rate20.7% 13.7% 18.8% 19.5%


The effective tax rate for the three and six months ended June 30, 2019, is lower than the United States Federal tax rate of 21.0 percent mainly due to a reduction in previously non-deductible interest expense and excess tax benefits from stock compensation, offset partially by state taxes, higher tax rates applied to income earned in certain foreign jurisdictions, and other discrete items.Note 16.        Income Taxes - (Continued)
As of June 30, 20192020 and December 31, 2018,2019, the Company has accrued income tax liabilities of $42.9$37.1 million related to the transition tax enacted on December 22, 2017 as part of the Tax Cuts and Jobs Act. Of the amounts accrued, none areis expected to be due within one year. The remaining transition tax will not accrue interest and will be paid in annual installments beginning in 20202021 through 2024.
The Company has not provided United States, state or foreign income taxes for earnings generated after January 1, 2018 by certain subsidiaries outside the United States as management currently intends to reinvest the earnings in operations and other activities outside of the United States indefinitely. Should the Company subsequently elect to repatriate such foreign earnings, the Company would need to accrue and pay state and foreign income taxes, thereby reducing the amount of our cash. United States taxes would generally not be payable due to changes made by the Tax Cuts and Jobs Act.
As of June 30, 2019,2020, the Company had approximately $21.1$23.0 million of unrecognized tax benefits, all of which $21.7 million would affect the Company’s effective tax rate if recognized. The Company anticipates approximately $5.2$10.9 million of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of the applicable statute of limitations.
The Company classifies interest and penalties related to unrecognized tax benefits in the income tax provision. As of June 30, 2019,2020, the Company had $6.6$4.6 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.Sheets.
During the three-month period endingended December 31, 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of the Company's non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $323.4$322.2 million (Swedish kronor 3.0 billion). On March 26, 2020, the Company received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA's reassessment. The Company believesdoes not agree with the STA’s assertionsCourt’s ruling, continues to believe the STA's arguments in the reassessment are not in accordance with Swedish tax regulations or the treaty for the avoidance of double taxation between Sweden and plansBelgium, and has appealed the decision to defend the Company's positions with the STA and through the Swedish court system, as necessary.Administrative Court of Appeal in Stockholm. Consequently, no adjustment to the Company's unrecognized tax benefits has been recorded in relation to this matter. The Company has received a respite from paying the reassessment until after a decision by the Administrative Court of Appeal by putting in place a bank guarantee to secure possible future payment of the tax and interest. There can be no assurance that the Company’s appeal will be successful.
During the three-month period ended September 30, 2019, the European Commission announced the opening of a separate review to assess whether an excess profit tax ruling granted by Belgium to one of the Company's international subsidiaries is in breach of European Union state aid rules. The Company believes all taxes assessed by Belgium have been paid and has not adjusted unrecognized tax benefits in relation to this matter.
Management believes that the Company's recorded tax liabilities are adequate in the aggregate for its income tax exposures.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the bipartisan $2.0 trillion economic relief package aimed at helping American workers and businesses impacted by the coronavirus pandemic. The CARES Act, along with earlier issued IRS guidance, has allowed the Company to defer certain tax payments. The CARES Act, among other things, also contains numerous other provisions which may benefit the Company. The Company will continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.
The Company currently has the following tax years open to examination by major taxing jurisdictions:
 Tax Years:
United States Federal2015 - 20172016-2018
State of California2014 - 20172015-2018
State of Massachusetts2014 - 20172015-2018
State of Oregon2015 - 20172016-2018
Sweden2012 - 20172012-2018
United Kingdom2014 - 20172015-2018
Belgium2011 - 20172012-2018


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

Note 19.17.        Operating Segments and Related Information
Operating Segments
The Company’s chief operating decision maker ("CODM"), its Chief Executive Officer, evaluates each of its segments’ performance and allocates resources based on revenue and segment operating income. Intersegment revenues are recorded at cost and are eliminated in consolidation. The Company and each of its segments employ consistent accounting policies.
In the first quarter of 2020, the Company completed a business reorganization as part of its "Project Be Ready" restructuring plan which resulted in identification of 2 reportable segments (Industrial Technologies and Defense Technologies). The Company has three reportablecommenced operating segments as follows:and reporting under the new organization structure effective January 1, 2020. See Note 19, “Restructuring” for further information on Project Be Ready.
Industrial Business Unit
Technologies Segment. The Industrial business unitTechnologies segment develops and manufactures thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops, manufactures, and manufactures devicesservices offerings that image, measure, and assessanalyze thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications, imaging payloads for Unmanned Aerial Systems ("UAS"), and machine vision cameras, people countingcameras. Additionally, the segment develops, manufactures, and tracking,services fixed-mounted visible and thermal imaging solutionscameras and related analytics software for use by consumers in the smartphoneperimeter security, critical infrastructure, recreational and mobile devices markets. Productscommercial maritime, and traffic monitoring and control. Offerings include thermal imaging cameras, analytics software, gas detection cameras, firefighting cameras, process automation cameras, and environmental test and measurement devices.devices, security cameras, marine electronics, and traffic cameras.
Government and Defense Business Unit
Technologies Segment. The Government and Defense business unitTechnologies segment develops and manufactures enhanced imaging and recognition solutions for a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. The segment also develops and manufactures sensor instruments and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE") threats for military force protection, homeland security, and commercial applications. Offerings include airborne, land, maritime, and man-portable multi-spectrum imaging systems, radars, lasers, imaging components, integrated multi-sensor system platforms, CBRNE detectors, nano-class UAS solutions, and services related to these systems.
Commercial Business Unit
The Commercial business unit developssegment also produces advanced multi-mission unmanned air and manufactures cameras, video recordingground based systems serving US Department of Defense and video management systems for useFederal government agencies, public safety, and governmental customers in commercial and critical infrastructure, electronics and imaging instruments for the recreational and commercial maritime market, intelligent traffic monitoring and signal control systems, and hand-held and weapon-mounted thermal imaging systems for use in a variety of applications. Products include thermal and visible-spectrum security cameras, digital and networkedvideo recorders, and related software and accessories, a full suite of networked marine electronic systems including multi-function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and communications equipment for boats of all sizes, traffic cameras, sensors and associated traffic management software, and thermal scopes and handheld thermal cameras.international markets.
The following tables present revenue, segment operating income, and segment assets for the threetwo segments. OperatingSegment operating income as reviewed by the CODM is revenue less cost of goods sold and operating expenses, excluding general corporate expenses, separation, transaction, and integration costs, amortization of purchasedacquired intangible assets, amortization of acquisition-related inventory step-up, loss on sale of a businessrestructuring expenses and restructuringasset impairment charges, and other charges.discrete legal and compliance matters. Net accounts receivable, inventories and demonstration assets for the operating segments are regularly reviewed by management and are reported below as segment assets. All remaining assets, liabilities, capital expenditures, and depreciation are managed on a Company-wide basis.

Segment operating income information is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Revenue—External Customers:       
Industrial Technologies$300,198
 $284,489
 $576,613
 $555,875
Defense Technologies181,817
 197,509
 356,325
 370,859
 $482,015
 $481,998
 $932,938
 $926,734
Revenue—Intersegments:       
Industrial Technologies$3,927
 $3,876
 $6,629
 $8,462
Defense Technologies1,438
 1,436
 3,273
 2,947
Eliminations(5,365) (5,312) (9,902) (11,409)
 $
 $
 $
 $
Segment operating income:       
Industrial Technologies$107,137
 $71,633
 $171,402
 $140,652
Defense Technologies41,155
 45,786
 74,309
 92,676
 $148,292
 $117,419
 $245,711
 $233,328
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 19.17.        Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Operating segment information is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenue—External Customers:       
Industrial$188,902
 $188,421
 $368,272
 $359,079
Government and Defense197,509
 161,027
 370,859
 320,358
Commercial95,587
 103,259
 187,603
 212,888
 $481,998
 $452,707
 $926,734
 $892,325
Revenue—Intersegments:       
Industrial$3,348
 $6,164
 $9,546
 $12,496
Government and Defense1,436
 4,573
 2,947
 6,101
Commercial5,784
 3,601
 10,217
 8,081
Eliminations(10,568) (14,338) (22,710) (26,678)
 $
 $
 $
 $
Segment operating income:       
Industrial$62,077
 $58,096
 $118,974
 $103,550
Government and Defense48,970
 45,548
 97,237
 91,730
Commercial12,980
 17,367
 25,928
 31,839
 $124,027
 $121,011
 $242,139
 $227,119
A reconciliation of the Company's consolidated segment operating income to consolidated earnings before income taxes is as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 20182020 2019 2020 2019
Consolidated segment operating income$124,027
 $121,011
 $242,139
 $227,119
$148,292
 $117,419
 $245,711
 $233,328
Unallocated corporate expenses(34,672) (22,488) (65,711) (57,435)(29,026) (29,635) (65,270) (57,925)
Amortization of purchased intangible assets(21,045) (6,099) (26,974) (12,086)(11,754) (21,046) (23,650) (26,974)
Amortization of acquisition-related inventory step-up(899) 
 (899) 
Loss on sale of business
 
 
 (10,178)
Restructuring and other charges(3,674) (3,758) (3,736) (3,262)
Restructuring expenses(7,702) (3,001) (28,486) (3,610)
Consolidated earnings from operations63,737
 88,666
 144,819
 144,158
99,810
 63,737
 128,305
 144,819
Interest and non-operating expenses, net(5,614) (5,713) (11,939) (6,590)(17,916) (5,614) (23,213) (11,939)
Consolidated earnings before income taxes$58,123
 $82,953
 $132,880
 $137,568
$81,894
 $58,123
 $105,092
 $132,880
Unallocated corporate expenses include general corporate expenses, acquisition relatedseparation, transaction, and integration costs, amortization of acquired intangible assets, restructuring expenses and executive transition costs.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 19.        Operating Segmentsasset impairment charges, and Related Information - (Continued)
Operating Segments - (Continued)discrete legal and compliance matters.
A reconciliation of the Company's consolidated segment operating assets to consolidated total assets is as follows (in thousands):
June 30, December 31,June 30, December 31,
2019 20182020 2019
Operating segment assets:      
Net accounts receivable, inventories and demonstration assets:      
Industrial$273,938
 $266,457
Government and Defense361,580
 307,041
Commercial148,742
 137,560
Industrial Technologies$402,454
 $405,166
Defense Technologies366,786
 332,639
$784,260
 $711,058
$769,240
 $737,805
Goodwill:      
Industrial391,079
 391,603
Government and Defense725,436
 284,188
Commercial235,683
 228,780
Industrial Technologies633,421
 635,899
Defense Technologies707,568
 728,697
$1,352,198
 $904,571
$1,340,989
 $1,364,596
Total operating segment assets$2,136,458
 $1,615,629
$2,110,229
 $2,102,401
      
Assets not allocated:      
Cash and cash equivalents$268,885
 $512,144
$332,958
 $284,592
Prepaid expenses and other current assets77,577
 69,445
84,078
 86,337
Property and equipment, net251,684
 247,407
255,770
 255,905
Deferred income taxes98,330
 100,620
41,393
 39,983
Intangible assets, net273,225
 146,845
222,123
 247,514
Other assets138,527
 89,152
110,746
 120,809
Total assets$3,244,686
 $2,781,242
$3,157,297
 $3,137,541

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


Note 17.        Operating Segments and Related Information - (Continued)
Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands):
 Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
 Industrial Government and Defense Commercial Total Industrial Government and Defense Commercial Total
United States$99,122
 $134,216
 $35,534
 $268,872
 $200,332
 $243,519
 $67,747
 $511,598
Europe32,855
 25,000
 41,584
 99,439
 64,163
 51,596
 84,140
 199,899
Asia43,459
 17,548
 10,163
 71,170
 77,893
 34,934
 17,121
 129,948
Middle East/Africa2,922
 18,815
 2,864
 24,601
 6,691
 36,222
 8,960
 51,873
Canada/Latin America10,544
 1,930
 5,442
 17,916
 19,193
 4,588
 9,635
 33,416
 $188,902
 $197,509
 $95,587
 $481,998
 $368,272
 $370,859
 $187,603
 $926,734

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

Note 19.        Operating Segments and Related Information - (Continued)
Revenue and Long-Lived Assets by Geographic Area - (Continued)
 Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
 Industrial Technologies Defense Technologies Total Industrial Technologies Defense Technologies Total
United States$131,301
 $111,700
 $243,001
 $234,638
 $227,647
 $462,285
Europe77,831
 25,945
 $103,776
 143,166
 45,421
 $188,587
Asia60,951
 16,214
 $77,165
 134,338
 28,078
 $162,416
Middle East/Africa14,788
 25,094
 $39,882
 32,815
 50,222
 $83,037
Canada/Latin America15,327
 2,864
 $18,191
 31,656
 4,957
 $36,613
 $300,198
 $181,817
 $482,015
 $576,613
 $356,325
 $932,938
Three Months Ended June 30, 2018 Six Months Ended June 30, 2018Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
Industrial Government and Defense Commercial Total Industrial Government and Defense Commercial TotalIndustrial Technologies Defense Technologies Total Industrial Technologies Defense Technologies Total
United States$89,259
 $102,798
 $41,478
 $233,535
 $175,555
 $197,931
 $85,493
 $458,979
$134,656
 $134,216
 $268,872
 $268,079
 $243,519
 $511,598
Europe32,610
 18,701
 41,678
 92,989
 68,153
 35,903
 86,455
 190,511
74,439
 25,000
 99,439
 148,303
 51,596
 199,899
Asia49,655
 13,696
 9,339
 72,690
 83,711
 32,049
 18,303
 134,063
53,622
 17,548
 71,170
 95,014
 34,934
 129,948
Middle East/Africa4,873
 24,088
 6,448
 35,409
 8,538
 51,270
 12,008
 71,816
5,786
 18,815
 24,601
 15,651
 36,222
 51,873
Canada/Latin America12,024
 1,744
 4,316
 18,084
 23,122
 3,205
 10,629
 36,956
15,986
 1,930
 17,916
 28,828
 4,588
 33,416
$188,421
 $161,027
 $103,259
 $452,707
 $359,079
 $320,358
 $212,888
 $892,325
$284,489
 $197,509
 $481,998
 $555,875
 $370,859
 $926,734
Long-lived assets consist of net property and equipment, net identifiable intangible assets, goodwill and other long-term assets. Long-lived assets by significant geographic locations are as follows (in thousands):
June 30, December 31,June 30, December 31,
2019 20182020 2019
United States$1,154,649
 $720,885
$1,104,883
 $1,137,375
Europe447,438
 446,704
416,394
 435,024
Other foreign413,547
 220,386
408,351
 416,425
$2,015,634
 $1,387,975
$1,929,628
 $1,988,824
Major Customers
Revenue derived from major customers is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
United States government$156,161
 $120,244
 $293,654
 $239,199
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
United States government$130,047
 $156,161
 $262,196
 $293,654


Note 20.
Business Acquisitions and Divestitures
Business Acquisitions
Acyclica, Inc. On September 10, 2018, the Company completed a transaction to acquire 100% of the outstanding stock of Acyclica, Inc., a privately held software developer for automotive roadway and intersection data generation and analysis for approximately $9.7 million, including an estimate for contingent consideration pursuant to the stock purchase agreement. Based on the Company's preliminary purchase price allocation, the Company recorded $3.9 million of identified intangible assets and $6.0 million of goodwill in the Commercial business unit in the current quarter. The final allocation of the purchase price to identified intangible assets, goodwill, and the related tax attributes is subject to final determination of fair value and is expected to be finalized during the third quarter of 2019.
SeaPilot AB. On October 16, 2018, the Company acquired substantially all of the outstanding shares of SeaPilot AB, a privately held technology company for approximately $4.6 million in cash. During the current quarter, the Company preliminarily recorded $2.4 million of identified intangible assets and $2.3 million of goodwill in the Commercial business unit. The final allocation of the purchase price to identified intangible assets, goodwill, and the related tax attributes is subject to final determination of fair value and is expected to be finalized during the third quarter of 2019.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 20.18.
Business Acquisitions and Divestitures - (Continued)
Business Acquisitions - (Continued)
Aeryon Labs Inc. On January 28, 2019, the Company completed its acquisition of 100% of the outstanding stock of Aeryon Labs Inc., a privately held developer of high-performance UAS for the global military, public safety, and critical infrastructure markets for approximately $205.9 million in cash. Based on the Company's preliminary purchase price allocation, the Company recorded $44.3 million of identified intangible assets and $154.7 million of goodwill in the Government and Defense business unit in the current quarter. The final allocation of the purchase price to identified intangible assets, goodwill, and the related tax attributes is subject to final determination of fair value and is expected to be finalized during the fourth quarter of 2019.
The preliminary allocation of the purchase price for Aeryon Labs Inc. is as follows (in thousands):
Cash acquired $5,145
Other tangible assets and liabilities 6,096
Net deferred taxes (4,327)
Identified intangible assets 44,292
Goodwill 154,716
Total purchase price $205,922

Endeavor Robotics Holdings, Inc. On March 4, 2019, the Company completed its acquisition ofacquired 100% of the outstanding stock of Endeavor Robotics Holdings, Inc. ("Endeavor"), a privately held developer of tactical unmanned ground vehicles for the global military, public safety, and critical infrastructure markets for approximately $385.9 million in cash. Based onThe acquisition enhances the Company's preliminaryCompany’s offerings in unmanned ground systems and expands distribution channels in adjacent markets. During the first quarter of 2020, the Company completed the tax assessment for the short–period return that resulted in a goodwill adjustment of $12.6 million. Accordingly, the Company finalized the purchase price allocation the Companyand recorded $102.7 million of identified intangible assets and $284.3$271.4 million of goodwill in the Government and Defense business unit in the current quarter. Technologies segment.
The final allocation of the purchase price to identified intangible assets, goodwill, and the related tax attributes is subject to final determination of fair value and is expected to be finalized during the fourth quarter of 2019.
The preliminary allocation of the purchase price for Endeavor Robotics Holdings, Inc. is as follows (in thousands):
Cash acquired $6,687
 $6,687
Other tangible assets and liabilities 14,916
 14,915
Net deferred taxes (22,739) (9,776)
Identified intangible assets 102,740
 102,740
Goodwill 284,327
 271,365
Total purchase price $385,931
 $385,931

The goodwill of $271.4 million represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as a separate intangible asset. All of the goodwill presented above is not expected to be deductible for tax purposes.
The Company identified $102.7 million of intangible assets. The following table summarizes the acquired intangible assets and their estimated fair values and estimated useful lives (in thousands, except years):
 Estimated
Useful Life
 Amount
Developed technology5.0 years $60,400
In-process research and development9.0 years 28,000
Trademarks and trade name4.5 years 9,990
Backlog1.0 year 3,850
Customer contracts1.0 year 500
   $102,740

Acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology, in-process research and development, trademarks and backlog. Developed technology represents the economic advantage of having certain technologies in place that lower manufacturing and operating costs and drive higher margins. In-process research and development consist of proprietary robot technology. Trademarks provide value to the marketing or promotion of an entity and its products or services. Backlog represents “pre-sold” business at the date of acquisition, which provides positive earning streams post acquisition that exceed what is required to provide a return on the other assets employed.
The developed technology and in-process research and development were valued using the income approach and relief from royalty method. The trade names and backlog were valued using an income approach method.
New England Optical Systems, Inc. On May 1, 2019, the Company acquired 100% of the outstanding stock of New England Optical Systems, Inc., a privately-held engineering and manufacturing company engaged in the design and production of infrared optical assemblies. The transaction consideration includes an initial $22.0included a $21.9 million cash payment with up to an additional $12.0 million in deferred considerationcompensation payable over a two-year period. The final allocationDuring the first quarter of 2020, the Company finalized the purchase price allocation and concluded that there were no changes to the previously recorded $6.4 million of identified intangible assets and $14.0 million of goodwill in the Industrial Technologies segment as presented in Note 20, "Business Acquisitions and Divestitures" of the related tax attributes is subjectNotes to final determinationthe Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019. All of fair value andthe goodwill is expected to be finalized during the fourth quarter of 2019. Goodwill and intangibles will be recorded in the Industrial business unit, further expanding its vertically integrated manufacturing strategy. The preliminary unallocated purchase price of approximately $20.9 million has been reported in other assets as of June 30, 2019.deductible for tax purposes.
The business acquisitions listed above are not significant as defined in Regulation S–X under the Securities Exchange Act of 1934, nor are they significant compared to the Company's overall results of operations. Consequently, no pro forma financial information is provided.

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

Note 20.Business Acquisitions and Divestitures - (Continued)
DivestituresNote 19.Restructuring
In the first quarter of 2020, the Company initiated a strategy-driven restructuring plan, Project Be Ready, to simplify the Company’s product portfolio and better align resources with higher growth opportunities while reducing costs. Project Be Ready includes an organizational realignment, targeted workforce reductions, and facility optimization initiatives. All previously approved ongoing restructuring activities that were in process as of January 1, 2020 have been consolidated into Project Be Ready.
The Company expects to incur total costs of approximately $40.0 million to $55.0 million related to Project Be Ready, including approximately $20.0 million to $25.0 million of employee separation costs, approximately $5.0 million to $10.0 million of facility consolidation expenses, and approximately $15.0 million to $20.0 million of third party and other costs. The Company estimates that a majority of the Consumercumulative pretax costs will be cash outlays related to employee separation, facility consolidation, and Smallthird-party expenses and Medium-Sized Security Businessesthat the costs will continue through 2021.
On February 6, 2018Restructuring expenses related to Project Be Ready were as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Employee separation costs$6,888
 $
 $17,353
 $
Lease consolidation expenses
 
 204
 
Third party and other costs814
 
 10,929
 
Total Restructuring Program Expenses$7,702
 $
 $28,486
 $

During the Company sold the Consumerthree and Small and Medium-sized ("SMB") Security businesses within the Commercial business unit for total cash consideration of approximately $28.8 million. As a result of this combined sale,six months ended June 30, 2020, the Company recognized a total pre-tax loss of approximately $37.3$7.7 million (approximately $23.6and $28.5 million, respectively, of expense in yearconnection with Project Be Ready which have been recorded in “Restructuring Expenses” on the Consolidated Statements of Income.
The restructuring liability related to Project Be Ready was as follows (in thousands):
 Employee separation costs Third party and other costs Total
Balance at December 31, 2019$1,343
 $2,780
 $4,123
Accrual and accrual adjustments17,353
 11,133
 28,486
Cash payments(7,603) (13,079) (20,682)
Balance at June 30, 2020$11,093
 $834
 $11,927

During the three and six months ended December 31, 2017June 30, 2019, the Company recognized a total of $3.0 million and approximately $13.7$3.6 million, respectively, of expense in connection with other restructuring activities which have been recorded in “Restructuring Expenses” on the year ended December 31, 2018). This disposal did not qualify as discontinued operations and therefore, its operating results were included in the Company’s continuing operations for all periods presented through the dateConsolidated Statements of the sale.Income.

Note 21.20.
Subsequent Events
On July 18, 2019August 4, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.17 per share on its common stock, payable on September 6, 20194, 2020, to shareholders of record as of the close of business on August 23, 201921, 2020. The total cash payment of this dividend will be approximately $23.1$22.3 million.
On August 3, 2020, the Company issued and sold $500.0 million in aggregate principal amount of its 2.500 percent unsecured senior notes due 2030 (the “2030 Notes”). The public offering was made pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-234452) on file with the Securities and Exchange Commission, including a final prospectus and prospectus supplement filed by the Company on July 22, 2020. The 2030 Notes were issued under a Supplemental Indenture, dated as of August 3, 2020, between FLIR Systems, Inc. and U.S. Bank National Association, as trustee, to an Indenture, dated as of August 3, 2020, between FLIR Systems, Inc. and the trustee.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 20.        Subsequent Events - (Continued)
The underwritten public offering price of the 2030 Notes equaled 99.807 percent of their aggregate principal amount, yielding an effective rate (including financing fees and other regulatory, legal and processing fees) of approximately 2.650 percent per annum to maturity. Interest on the 2030 Notes is payable semiannually in arrears on February 1 and August 1 of each year beginning on February 1, 2021. The 2030 Notes will mature on August 1, 2030, unless earlier redeemed. The aggregate net proceeds from the offering were approximately $494.0 million after deducting underwriting discounts and commissions and estimated transaction expenses.
The proceeds from the sale of the Notes will be used to redeem FLIR’s $425.0 million in aggregate principal amount of 3.125 percent notes due June 15, 2021 (the “2021 Notes”), and for general corporate purposes, which may include funding for working capital, investments in our subsidiaries, capital expenditures, acquisitions, and stock repurchases. On July 20, 2020, FLIR issued a notice to holders of the 2021 Notes that it intends to redeem the 2021 Notes in full on August 19, 2020.
The Company expects to record a loss on extinguishment of the debt of approximately $9.0 million in the third quarter of 2020.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Impact of COVID-19
On January 30, 2020, the World Health Organization declared the recent coronavirus disease 2019 (“COVID-19”) outbreak as a global health emergency. On March 11, 2020, the World Health Organization raised the COVID-19 outbreak to “pandemic” status. Early on, the transmission of COVID-19 and efforts to contain its spread resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the U.S. and global economy and financial environments. More recently, state and local jurisdictions started to lift mandatory stay-at-home or shelter-in-place orders and started gradually to ease restrictions. In addition, as cases have resurged in parts of the U.S., including areas in which we maintain large facilities, we have seen governments slow or reverse efforts to reopen or shift into later phases of recovery, with increased risks to our operations.
The health and safety of our employees across the globe remain our top priority during this crisis. We have enacted stringent safety protocols to protect our employees and ensure we continue to service our customers. We initiated a site entry restriction policy for external visitors to our facilities. We have also developed contingency plans for staggered work schedules designed to reduce the number of employees working at a given time. We are regularly deep cleaning our facilities, advising all employees to follow safe hygiene practices, and requiring employees to stay home if they have any of the known symptoms or have come into contact with people who have tested positive for COVID-19. We have also implemented a global employee travel ban and allowed employees to work remotely if they are able to do so.
In aggregate, the outbreak did not have a material impact on our consolidated financial results in the first six months of 2020. While the Industrial Technologies segment has experienced heightened demand for its Elevated Skin Temperature (“EST”) cameras as a result of the COVID-19 pandemic, which are being deployed to help prevent the spread of the virus, this increase has been partially offset by lower volume in commercial end markets such as maritime and security products. The Defense Technologies segment has experienced administrative processing delays impacting the timing of bookings and revenue. These trends are likely to affect the segment’s results in subsequent quarters, although it is not yet possible to estimate the longer-term effects of the pandemic on demand for EST screening technology and other products.
We continue to monitor the rapidly evolving situation related to COVID-19. The extent to which COVID-19 impacts our operations or financial results will further depend on future developments, which are highly uncertain and cannot be predicted, including the status of state and local government reopening plans and any potential recurrence of illness, additional actions taken by governments, businesses and individuals to contain the virus or address its impact, new information which may emerge concerning the severity or treatability of the virus, and the extent of the economic downturn resulting from the response to the virus, among others.

Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on management’s current expectations, estimates, projections and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements, including management’s expectations regarding the Company’s ability to keep manufacturing facilities operational, the ability of the Company to rely on existing suppliers and vendors in its supply chain and management’s expectations to be able to mitigate future disruptions to the Company’s business operations are based on current expectations, estimates, and projections about FLIR’s business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks uncertainties and assumptionsuncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in “Risk Factors” section in Part II, Item 1A of this Report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as thosethe following:
risks related to United States government spending decisions and applicable procurement rules and regulations;
negative impacts to operating margins due to reductions in sales or changes in product mix;
impairments in the value of tangible and intangible assets;

unfavorable results of legal proceedings;
risks associated with international sales and business activities, including the regulation of the export and sale of our products worldwide and our ability to obtain and maintain necessary export licenses, as well as the imposition of significant tariffs or other trade barriers;
risks related to subcontractor and supplier performance and financial viability as well as raw material and component availability and pricing;
risks related to currency fluctuations;
adverse general economic conditions or volatility in our primary markets;
our ability to compete effectively and to respond to technological change;
risks related to product defects or errors;
our ability to protect our intellectual property and proprietary rights;
cybersecurity and other security threats and technology disruptions;
our ability to successfully manage acquisitions, investments and divestiture activities and integrate acquired companies;
our ability to achieve the intended benefits of our strategic restructuring;
our ability to attract and retain key senior management and qualified technical, sales and other personnel;
risks to our supply chain, production facilities or other operations, and changes to general, domestic, and foreign economic conditions, due to the COVID-19 pandemic; and
other risks discussed from time to time in filings and reports filed with the Company’s other Securities and Exchange Commission filingsCommission.
COVID-19 may exacerbate one or more of the aforementioned and/or other risks, uncertainties and reports.other factors more fully described in the Company’s reports filed with the SEC. In addition, such statements could be affected by general industry economic, and market conditions and growth rates, and general domestic and international economic conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporatedon which they are made and except as required by reference, the date of that document, andlaw, the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report,release, or for changes made to this document by wire services or Internetinternet service providers. If the Company updatesproviders, whether as a result of new information, future events, 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.otherwise.

Consolidated Operating Results
The following discussion of operating results provides an overview of our operationsoperating results by addressing key elements in our Consolidated Statements of Income. The “Segment Operating Results” section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Given the nature of our business, we believe revenue and earnings from operations, or operating income, (including operating margin percentage) are most relevant to an understanding of our performance at a segment level. Additionally, at the segment level we disclose backlog, which represents orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.no revenue has been recognized. Backlog is not an absolute indicator of future revenue because a portion of the orders in backlog could be delayed or canceled at the customer's discretion. WhileFurther, due to the COVID-19 pandemic, as described above within “Impact of COVID-19,” we are unsure how future results will compare to historic trends in the conversion of backlog is subject to order cancellations, we have not historically experienced a significant amount of order cancellations.revenue.
Revenue. Consolidated revenue for the three months ended June 30, 2020 and 2019, increased by 6.5 percent year over year, from $452.7 million in the second quarter of 2018 torespectively was consistent at $482.0 million in the second quarter of 2019.million. Consolidated revenue for the six months ended June 30, 2019 increased by 3.9 percent year over year, from $892.32020 totaled $932.9 million, in the first six months of 2018compared to $926.7 million infor the first six months ended June 30, 2019, reflecting an increase of 2019. Increases in revenues for the three month period$6.2 million or 0.7 percent. The revenue increase was primarily driven by increasesattributable to heightened demand for Elevated Skin Temperature ("EST") cameras in our Government and Defense business unit which is partially attributed to the acquisitions of Aeryon Labs Inc. ("Aeryon") and Endeavor Robotics Holdings Inc. ("Endeavor") during the first quarter of 2019 coupled with volume increases of unmanned solutions and surveillance systems. Increases in revenues for the sixth month period were primarily driven by increases in our Government and Defense business unit as noted above, partially offset by declines in our Commercial business unitIndustrial Technologies as a result of the divestitureCOVID-19 pandemic and contributions of unmanned revenues from the ConsumerAeryon Labs and SmallEndeavor Robotics acquisitions in Defense Technologies. These increases were partially offset by lower volume in commercial end markets such as maritime and Medium-sized ("SMB") Security businesses as announcedsecurity products in February 2018Industrial Technologies and volume declinesthe completion of certain contracts that contributed to revenue in the Maritime and Outdoor and Tactical Systems ("OTS") businesses.prior year in Defense Technologies.
The timing of orders, scheduling of backlog, and fluctuations in demand in various regions of the world can give rise to quarter to quarter and year over year fluctuations in the mix of revenue. Consequently, year over year comparisons for any given quarter may not be indicative of comparisons using longer time periods. We currently expect total annual revenue for 20192020 to be

higher than 2018 revenue,2019 revenue; however, unexpected changes in economic conditions from key customer markets or other major unanticipated events may cause total revenue, and the mix of revenue between our segments, to vary from quarter to quarter during the year.
International sales accounted for 44.249.6 percent and 48.444.2 percent of total revenue for the quartersthree months ended June 30, 2020 and 2019, respectively. International sales accounted for 50.4 percent and 2018,44.8 percent of total revenue for the six months ended June 30, 2020 and 2019, respectively. The proportion of our international revenue compared to total revenue will fluctuate from quarter to quarter due to normal variation in order activity across various regions as well as specific factors that may affect one region and not another. Overall, we anticipate that revenue from international sales will continue to comprise a significant percentage of total revenue.
Cost of goods sold. Cost of goods sold for the three months ended June 30, 2020 was $229.8 million, compared to $248.6 million for the prior year quarter. The decrease was primarily associated with lower revenue volume and intangible asset amortization in Defense Technologies and favorable product mix in Industrial Technologies. Cost of goods sold for the six months ended June 30, 2019 were $248.4 million and $459.52020 was $461.4 million, compared to cost of goods sold$459.5 million for the three and six months ended June 30, 2018 of $220.2 million2019. The slight increase was primarily associated with increases in unmanned revenues from the Aeryon Labs and $441.9 million. The increaseEndeavor Robotics acquisitions and increased intangible asset amortization in costDefense Technologies, partially offset by favorable product mix in Industrial Technologies.
Cost of goods sold for the three month period is partially attributed to the acquisitions of Aeryonincludes materials, labor and Endeavor coupled with volume increases of unmanned solutions and surveillance systems. The increase in cost of goods sold for the six

month period is primarily driven by the Government and Defense business unit for the same reasons noted for the three month period, partially offset by declines in our Commercial business unit as a result of the divestiture of the Consumer and SMB Security businessesoverhead costs incurred in the first quartermanufacturing of 2018products and volume declinesservices sold in the Maritimeperiod as well as warranty costs. Material costs include raw materials, purchased components and OTS businesses.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 quarterthree months ended June 30, 2019,2020 was $233.6$252.2 million, compared to $232.6$233.4 million for the same quarter last year.prior year quarter. Gross profit for the six months ended June 30, 20192020 was $467.3$471.6 million, compared to $450.5$467.3 million for the six month periodmonths ended June 30, 2018.2019. Gross margin, defined as gross profit divided by revenue, decreasedincreased to 52.3 percent for the three months ended June 30, 2020 from 51.448.4 percent in the second quarter of 2018 to 48.5 percent in the secondprior year quarter, of 2019primarily attributable to favorable product mix in Industrial Technologies and remained flat at 50.4 percentlower intangible asset amortization. Gross margin for the six months ended June 30, 2020 and 2019 compared towas consistent at approximately 50.5 percent for the six months ended June 30, 2018. The decrease in gross margin for the three month period was primarily due to the change in product mix in our Government and Defense business unit due to the acquisitions as noted above, as well as the increase in amortization of acquired intangible assets recorded during the period.percent.
Research and development expenses. Research and development expenses for the second quarterthree months ended June 30, 2020 totaled $56.0 million, or 11.6 percent of 2019 totaledrevenue, compared to $53.0 million, compared to $46.4 million inor 11.0 percent of revenue for the second quarter of 2018.prior year quarter. Research and development expenses for the first six months of 2019 were $101.0 million compared to $91.0 million for the first six months of 2018. Research and development expenses as a percentage of revenue were 11.0 percent for the three months ended June 30, 2019 and 10.32020 totaled $109.9 million, or 11.8 percent of revenue, compared to $100.6 million, or 10.9 percent of revenue for the threesix months ended June 30, 2018. Research and development expenses as a percentage of revenue for the first six months of 2019 were 10.9 percent and 10.2 percent during the first six months of 2018.2019. We have, and will continue to have, fluctuations in quarterly spending depending on product development needs and overall business spending priorities and believe that annual spending levels are most indicative of our commitment to research and development. Over the past five annual periods through December 31, 2018,2019, our annual research and development expenses have varied between 8.5 percent and 9.910.8 percent of revenue, and we currently expect these expenses to remain within that approximate range, on an annual basis, for the foreseeable future.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $116.9 million and $97.5 million for the quartersthree months ended June 30, 2019 and 2018, respectively.2020 were $88.7 million, or 18.4 percent of revenue, compared to $113.7 million, or 23.6 percent of revenue for the prior year quarter. Selling, general, and administrative expenses were $221.4 million and $205.1 million for the six months ended June 30, 2019 and2020 were $204.9 million, or 22.0 percent of revenue, compared to $218.2 million, or 23.5 percent of revenue for the six months ended June 30, 2018, respectively. The increases2019. Reductions for both the three and six month periods were primarily attributable to decreases in selling, general,intangible asset amortization, marketing, travel, and administrative expenses year over year is primarily attributed to acquisition related expenses for acquisitions occurring in the first half of 2019 and consent agreement related costs. The increase in selling, general and administrative expense during the first six months in 2019 compared to the first six months in 2018 is primarily attributed to acquisition related expenses for acquisitions occurring in the first half of 2019 and consent agreement related costs partially offset by the $15 million regulatory settlement that was recorded indeferred compensation expenses.
Restructuring. In the first quarter of 2018. Selling, general,2020, we initiated a strategy-driven restructuring plan, Project Be Ready, to simplify our product portfolio and administrative expensesbetter align resources with higher growth opportunities while reducing costs. Project Be Ready includes an organizational realignment, targeted workforce reductions, and facility optimization initiatives. All previously approved ongoing restructuring activities that were in process as a percentage of revenue were 24.2 percentJanuary 1, 2020 have been consolidated into Project Be Ready. We recorded net pre-tax restructuring charges for these programs during the three and 21.5 percent forsix months ended June 30, 2020 of $7.7 million and $28.5 million, respectively, which primarily represent employee separation costs and third party and other costs. During the quartersthree and six months ended June 30, 2019, and 2018, respectively. Selling, general, and administrative expenses as a percentage of revenue were 23.9 percent and 23.0 percent for the six month periods ended June 30, 2019 and June 30, 2018, respectively. Over the past five annual periods through December 31, 2018, our annual selling, general and administrative expenses have varied between 19.4 percent and 21.8 percent of revenue, and excluding the impact of the $15.0 million regulatory settlement cost described above, we currently expect these expenses to remain within that approximate range, on an annual basis, for the foreseeable future.
Loss on sale of business. During the first quarter of 2018, we recorded an additionalnet pre-tax loss on the salerestructuring charges of our Consumer$3.0 million and SMB Security businesses of $10.2 million. See$3.6 million, respectively, in connection with other restructuring activities. Refer to Note 20, "Business Acquisitions and Divestitures,"19, "Restructuring" of the Notes to the Consolidated Financial Statements for additional information.further discussion.
Interest expense. Interest expense for the three months ended June 30, 2019,2020 was $7.3$7.0 million, compared to $4.0$7.3 million for the same period of 2018. prior year quarter. Interest expense for the six months ended June 30, 20192020 was $12.8$13.9 million, compared to $8.0$12.8 million for the same period of 2018.six months ended June 30, 2019. Interest expense for the three and six month period inmonths ended June 30, 2020 and 2019, respectively,

was primarily associated with the $425 million aggregate principal amount of our 3.125 percent senior unsecured notes and interest on amounts drawn under our credit facility. Interest expense for the same periods in 2018 were primarily associated with the $425 million aggregate principal amount of our 3.125 percent senior unsecured notes.
Income taxes. Our income tax provision of $12.0 million and $25.0 million for the three and six months ended June 30, 2019,2020 was $20.6 million and $28.4 million, respectively, which represents an effective tax rate of 20.725.2 percent and 18.827.0 percent. Our income tax provision for the three and six months ended June 30, 20182019 was $11.4$12.0 million and $26.8$25.0 million, respectively, which represented an effective tax rate of 13.720.7 percent and 19.518.8 percent. The effective tax rate for the three and six months ended June 30, 2020 is higher than the United States Federal tax rate of 21 percent due to non-recognition of the tax benefit of current year operating losses of a foreign subsidiary, an increase in unrecognized tax benefits related to positions taken on prior year tax returns, the addition of valuation allowance against deferred tax assets related to minority investments, and state taxes. These amounts were offset partially by benefits related to US export sales and research credits. The effective tax rate for the three and six months ended June 30, 2019 is lower than the United States Federal tax rate of 21 percent mainly due to a reduction in previously non-deductible interest expense and excess tax benefits from stock compensation, offset partially by state taxes, higher tax rates applied to income earned in certain foreign jurisdictions, and other discrete items.
During the three-month period ending December 31, 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of our non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $323.4$322.2 million (Swedish kronor 3.0 billion). On March 26, 2020, we received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA's reassessment. We do not agree with the Court’s ruling, continue to believe the STA’s assertionsSTA's arguments in the

reassessment are not in accordance with Swedish tax regulations or the treaty for the avoidance of double taxation between Sweden and planBelgium, and have appealed the decision to defend our positions with the STA and through the Swedish court system, as necessary.Administrative Court of Appeal in Stockholm. Consequently, no adjustment to ourthe unrecognized tax benefits has been recorded in relation to this matter. We received a respite from paying the reassessment until after a decision by the Administrative Court of Appeal by putting in place a bank guarantee to secure possible future payment of the tax and interest. There can be no assurance that the appeal will be successful.
During the three-month period ended September 30, 2019, the European Commission announced the opening of a separate review to assess whether an excess profit tax ruling granted by Belgium to one of our international subsidiaries is in breach of European Union state aid rules. We believe all taxes assessed by Belgium have been paid and has not adjusted unrecognized tax benefits in relation to this matter.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the bipartisan $2.0 trillion economic relief package aimed at helping American workers and businesses impacted by the coronavirus pandemic. The CARES Act, along with earlier issued IRS guidance, has allowed us to defer certain tax payments. The CARES Act, among other things, also contains numerous other provisions which may benefit us. We continue to assess the effect of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.

Segment Operating Results
The Company is currently organized into three reportable segments. The threeIn the first quarter of 2020, we completed a business reorganization as part of its "Project Be Ready" restructuring program which resulted in identification of two reportable segments continue to be the Industrial business unit, Government(Industrial Technologies and Defense business unitTechnologies). We commenced operating and reporting under the Commercial business unit.new organization structure effective January 1, 2020. See Note 19,17, “Operating Segments and Related Information,”Information” of the Notes to the Consolidated Financial Statements for a description of each operating segment, including the types of products and services from which each operating segment derives its revenues.

IndustrialSee Note 19, “Restructuring” for further information on Project Be Ready.
Industrial business unitTechnologies Segment
Industrial Technologies operating results are as follows (in millions, except percentages):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenue$188.9
 $188.4
 $368.3
 $359.1
Earnings from operations62.1
 58.1
 119.0
 103.6
Operating margin32.9% 30.8% 32.3% 28.8%
Backlog, end of period    154
 181
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Revenue$300.2
 $284.5
 $576.6
 $555.9
Segment operating income107.1
 71.6
 171.4
 140.7
Segment operating margin35.7% 25.2% 29.7% 25.3%
Total backlog, end of period    $350.7
 $236.8

Industrial business unit revenueTechnologies revenues for the quarterthree months ended June 30, 2019 was flat2020 of $300.2 million increased by $15.7 million, or 5.5 percent compared to the same periodprior year quarter. Industrial Technologies revenues for the six months ended June 30, 2020 of 2018. Industrial business unit$576.6 million increased by $20.7 million, or 3.7 percent compared to the six months ended June 30, 2019. The revenue increase for both the three and six month periods was primarily attributable to heightened demand for Elevated Skin Temperature ("EST") cameras as a result of the COVID-19 pandemic, partially offset by lower volume in commercial end markets such as maritime and security products.
Segment operating income for the three months ended June 30, 2020 was $107.1 million, or 35.7 percent of revenue, compared to $71.6 million, or 25.2 percent of revenue in the prior year quarter. Segment operating income for the six months ended June 30, 2020 was $171.4 million, or 29.7 percent of revenue, compared to $140.7 million, or 25.3 percent of revenue for the six months ended June 30, 2019 increased by 2.6%, compared to the same period of 2018.2019. The increase in revenue for the six month period was predominately attributable to strong growth across the cooled cores product lines partially offset by declines in the Instruments and Integrated Imaging Systems (IIS) businesses. The increases in earnings from operations and correspondingsegment operating margin increase for both the three and six month periods ended June 30, 2019, comparedwas primarily attributable to the same periods of 2018, were predominately attributable toaforementioned higher revenue and associated gross profit volume, favorable product mix, led by the OEM business and productivity initiatives to improve manufacturing efficiencylower marketing, travel, and decrease product costs across all divisions. The decline in backlog as of June 30, 2019 when compared to thedeferred compensation expenses. Total backlog at June 30, 2018 is2020 was $350.7 million, reflecting an increase of 48.1 percent from the prior year quarter, primarily attributed toas a result of award timing and increased shipments of one large aerospace and defense customer as well as uncooled products in addition to the timing of orders which can fluctuate from period to period depending on customer purchasing timetables.for EST cameras.
Government and Defense Technologies Segment
Government and Defense business unitTechnologies operating results are as follows (in millions, except percentages):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenue$197.5
 $161.0
 $370.9
 $320.4
Earnings from operations49.0
 45.5
 97.2
 91.7
Operating margin24.8% 28.3% 26.2% 28.6%
Backlog, end of period    471
 352
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Revenue$181.8
 $197.5
 $356.3
 $370.9
Segment operating income41.2
 45.8
 74.3
 92.7
Segment operating margin22.6% 23.2% 20.9% 25.0%
Total backlog, end of period    $562.1
 $572.6
Government and Defense business unit revenueTechnologies revenues for the quarterthree months ended June 30, 2019 increased2020 of $181.8 million decreased by 22.7$15.7 million, or 7.9 percent compared to the same periodprior year quarter. Defense Technologies revenues for the six months ended June 30, 2020 of 2018. Government$356.3 million decreased by $14.6 million, or 3.9 percent compared to the six months ended June 30, 2019. The revenue decrease for both the three and Defense business unitsix month periods was primarily attributable to the completion of certain contracts that contributed to revenue in the prior year periods partially offset by increased volumes for unmanned revenues from the Aeryon Labs and Endeavor Robotics acquisitions.
Segment operating income for the three months ended June 30, 2020 was $41.2 million, or 22.6 percent of revenue, compared to $45.8 million, or 23.2 percent of revenue in the prior year quarter. The segment operating margin decrease was primarily attributable to the lower revenue and associated gross profit volume. Segment operating income for the six months ended June 30, 2020 was $74.3 million, or 20.9 percent of revenue, compared to $92.7 million, or 25.0 percent of revenue for the six months ended June 30, 2019 increased by 15.8 percent compared2019. The segment operating margin decrease was primarily attributable to the same period of 2018. Thelower revenue and associated gross profit volume, product mix and an increase in revenue for the threeresearch and six month periods endeddevelopment expenses. Total backlog at June 30, 2019, compared to the same periods2020 was $562.1 million, reflecting a decrease of 2018, was primarily driven by the Aeryon and Endeavor acquisitions during the first quarter of 2019 and increased volumes of UAS products and surveillance systems. Earnings from operations are only up slightly for the three and six month periods ended June 30, 2019 compared to the same periods of 2018 while operating margins declined for the same periods due to the inclusion of the operating losses1.8 percent from the same acquisitions noted above. See Note 20, "Business Acquisitions and Divestitures,"prior year quarter, primarily as a result of the Notes to the Consolidated Financial Statements for further information. The increase in

year-over-year backlog is primarily driven by the first quarter of 2019 acquisitions as noted above in addition to the timing of ordersorder and subsequent deployment timing of deployment offor a few major programs.
Commercial
Commercial business unit operating results are as follows (in millions, except percentages):
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenue$95.6
 $103.3
 $187.6
 $212.9
Earnings from operations13.0
 17.4
 25.9
 31.8
Operating margin13.6% 16.8% 13.8% 15.0%
Backlog, end of period    45
 64
Commercial business unit revenue for the quarter ended June 30, 2019 decreased by 7.4 percent compared to the same period of 2018. Commercial business unit revenue for the six month period ended June 30, 2019 decreased by 11.9 percent compared to the same period of 2018. The decrease in both revenue and earnings from operations and corresponding operating margin for the three month period ended June 30, 2019 compared to the same period of 2018 is primarily attributed to volume declines in our Maritime and OTS businesses. The decrease in both revenue and earnings from operations and corresponding operating margin for the six month period ended June 30, 2019 compared to the same period of 2018 is also attributed to volume declines in those same businesses as well as the divestiture of our Consumer and SMB Security business during the first quarter of 2018. The decrease in year-over-year backlog is partially attributed to volume declines in the Maritime and OTS businesses. Additionally, there was an international order in current backlog as of June 30, 2018, which was moved to non-current backlog in late 2018 and subsequently canceled.

Liquidity and Capital Resources
Overview
At June 30, 2019,2020, we had a total of $268.9$333.0 million in cash and cash equivalents, $70.8$106.2 million of which residedwas in the United States and $198.1$226.8 million was at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 2018,2019 of $512.1$284.6 million, of which $327.0$77.8 million residedwas in the United States and $185.1$206.8 million at our foreign subsidiaries. The decrease in cash and cash equivalents during the six months ended
At June 30, 2020 and December 31, 2019, was primarily due to cash used for business acquisitionswe had outstanding debt of $602.5 million, common stock repurchases of $50.0 million, dividend payments of $46.1 million, a minority interest investment of $5.0$846.7 million and capital expenditures$676.9 million, respectively, which consists of $17.8 million, partially offset by cash provided from operations of $123.3 million, net proceeds of $345.0 million from our revolving credit facility and long-term debt, and proceeds of $17.4 million from shares issued under our stock compensation plans.
Cash provided by operating activities during the six months ended June 30, 2019 totaled $123.3 million, which primarily consisted of net earnings, adjusted for depreciation and amortization, stock-based compensation, other non-cash items and changes in working capital. The decrease of cash provided by operating activities in 2019 compared to 2018 was primarily due to changes in working capital balances driven by increases in accounts receivable and accounts payable as well as a decrease in net income in the period.
Cash used by investing activities for the six months ended June 30, 2019 totaled $622.3 million, which consisted primarily of business acquisitions, a minority interest investment and capital expenditures in the ordinary course of business.
Cash provided by financing activities for the six months ended June 30, 2019 totaled $255.4 million, which primarily consisted of cash provided from net proceeds from our revolving credit facility and long-term debt, and proceeds from shares issued under our stock compensation plans, partially offset by repurchases of shares of our common stock and the payment of quarterly dividends.
On March 29, 2019, we entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., MUFG Union Bank, N.A., and the other lenders party thereto. The Credit Agreement amended and restated the Company's existing Amended and Restated Credit Agreement, dated as of May 31, 2016 ("Existing Credit Agreement"). The Credit Agreement provides for a $650.0 million unsecured revolving credit facility, a $100.0 million unsecured term loan facility available in U.S. dollars amortizing at 5.000 percent per annum,loans and a $150.0 million unsecured term loan facility available in Swedish kronor amortizing at 5.000 percent per annum. The Credit Agreement has a term of five years and matures on March 29, 2024. In connection with the closing of the Credit Agreement, we made an initial borrowing of $100.0 million in revolving loans, $100.0 million in term loans in U.S. dollars, and the equivalent

of $150.0 million in term loans in Swedish kronor. Additionally we repaid in full all outstanding amounts, consisting of revolving loans in an aggregate principal amount of $375.0 million, under the Existing Credit Agreement.
We have the right, subject to certain conditions, including approval of additional commitments by qualified lenders, to increase the availabilityborrowings under the revolving credit facility by an additional $200.0 million until March 29, 2024. The Credit Agreement allows us and certain designated subsidiariesthat we entered into during 2019 (collectively referred to borrow in United States dollars, European euros, Swedish kronor, British pound sterling, Japanese yen, Canadian dollars, Australian dollars, and other agreed upon currencies. Interest rates underas the Credit Agreement fluctuate depending on the typeAgreement) and tenor of the borrowing, with the most common being a Eurocurrency rate loan based on the published Eurocurrency rate (e.g. LIBOR) in which the loan is denominated. Interest rates under the Credit Agreement are governed based on the type and tenor of the borrowing and includes Eurocurrency rate loans based on the published Eurocurrency rate (e.g. LIBOR) in which the loan is denominated. The Eurocurrency rate loans have a floor of zeroour 3.125 percent and an applicable margin that ranges from 1.0 percent to 1.375 percent depending on the Company’s consolidated total leverage ratio. At June 30, 2019, the borrowing rate on the revolving loan was 3.652 percent per annum, the borrowing rate on the U.S. dollar term loan was 3.569 percent per annum and the borrowing rate on the Swedish kronor term loan was 1.250 percent per annum. The Credit Agreement requires us to pay a commitment fee on the amount of unused revolving commitments at a rate, based on our consolidated total leverage ratio, which ranges from 0.125 percent to 0.200 percent of unused revolving commitments. At June 30, 2019, the commitment fee on the amount of unused revolving credit was 0.175 percent per annum.senior unsecured notes due 2021 (the "2021 Notes"). The Credit Agreement contains one financial covenant that requires maintenance of a consolidated total leverage ratio with which we were in compliancecomplied at June 30, 2019.2020. On August 3, 2020, we issued and sold $500.0 million in aggregate principal amount of our 2.500 percent unsecured senior notes due 2030 (the “2030 Notes”). The credit facilities available underunderwritten public offering price of the Credit Agreement are unsecured.2030 Notes equaled 99.807 percent of their aggregate principal amount, yielding an effective rate (including financing fees and other regulatory, legal and processing fees) of approximately 2.650 percent per annum to maturity. Interest on the 2030 Notes is payable semiannually in

arrears on February 1 and August 1 of each year beginning on February 1, 2021. The Credit Agreement also contains language providing for the adoption of a LIBOR successor rate consistent with market practice.
To manage the interest rate risk arising2030 Notes will mature on August 1, 2030, unless earlier redeemed. The proceeds from the variabilitysale of the 2030 Notes will be used to redeem the 2021 Notes in interest expense attributablefull on August 19, 2020, and for general corporate purposes. On July 20, 2020, FLIR issued a notice to amounts drawn underholders of the Swedish kronor term loan, we entered into2021 Notes that it intends to redeem the 2021 Notes in full on August 19, 2020. We expect to record a floored amortizing interest rate swap with a Swedish kronor notional amount initially equivalentloss on extinguishment of the debt of approximately $9.0 million in the third quarter of 2020. See Note 13, "Debt" and Note 20, "Subsequent Events" of the Notes to $150.0 million. The interest rate swap was designated, and effective, as cash flow hedges.the Consolidated Financial Statements for more details.
We had $8.8$10.8 million of letters of credit outstanding under the Credit Agreement at June 30, 2019,2020, which reduced the total availability under the revolving commitments under the Credit Agreement.
In June 2016, weOn January 11, 2019, a standby letter of credit not to exceed Swedish kronor 2.2 billion, was issued $425.0 million aggregate principal amountunder a new bilateral letter of our 3.125 percent senior unsecured notes due June 15, 2021 (the “Notes”credit reimbursement agreement ("L/C Agreement"). The net proceeds to secure a payment guarantee required by the Swedish Tax Authorities in order to grant the original respite from paying the issuancetax reassessment described in Note 16, "Income Taxes" of the Notes wereto the Consolidated Financial Statement. The outstanding amount of the L/C Agreement was equivalent to approximately $421.0$238.2 million after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest onat June 30, 2020. While outstanding amounts under the Notes is payable semiannually in arrears on December 15 and June 15. The proceedsL/C Agreement do not reduce the available revolving credit from the Notes were usedCredit Agreement, they are considered indebtedness and influence the incremental debt capacity governed by our Credit Agreement covenants. The standby letter of credit was further amended on April 24, 2020 to repay our 3.750 percent senior unsecured notes that were due September 1, 2016,reflect the new respite.
We paid dividends of $22.3 million and are being used for general corporate purposes, which include working capital$45.0 million during the three and capital expenditure needs, business acquisitions,six months ended June 30, 2020, respectively, and repurchases of our common stock.
On February 8, 2017, our Board of Directors authorized$23.0 million and $46.1 million during the repurchase of up to 15.0 million shares of our outstanding common stock. This authorization expired on February 8, 2019. On February 7, 2019, our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. This authorization will expire on February 7, 2021. As ofthree and six months ended June 30, 2019, a total of approximately 1.0 million shares have been repurchased underrespectively.
For the February 7, 2019 authorization.
As of June 30, 2019 and December 31, 2018, the Company has accrued income tax liabilities of $42.9 million related to the transition tax enacted on December 22, 2017 as part of the Tax Cuts and Jobs Act. Of the amounts accrued, none are expected to be due within one year. The remaining transition tax will not accrue interest andnext 12 months, we anticipate that we will be paid in annual installments beginning in 2020able to meet our liquidity needs, including servicing our debt, through 2024.
We have not provided United States, state or foreign income taxes for earningsexisting cash on hand, cash generated after January 1, 2018 by certain subsidiaries outside the United States as we currently intend to reinvest the earnings infrom operations and, other activities outside of the United States indefinitely. Should we subsequently elect to repatriate such foreign earnings, we would need to accrue and pay state and foreign income taxes, thereby reducing the amount of our cash. United States taxes would generally not be payable due to changes made by the Tax Act.
During 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of our non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $323.4 million (Swedish kronor 3.0 billion). We believe the STA’s assertions in the reassessment are not in accordance with Swedish tax regulations and plan to defend our positions with the STA and through the Swedish court system, as necessary. Consequently, no adjustment to our unrecognized tax benefits has been recorded in relation to this matter.
We believe thatif needed, amounts available on our existing cash combined with the cash we anticipate generating from operating activities, and our available credit facilities andor financing available from other sources. However, as the impact of the COVID-19 pandemic on the global economy and our operations evolve, we will continue to assess our liquidity needs. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources willof liquidity and financial condition, and could materially adversely impact our customers or suppliers. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. In addition to the acquisitions and divestiture disclosed elsewhere, we have evaluated and expect to continue to evaluate possible transactions. Such transactions may be sufficient to meetmaterial and involve cash, our securities or the assumption or incurrence of additional indebtedness.
Summary of Cash Flows
The following table summarizes cash requirementsflow information for the next twelveperiods presented (in thousands):

months. We do not have any significant commitments nor are we aware
 Three Months Ended June 30, Six Months Ended June 30,
 2020 2019 2020 2019
Net cash provided by operating activities$63,149
 $67,790
 $114,015
 $123,301
Net cash used in investing activities(14,221) (31,541) (26,938) (622,264)
Net cash (used in) provided by financing activities(28,734) (52,933) (28,903) 255,381
Net cash provided by operating activities decreased $4.6 million for the three months ended June 30, 2020, when compared to the prior year quarter, primarily due to less favorable timing of any significant events or conditions that are likelyworking capital changes partially offset by higher net earnings after adding back non-cash adjustments.
Net cash provided by operating activities decreased $9.3 million for the six months ended June 30, 2020, when compared to have a material impact onthe prior year, primarily due to lower net earnings after adding back non-cash adjustments.
Net cash used in investing activities decreased $17.3 million for the three months ended June 30, 2020, when compared to the prior year quarter, primarily due to cash paid for business acquisitions in the prior year quarter.
Net cash used in investing activities decreased $595.3 million for the six months ended June 30, 2020, when compared to the prior year, primarily due to cash paid for business acquisitions in the prior year.
Net cash used in financing activities decreased $24.2 million for the three months ended June 30, 2020, when compared to the prior year quarter, primarily due to repurchases of common stock totaling $25.0 million in the prior year quarter.
Net cash used in financing activities increased $284.3 million for the six months ended June 30, 2020, when compared to the prior year, primarily due to lower net proceeds from our liquidity or capital resources.

revolving credit facility and long-term debt and an increase in repurchases of common stock.

Off-Balance Sheet Arrangements
As of June 30, 2019,2020, we did not have any off-balance sheet arrangements that have or are likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Recently Issued Accounting Pronouncements
In November 2018,For a discussion of these items, see Note 1, "Basis of Presentation and Accounting Standards Updates" of the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): ClarifyingNotes to the Interaction between Topic 808 and Topic 606" ("ASU 2018-18"). The standard clarifies that certain transactions between collaborative arrangement participants should be accounted for under ASC 606, when one participant is a customer, and specifies that a distinct good or service is the unit of account for evaluating whether the transaction is with a customer. The standard also provides some guidance on presentation of transactions not in the scope of ASC 606. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted as long as a company has already adopted the guidance in ASC 606. The Company plans to adopt the standard as of January 1, 2020 and is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.Consolidated Financial Statements.

Critical Accounting Policies and Estimates
Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Readers should refer toSee Management's Discussion and Analysis and the discussion of critical accounting policies and its use of estimates as reported in Note 1, "Nature of Business and Significant Accounting Policies" and Note 14,15, "Contingencies" of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019. Actual results in these areas could differ materially from management's estimates. There have been no significant changes in the Company's assumptions regarding critical accounting estimates during the first six months of 2019.ended June 30, 2020.

Contractual Obligations
There were no material changes to the Company's contractual obligations outside the ordinary course of its business during the quartersix months ended June 30, 2019, other than the $1002020. The Company borrowed an additional $175.0 million borrowed under the revolving credit facility during the six months ended June 30, 2020.
On August 3, 2020, the Company issued and $250sold $500.0 million borrowed underin aggregate principal amount of its 2.500 percent unsecured senior notes due 2030 (the “2030 Notes”). The underwritten public offering price of the term loan facility2030 Notes equaled 99.807 percent of their aggregate principal amount, yielding an effective rate (including financing fees and related interest underother regulatory, legal and processing fees) of approximately 2.650 percent per annum to maturity. Interest on the Credit Agreement, as described above2030 Notes is payable semiannually in "Liquidityarrears on February 1 and Capital Resources."August 1 of each year beginning on February 1, 2021. The 2030 Notes will mature on August 1, 2030, unless earlier redeemed. The proceeds from the sale of the 2030 Notes are expected to be used to redeem the 2021 Notes in full on August 19, 2020, and for general corporate purposes. On July 20, 2020, FLIR issued a notice to holders of the 2021 Notes that it intends to redeem the 2021 Notes in full on August 19, 2020. The Company expects to record a loss on extinguishment of the debt of approximately $9.0 million in the third quarter of 2020. See Note 13, "Debt" and Note 20, "Subsequent Events" of the Notes to the Consolidated Financial Statements for more details.

Contingencies
See Note 17, "Contingencies,"15, "Contingencies" of the Notes to the Consolidated Financial Statements for the disclosure of certain matters by the Company to the United States Department of State Office of Defense Trade Controls Compliance, communications to the Company from the United States Department of Commerce Bureau of Industry and Security, and the Company's current estimates of the range of potential loss associated with quality concerns identified by the Company regarding certain SkyWatch Surveillance Towers.Towers, among other matters.


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2019,2020, the Company has not experienced any changes in market risk exposure that would materially affect the quantitative and qualitative disclosures about market risk presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, other than the following:
Interest Rate Risk
The Company’s exposure to changes in market interest rates relates primarily to interest paid on the Company’s outstanding floating rate long-term debt. The Company’s outstanding floating rate long-term debt consists of amounts borrowed under our revolving loan facility that bearsas well as outstanding term loans. These borrowings bear interest at the respective Eurocurrency rate (e.g. LIBOR) plus a scheduled spread. Fluctuations in market interest rates will cause interest expense increases or decreases on such long-termoutstanding debt.
As our risk management objectives include mitigating the risk of changes in cash flows attributable to changes in the designated three-month Eurocurrency rate on the Company’s Swedish kronor term loan, the Company entered into a floored amortizing interest rate swap for the aggregate notional amount borrowed changes in the cash flows of the interest rate swap is expected to exactly offset the changes in cash flows attributable to fluctuations in the three-month Eurocurrency-based interest payments. The net effect of the swap is to convert the floating interest rate basis to a fixed rate of 0.59 percent.
It is expected that a number of banks currently reporting information used to set LIBOR will stop doing so after 2021. Such an occurrence could cause LIBOR to stop publication or cause LIBOR to no longer be representative of the underlying market. We are engaged in regular dialogue with our lenders and derivatives counterparties to keep apprised of the proposed successor rates in each of the jurisdictions in which we may have a need to execute a financial transaction. Although progress has been made by the various working groups, we believe our exposureit is too early to market risk associated withaccurately assess an impact of the expected discontinuation of LIBOR is limited because our revolving loan facility and related interest rate swap agreements include provisions for a successor rate. benchmark reform.
See Note 6, "Derivative Financial Instruments - Interest Rate Swap Contracts," Note 13, "Credit Agreement,"Debt," and Note 14, "Long-Term Debt,"20, "Subsequent Events" of the Notes to the Consolidated Financial Statements and Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for additional information on the Company's debt and interest rate risk.

ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2019,2020, the Company completed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. 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.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarterthree months ended June 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company implemented internal controls to ensure it adequately evaluated its contracts and properly assessed the impact of the new accounting standard related to leases on the Company's financial statements to facilitate the adoption on January 1, 2019. There were no significant changes to the Company's internal control over financial reporting due to the adoption of the new standard.




PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of its business. See Note 17,15, “Contingencies” of the Notes to the Consolidated Financial Statements for additional information on the Company’s legal proceedings.

ITEM 1A.    RISK FACTORS
The following are importantupdates and supplements the risk factors thatdescribed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and should be read in conjunction with the risk factors in the 2019 Form 10-K. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2019 Form 10-K which 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,affect our business, financial condition or future results. The COVID-19 pandemic has heightened, and resultsin some cases manifested, certain of operations could be materially adversely affected. Additionally,the risks 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 ofnormally face in operating 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 reductionincluding those disclosed in the purchase of our products by these agencies or contractors for these agencies would have a material adverse effect on our business. For2019 Form 10-K, and the fiscal years ended December 31, 2018, 2017 and 2016, approximately 29 percent, 26 percent and 25 percent, respectively, of our revenues were derived directly or indirectly from sales to the United States government and its agencies. The funding of contracts awarded to us depends on the overall United States government budget and appropriations process, which is beyond our control. A failure to pass budget appropriations, adopt continuing funding resolutions or other budgetary decisions limiting or delaying federal government spending, could reduce government spending on our products and services and have a material adverse effect on our business and our operating results.
In addition, at its discretion, the United States government may change its spending priorities and/or terminate, reduce or modify contracts.
Substantial uncertainty existsrisk factor disclosure in the spending levels and priorities2019 Form 10-K is qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q, including the updated risk factor set forth below. Except as set forth below, there have been no material changes from the risk factors previously disclosed under “Risk Factors” in 2019 Form 10-K.
The effects of the United States government, particularly with respect to military expenditures. Continued and further reductions in military spending could have a material adverse effect on our results from operations.
Considerable uncertainty exists regarding how future budget and program decisions will unfold, including the defense spending priorities of the United States government agencies. If annual appropriations bills are not timely enacted for fiscal year 2020 or beyond, the United States government may continue to operate under a continuing resolution. This could restrict new contract or program starts, presenting resource allocation challenges and placing limitations on some planned program budgets. We may also face another United States government shutdown of unknown duration. If a prolonged government shutdown of the Department of Defense were to occur, it could result in program cancellations, disruptions and/or stop work orders and could limit the United States government’s ability effectively to progress programs and to make timely payments, limit our ability to obtain necessary export licenses to ship internationally, and limit our ability to perform on our United States government contracts and successfully compete for new work. Consequently, significant delays or reductions in appropriations; long-term funding under a continuing resolution; an extended debt ceiling breach or government shutdown; and/or future budget and program decisions, among other items, may negatively impact our business and could have a material adverse effect on our financial condition and results of operations.
As a United States government supplier, we are subject to a number of procurement rules and regulations
Government contractors must comply with specific procurement regulations and other requirements and are subject to routine and non-routine audits and investigations by United States government agencies. In addition, violations of these regulations or other 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. The impairment or loss of our government contracts could have a material adverse effect on our business.

Operating margins may be negatively impacted by reduction in sales or by a change in the mix of products sold
Our expense levels are based, in part, on our expectations regarding future sales and these expenses are largely fixed in the short term. Some expenses, such as those related to research and development activities, would likely be maintained in the event of a sales downturn in order to maintain and enhance our long-term competitiveness. We maintain inventories of finished goods, components and raw materials at levels we believe are necessary to meet anticipated sales. Accordingly, we may not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted and actual sales. Any significant shortfall of sales may result in us carrying higher levels of inventories of finished goods, components and raw materials thereby increasing our risk of inventory obsolescence and corresponding inventory write-downs and write-offs. Our fixed costs, including facilities and information technology costs, compliance and public company costs, and depreciation and amortization related to previous acquisitions and capital expenditures, are significant and are difficult to reduce in the short term. Our operating margins vary by product and substantial changes in the mix of products sold could also have a negative impact on our operating margins.
We may experience impairment in the value of our tangible and intangible assets
Our industry is subject to rapid changes in technology, which may result in unexpected obsolescence or impairment of our assets. Our intangible assets, including goodwill, represent a significant portion of our total assets. Most of these intangibles are the result of acquisitions in which the purchase price exceeded the value of the tangible assets acquired. We amortize certain of these intangibles over their anticipated useful life and review goodwill and indefinite-lived intangible assets for impairment annually or more frequently if warranted by events. 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.
Unfavorable results of legal proceedings could materially adversely affect us
We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and could cause significant expense and diversion of management attention. From time to time, we are involved in lawsuits concerning intellectual property, torts, contracts, shareholder litigation, administrative and regulatory proceedings and other matters, as well as governmental inquiries and investigations, the outcomes of which may be significant to our results of operations and may limit our ability to engage in our business activities. In recognition of these considerations, we have and may in the future enter into material settlements to avoid ongoing costs and efforts in defending or pursuing a matter. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us thatCOVID-19 outbreak could adversely affect our business, results of operations, and financial condition
On January 30, 2020, the World Health Organization declared the recent coronavirus disease 2019 (“COVID-19”) outbreak as a global health emergency. On March 11, 2020, the World Health Organization raised the COVID-19 outbreak to “pandemic” status. The transmission of COVID-19 and efforts to contain its spread have resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the U.S. and global economy and financial environments. The ultimate impact of the COVID-19 pandemic on our business, results of operations and financial condition operating resultsis uncertain and cash flows. While we have insurance relateddifficult to predict, but the COVID-19 pandemic could cause sudden, significant disruptions in our business operations, itincluding the following:
We have experienced and may not applycontinue to experience disruptions in our supply chain from the actions of governments or fully cover liabilities we incurbusinesses intended to contain or slow the spread of the virus, such as closing factories or other operations that produce components necessary for our products, quarantining individuals around major commercial hubs, and/or restricting the transportation of goods and services.
We may experience significant workplace disruptions as a result of these lawsuits. We record accrualsemployees in our production facilities becoming sick or are quarantined as a result of exposure to COVID-19, which could necessitate closing such facilities or significantly reducing their output for liabilities where we believe a loss to be probablean extended period.
Delays in inspection, acceptance and reasonably estimable. However,payment by our actual costs may differ materially from these estimates.
We face risks fromcustomers, many of whom are working remotely, could also affect our sales and cash flows. Limitations on government operations can also impact regulatory approvals such as export licenses that are needed for international sales and business activities
We marketdeliveries. In addition, we could experience delays in international orders, many of which require lines of credit from local banks whose operations may be impacted by the COVID-19 pandemic. The Defense Technologies segment has and sell our products worldwide and international sales have accounted for, and are expected tomay continue to account for, a significant portion of our revenue. For the years ended December 31, 2018, 2017 and 2016, international sales accounted for 47 percent, 47 percent and 46 percent, respectively, of our total revenue. We also manufacture certain products and subassembliesexperience delays in Europe and we have several contract manufacturing agreements with third parties in Europe and in Asia. Certain of these products, particularly our thermal and infrared products, are subject to substantial government regulation and licensing and end use restrictions throughout the world. Our international business activities are subject to a number of risks, including:
the imposition of and changes to governmental licensing restrictions and controls impacting our technology and products;
restrictions and prohibitions on the export of technology and products, including any applicable changes in regulation prohibiting the sale of certain of our products to certain end users without a license;
international trade restrictions;
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 laws applicable to global trade and United States exports and costs and penaltiesorders from violations of such laws and related regulations, including the costs associated with required remedial and other increased compliance activity;
difficulties in staffing and managing international operations; and
instability in economic or political conditions, inflation, recession, actual or anticipated military or political conflicts, and potential impact due to the upcoming exit of the United Kingdom (the "U.K.") from the European Union (the "EU"), colloquially referred to as "Brexit".
Some of these factors recently have had an adverse impact on our sales and operations and increased our cost of doing business and subjected the business to additional rules, policies and procedures that impacted the operation of the Company. 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 United States laws and regulations that apply to our international operations increases our cost of doing business both in the United States and in international jurisdictions. These regulations include import and export laws, anti-competition laws, anti-corruption laws, such as the FCPAforeign government agencies, and the U.K. Bribery Act,Industrial Technologies segment has and may continue to experience a decline in demand for industrial and consumer products that are deemed non-essential. As a result of the COVID-19 crisis, there may be changes in our customers’ priorities and practices, as our customers confront competing budget priorities and more limited resources. These changes may impact current and future programs, government payments and other local laws prohibiting corrupt payments to governmental officials, data privacy requirements, tax laws,practices, procurements, and accounting, internal control and disclosure requirements. For example, on April 8, 2015, the Company and the Securities and Exchange Commission (“SEC”) entered into an agreement through entry of an Order Instituting Cease-and-Desist Proceedings funding decisions.
Pursuant to Section 21Cgovernment closure orders intended to contain or slow the spread of the Securities and Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the “SEC Order”). The SEC Order settled charges under the FCPA with respect to incidents of improper travel and gifts involving FLIR’s Middle East operation. Pursuant to the SEC Order, we are obligated to “cease and desist” from committing any future violations of the Securities Exchange Act of 1934, as amended. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our reputation, business and results of operations. In certain foreign jurisdictions, there is a higher risk of fraud or corruption and greater difficulty in maintaining effective internal controls and compliance programs. Further, althoughvirus, we have implemented and continuebeen required to implement policies and procedures designed to promote compliance with applicable laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies or applicable laws and regulations.
On April 24, 2018, we entered into a Consent Agreement with the United States Department of State’s Directorate of Defense Trade Controls (“DDTC”) to resolve allegations regarding the unauthorized export of technical data and defense services to dual and third country nationals inclose certain of our facilities that perform work that is deemed non-essential. One or more additional facilities could become subject to similar orders, which could further disrupt our operations if the failure to properly use and manage export licenses and export authorizations, and failures to report certain payments under 22 CFR Part 130 in potential violationwork performed at such facilities cannot be conducted remotely, necessitating the furloughing of ITAR. The Consent Agreement has a four-year term and provides for: (i) a civil penalty of $30 million with $15 million of this amount suspended on the condition that the funds have or will be used for Department-approved Consent Agreement remedial compliance measures, (ii) the appointment of an external Special Compliance Official to oversee compliance with the Consent Agreement and the ITAR; (iii) two external auditssome of our ITAR compliance program; and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures, and training. During the three-month period ended March 31, 2018,employees or a permanent reduction in our workforce.
If we recorded a $15 million charge for the portion of the penalty that isdo not subject to suspension. As of June 30, 2019, the remaining amounts payable of $3.5 million and $7.0 million have been recorded in other current liabilities and pension and other long-term liabilities, respectively. We expect recent and future investments in remedial compliance measures will be sufficient to cover the $15 million suspension amount.
As part of the Consent Agreement, DDTC acknowledged that we voluntarily disclosed certain of the alleged Arms Export Control Act and ITAR violations (which were resolved pursuantrespond appropriately to the Consent Agreement), cooperated in DDTC’s review,pandemic, or if customers do not perceive our response to be adequate, we could suffer damage to our reputation and instituted a numberour brands, which could adversely affect our business.

Deterioration of compliance program improvements.worldwide credit and financial markets could adversely affect our ability to obtain financing on favorable terms and continue to meet our liquidity needs.
In addition, across the globe, the response to the pandemic generally has involved a dramatic, rapid reduction in social and economic activity, which has led to a global recession which could be protracted. Therefore, while we have experienced increased demand for certain products that are used to help prevent the virus’s spread (such as our international contractsremote skin temperature sensors), the global economic downturn caused by the pandemic could significantly reduce demand for certain other products and services, particularly those with industrial or consumer applications. Furthermore, the resumption of our normal business operations after COVID-19-related interruptions may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreementsbe delayed or other financial obligations, known as offset obligations, and may provide for penalties if we fail to meet such requirements. The impactconstrained by lingering effects of these factors is difficult to predict, but one or more of them could have a material adverse effectCOVID-19 on our financial position, results of operations, suppliers, third-party service providers, and/or cash flows.

customers.
We face risks from Brexit
Brexit has created uncertainty aboutcontinue to monitor the future relationship between the U.K. and the EU. A draft withdrawal agreement was published in November 2018 but was rejected by the British Parliament and we are still uncertain about the final agreements they will reach on topics such as financial laws and regulations, tax and free trade agreements, immigration laws, and employment laws.rapidly evolving situation related to COVID-19. The EU and U.K. have agreed to a further delay to Brexit until October 31, 2019, while the U.K. could leave earlier if a withdrawal agreement is ratified by the British Parliament.
We have significant operations and a substantial workforce in Europe, a portion of which reside in the U.K. and therefore enjoy certain benefits based on the U.K.’s membership in the EU. The lack of clarity about Brexit and the future U.K. laws and regulations creates uncertainty for us, as the outcome of these negotiations may affect our business and operations. Additionally, there also is a risk that other countries may decide to leave the EU. The uncertainty surrounding Brexit not only potentially affects our business in the U.K. and the EU, but may have a material adverse effect on global economic conditions and the stability of global financial markets, which in turneffects described above, alone or taken together, could have a material adverse effect on our business, financial condition, and results of operations. Additionally, any development that has the effect of devaluing the European euro or British pound sterling could meaningfully reduce the value of our assets and reduce the usefulness of liquidity alternatives denominated in that currency, such as our multicurrency credit facility.
We face risks from currency fluctuations
Historically, currency fluctuations have affected our operating results. Changes in the value of foreign currencies in which our sales or costs incurred are denominated have in the past caused, and could in the future cause, fluctuations in our operating results. We seek to reduce our exposure to currency fluctuations by denominating, where possible, our international sales in United States dollars, by balancing expenses and revenues in various currencies and by undertaking limited hedging of forecasted currency exposures. With respect to international sales denominated in United States dollars, a decrease in the value of foreign currencies relative to the United States dollar could make our products less price competitive.
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 licenses and other authorizations may be required from United States government agencies under the ITAR, the EAR, the Office of Foreign Assets Control (“OFAC”) Regulations, the Trading with the Enemy Act of 1917, the International Emergency Economic Powers Act (“IEEPA”), the Arms Export Control Act of 1976 (“AECA”), and other similar laws and regulations for the sale, use and export of many of our products and related data and services. Thermal and infrared products and technical data have been subject to the ITAR and EAR, historically under United States Munitions List ("USML") Category XII and Commerce Control List ("CCL") Category 6. The United States Government’s export reform effort resulted in the transition of various Company products from the USML to the CCL, shifting the licensing requirements and restrictions for products regulated by the Department of Commerce under the EAR. This transition has increased the licensing requirements and restrictions on some products and reduced the requirements and restrictions on others. We can give no assurance that we will be successful in obtaining the necessary licenses from the United States Department of State or Department of Commerce required to conduct our business as presently or historically conducted.
The United States export licensing environment has been affected by a number of factors, including but not limited to, the aftermath of 9/11, the rise of terrorism and the changing geopolitical environment, heightened tensions with other countries (which shift and evolve over time), and the United States reliance on the tactical advantage of the night-time war fighter. Some of these factors have affected the thermal imaging and infrared technology industry overall while others have impacted us directly. In addition, the Consent Agreement and related submissions and other communications concerning our licensing posture overall have led to heightened scrutiny of export licenses for products in our markets and, in some cases, highlight DDTC’s focus on the manner in which we handle exports of our products, technical data and services subject to the ITAR. In addition, concerns with respect to potential diversion of certain of our products to prohibited end users and countries subject to economic and other sanctions implemented by the United States government has caused the United States Department of Commerce Bureau of Industry and Security to restrict our ability to sell 9hz thermal products without a license to customers in China not identified on a list maintained by the United States Department of Commerce.
Although we have taken actions and continue to take additional actions necessary to implement policies and procedures to promote an improved compliance culture and programs, there is no guarantee that our actions will be effective or that government agencies will not view our actions and programs with heightened scrutiny, including as a result of events outside of our control. As a result, we may receive more restrictive provisos or limitations on new license requests, wholesale denials of our license requests, suspensions or terminations of our existing licenses, or delays in receiving new licenses resulting from requests for follow-up

information, due diligence requests or additional limitations on our sale to third parties. We can give no assurance that we will be successful in obtaining necessary licenses required to facilitate our international business. Failures to obtain or delays in obtaining licenses may prevent or limit our ability to market, sell, export, or transfer our products outside the United States and has had and could continue to have a material adverse effect on our business and our operating results.
General economic conditions may adversely affect our business, operating results and financial condition
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of capital investment and consumer spending. Economic factors that could adversely influence demand for our products include uncertainty about global economic conditions leading to reduced levels of investment, changes in government spending levels and/or priorities, the size and availability of government budgets, customers’ and suppliers’ access to credit, consumer confidence and other macroeconomic factors affecting government, industrial or consumer spending behavior.
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. For example, there is uncertainty around the implementation of Brexit and its impact on us and global economic conditions generally.
Our primary markets are volatile and unpredictable
Our business depends on the demand for our products and solutions in a variety of commercial, industrial and government markets. In the past, the demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control, including:
the timing, number and size of orders from, and shipments to, our customers, as well as the relative mix of those orders;
variations in the volume of orders for a particular product or product line in a particular fiscal quarter;
the size and timing of new contract awards;
the timing of the release of government funds for procurement of our products; and
the timing of orders and shipments within a given fiscal quarter.

Seasonal fluctuations in our operating results are an outcome of:
the seasonal pattern of contracting by the United States government and certain foreign governments;
the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations; and
the tendency of commercial enterprises to utilize fully annual capital budgets prior to expiration.
Competition in our markets is intense and our failure to compete effectively could adversely affect our business
Competition in the diverse markets for our products is intense. The speed with which companies can identify new applications for thermal imaging, develop products to meet those needs and supply commercial quantities at low prices to the market are important competitive factors. We believe the principal competitive factors in our markets are product performance, price, customer service and training, product reputation, and effective marketing and sales efforts. Many of our competitors have greater financial, technical, research and development, and marketing resources than we do. All of these factors, as well as the potential for increased competition from new market entrants, require us to continue to invest in, and focus on, research and development and new product innovation. 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. It also could disrupt sales and affect our reputation and that of our products, which could have a material adverse effect on our business, financial condition and results of operations. As we expand our presence into new markets, we may face increased exposure to product liability claims. We maintain product liability insurance but cannot be certain that it will be sufficient or will continue to be available on acceptable terms.

Amounts included in our backlog may not result in actual revenues or translate into profits
Many contracts are subject to cancellation or suspension on short notice at the discretion of the customer, and the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contract. We have historically experienced variances in the components of backlog related to delivery delays or cancellations resulting from customer-specific circumstances, external market factors and economic factors beyond our control, and we may experience more delays or cancellations in the future. Accordingly, there is no assurance that backlog will actually be realized. If our backlog fails to materialize, we could experience a reduction in revenues and a decline in profitability, which could result in a deterioration of our financial position and liquidity.
Significant tariffs, restrictions on imports or other trade barriers between the United States and various countries, most significantly China, may impact our revenue and results of operations,
In July 2018, legal exposure, or financial condition. A sustained or prolonged outbreak could exacerbate the Office of the U.S. Trade Representative announced a list of Chinese imports that currently face tariffs of between ten and twenty-five percent. These tariffs currently affect some of the components of our products we import from China, and we may raise our prices on those products due to the tariffs or share the costadverse impact of such tariffs with our customers,effects. The extent to which could harm our operating performance or cause our customers to seek alternative suppliers. It is possible that further tariffs may be imposed on our other imports, or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes toCOVID-19 impacts our operations any ofor financial results will further depend on future developments, which could materially harm our revenue or operating results. In addition, we may seek to shift some of our manufacturing supply chain to other countries, which could result in disruption to our operations.

Risks, Uncertainties and Other Factors Related to Our Technology and Intellectual Property
Our inability to protect our intellectual property and proprietary rights and avoid infringing the rights of others could harm our competitive position and our business
Our ability to compete successfully and achieve future revenue growth depends, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others. To accomplish this, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements and contractual provisions to protect our proprietary rights. Many of our proprietary rights are held in confidence as trade secrets and are not covered by patents, making them more difficult to protect. Although we currently hold worldwide patents covering certain aspects of our technologies and products, and we are actively pursuing additional patents, we cannot be certain that we will obtain additional patents or trademarks on our technology, products and trade names. Furthermore, we cannot be certain that our patents or trademarks will not be challenged or circumvented by our competitors or that measures taken by us to protect our proprietary rights will adequately deter their misappropriation or disclosure. Any failure by us to protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Moreover, because intellectual property does not necessarily prevent our competitors from entering the markets we serve, 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 pasthighly uncertain and cannot be sure that we will not be subjectpredicted, including additional actions taken by governments, businesses and individuals to such litigation incontain the future. Similarly, there exists the possibility we will assert claims in litigation to protect our intellectual property. Lawsuits defendingvirus 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 oraddress its 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.
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, controls, and risk transfer mechanisms, there can be no assurance that such actions will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information, corruption of data, or financial loss.
We require user names and passwords in order to access our information technology systems. We use encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to our data or accounts. These security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities. For example, third parties may attempt to induce by fraud employees or customers into disclosing user names, passwords or other sensitive information which may in turn be used to access our information technology systems. These security systems cannot provide absolute security. Toemerge concerning the severity or treatability of the virus, and 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 manage effectively 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 useconomic downturn resulting 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 integrate successfully recent or future acquisitions into our operations, thereby disrupting our business and harming our financial condition and results of operations
We have made twelve 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 subjectresponse 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.virus, among others.
We have indebtedness as a result of the issuance of our 3.125 percent senior unsecured notes (the “Notes”) and borrowings against our unsecured credit facility, and we are subject to certain restrictive covenants under our unsecured credit facility and the indenture governing the Notes, and changes in the rate at which we can obtain indebtedness, any of which may limit our operational and financial flexibility
Our ability to meet our debt service obligations and comply with the financial covenants under our credit facility will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Our inability to meet our debt service obligations or comply with the required covenants could result in a default under the credit facility or indenture. In the event of any such default, under the credit facility, the lenders thereunder could elect to declare all outstanding debt, accrued interest and fees under the facility to be due and immediately payable. In the event of any such default under our indenture, either the trustee or the holders of at least 25 percent of the outstanding principal amount of the Notes could declare the principal amount of all of the Notes to be due and payable immediately. OurCertain of our indebtedness may use LIBOR as ais intrinsically linked to benchmark for establishing the interest rate. LIBOR has beenrates that are the subject of recent national, international and other regulatory guidance and proposals for reform and itglobal benchmark rate reform. The phasing out of rates, such as LIBOR, is expected that a number of banks currently reporting information used to set LIBORoccur by 2021 and the market will stop doing so after 2021. Such an occurrence could cause LIBORtransition to stop publication or cause LIBOR to no longer be representative of the underlying market.new benchmark rates. While we believe our exposure to market risk associated with the expected discontinuation of LIBOR is limited because our Notes carry a fixed-rate coupon and our unsecured credit facility agreement includes provisions for a successor rate, the consequences of these developments cannot be entirely predicted.predicted or reasonably estimated. If LIBOR is no longer available or if our lenders have increased costs due to changes in LIBOR, it could adversely impact our interest expense, results of operations and cash flows.
We may not be able to refinance our indebtedness on favorable terms, if at all, which could materially and adversely affect our liquidity and our ongoing results of operations
Our ability to refinance indebtedness, including the Notes, will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our indebtedness, including the Notes, could also require us to comply with more onerous covenants and further restrict our business operations. Our inability to refinance our indebtedness or to do so upon favorable terms could materially and adversely affect our business, results of operations, financial condition and cash flows, and make us vulnerable to adverse industry and general economic conditions.
We are effectively self-insured against many potential liabilities

Although we maintain insurance policies with respect to a broad range of risks, including automobile liability, general liability, workers’ compensation and employee group health, these policies do not cover all possible claims and certain of the policies are subject to large deductibles. Accordingly, we are effectively self-insured for a substantial number of actual and potential claims. In addition, if any of our insurance carriers defaulted on its obligations to provide insurance coverage by reason of its insolvency or for other reasons, our exposure to claims would increase and our profits would be adversely affected. Our estimates for unpaid claims and expenses are based on known facts, historical trends and industry averages, utilizing the assistance of actuarial services. The determination of such estimated liabilities and their appropriateness are reviewed and updated at least quarterly. However, these liabilities are difficult to assess and estimate due to many relevant factors, the effects of which are often unknown, including the severity of an injury or damage, the determination of liability in proportion to other parties, the timeliness of reported claims, the effectiveness of our risk management and safety programs and the terms and conditions of our insurance policies. Our accruals are based upon known facts, historical trends and our reasonable estimate of future expenses, and we believe such accruals are adequate. However, unknown or changing trends, risks or circumstances, such as increases in claims, a weakening economy, increases in medical costs, changes in case law or legislation or changes in the nature of the work we perform, could render our current estimates and accruals inadequate. In such case, adjustments to our balance sheet may be required and these increased liabilities would be recorded in the period that the experience becomes known. Insurance carriers may be unwilling, in the future, to provide our current levels of coverage without a significant increase in insurance premiums and/or collateral requirements to cover our obligations to them. Increased collateral requirements may be in the form of additional letters of credit and/or cash, and an increase in collateral requirements could significantly reduce our liquidity. If insurance premiums increase, and/or if insurance claims are higher than our estimates, our profitability could be adversely affected.
Changes in our effective income tax rate may have an adverse effect on our results of operations
We are subject to taxes in the United States and numerous foreign jurisdictions, including 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, in the United States and in foreign jurisdictions.
Our future effective tax rate may be adversely affected by a number of additional factors including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the valuation of our deferred tax assets and liabilities;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in share-based compensation expense;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles;
changes in foreign tax rates or agreed upon foreign taxable base; and/or
the repatriation of earnings from outside the United States for which we have not previously provided for United States taxes.
Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the United States Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our financial condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor. For example, during the three-month period ending December 31, 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of the Company's non-operating subsidiaries in Sweden. The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $323.4 million (Swedish kronor 3.0 billion). We believe the STA’s assertions in the reassessment are not in accordance with Swedish tax regulations and plan to defend our positions with the STA and through the Swedish court system, as necessary. Consequently, no adjustment to our unrecognized tax benefits has been recorded in relation to this matter. We believe that our recorded tax liabilities are adequate in the aggregate for its income tax exposures.
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted on December 22, 2017.  The Tax Act, among other things, (i) permanently reduces the U.S. corporate income tax rate to 21 percent beginning in 2018, (ii) provides for a five year period of 100 percent bonus depreciation followed by a phase-down of the bonus depreciation percentage, and (iii) provides for more general changes to the taxation of corporations, including changes to the deductibility of interest expense, the adoption of a modified territorial tax system, assessing a repatriation tax or “toll-charge” on undistributed earnings and profits

of U.S.-owned foreign corporations, and introducing certain anti-base erosion provisions. The long-term impact of the Tax Act on the general economy cannot be reliably predicted at this time and continues to require rule-making and interpretation in a number of areas.
The Tax Act requires complex computations not previously required by U.S. tax law. As such, the application of certain accounting guidance is currently evolving. Further, compliance with the Tax Act and the accounting for certain provisions require accumulation of information not previously required or regularly produced. As additional interpretative guidance is issued by the applicable authorities, we will continue our analysis on the application of the Tax Act and may need to revise our current estimates in future periods. The revisions to our current estimates could materially affect our results of operations, cash flow and financial position.
State of OregonDelaware law and our chartergoverning 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 ArticlesCertificate of Incorporation and Bylaws, including our ability to issue preferred stock without further action by our shareholders, as well as provisions of the General Corporation Law of the State of Oregon law,Delaware (the “DGCL”), may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable.
Our Bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents
Our Bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be, to the fullest extent permitted by law, the sole and exclusive forum for any shareholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or shareholder of the corporation to the corporation or the corporation's shareholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or as to which the DGCL, our Certificate of Incorporation or the Bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a shareholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage

such lawsuits against us and our directors, officers, employees and agents. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction.



ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2019,2020, the Company repurchased the following shares:
Period
Total Number of Shares Purchased(1)
 Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs
April 1 to April 30, 2019
 
 
  
May 1 to May 31, 2019488,445
 51.18
 488,445
  
June 1 to June 30, 2019
 $
 
  
Total488,445
 $51.18
 488,445
 14,012,886
did not repurchase shares.
All share repurchases are subject to applicable securities law,laws and are at times and in amounts as management deems appropriate. TheseThe repurchases wereare through open market transactions under the authorization by our Board of Directors on February 7, 2019 to repurchase of up to 15.0 million shares of our outstanding common stock. This authorization will expire on February 7, 2021.

2021 and may be suspended or discontinued at any time.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.OTHER INFORMATION
None.On August 4, 2020, the Board of Directors of the Company, acting upon the recommendation of its Corporate Governance Committee, approved a form of indemnification agreement for its officers and directors. The form of indemnification agreement requires the Company to indemnify and advance expenses to its directors and officers except to the extent prohibited by applicable law and establishes the procedures by which a director or officer may request and receive indemnification or advancement of expenses. The rights of officers and directors under the form of indemnification agreement are in addition to any other rights to which a director or officer may be entitled under the Company’s certificate of incorporation, bylaws and applicable law. 
The foregoing summary description of the form of indemnification agreement is not intended to be complete and is qualified in its entirety by the full text of the form of indemnification agreement filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and incorporated herein by reference. This disclosure is intended to satisfy the requirements of Item 1.01 of Form 8-K.



ITEM 6.EXHIBITS

NumberDescription
3.1
3.2
4.1
4.2
4.3
10.1
31.1  
31.2  
32.1  
32.2  
99.1
99.2
99.3
101.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) This exhibit constitutes a management contract or compensatory plan or arrangement.




SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  FLIR SYSTEMS, INC.
   
Date July 31, 2019August 6, 2020     /s/ Carol P. Lowe
  Carol P. Lowe
  Executive Vice President and Chief Financial Officer
  (Duly Authorized and Principal Financial Officer)


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