At April 17,July 31, 2002, there were 16,719,83416,866,528 shares of the Registrant’s common stock, $0.01, par value, outstanding.

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

The accompanying consolidated financial statements of FLIR Systems, Inc. (the “Company”) are unaudited and have been prepared by the Company 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 necessary for a fair presentation of the 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 year ended December 31, 2001.

 

The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All 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, 2002.

 

Certain reclassifications have been made to prior year’s data to conform to the current year’s presentation. These reclassifications had no impact on previously reported results of operations or shareholders’ equity.

 

 

Basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the weighted shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period.

 

The following table sets forth the reconciliation of the denominator utilized in the computation of basic and diluted earnings per share (in thousands):

 

 

There were no stock options excluded for the three months ended March 31, 2002. The effect of stock options for the three months ended March 31,June 30, 2002 and 2001 that aggregated 1,457,495302,221 and 428,449, respectively, and for the six months ended June 30, 2002 and 2001 that aggregated 218,630 and 739,919, respectively, have been excluded for purposes of diluted earnings per share since the effect would have been anti-dilutive.

 

 

 

Inventories consist of the following (in thousands):

 

 

 

During the three months ended March 31, 2002, the Company repaid all amounts outstanding under its Credit Agreement dated December 16, 1999, and amended on January 23, 2001, and terminated such Credit Agreement. On March 22, 2002, the Company entered into a new Credit Agreement with Bank of America, N.A., KeyBank, N.A., and Union Bank of California, N.A. The agreement provides for a $35 million, three-year revolving line of credit with an option for an additional $25 million during the first two years. Under the Credit Agreement, borrowings will bear interest based upon the prime lending rate of the Bank of America or Eurodollar rates with a provision for a spread over such rates based upon the Company’s leverage ratio. The Credit Agreement contains four financial covenants that require the maintenance of certain fixed charge and leverage ratios in addition to minimum levels of EBITDA and consolidated net worth. The Credit Agreement is collateralized by substantially all assets of the Company. At March 31,June 30, 2002, the Company had no amounts outstanding under the Credit Agreement and was in compliance with all covenants.

 

Additionally, the Company, through one of its subsidiaries, has a 40,000,00060,000,000 Swedish Kronar (approximately $3.9$6.5 million) line of credit at 4.34.95 percent at March 31,June 30, 2002. At March 31,June 30, 2002, the Company had $3.7 million outstanding on this line. This credit line is secured primarily by accounts receivable and inventories of the subsidiary and is subject to automatic renewal on an annual basis.

 

 

Comprehensive income includes foreign currency translation gains and losses that are reflected in shareholders’ equity instead of net income. The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):

 

 

Foreign currency translation gains and losses representsrepresent unrealized gains/losses in the translation of the financial statements of the Company’s subsidiaries in accordance with SFAS No. 52, “Foreign Currency Translation.” The Company has no intention of liquidating the assets of the foreign subsidiaries in the foreseeable future.

 

 

On June 8, 2000, the Securities and Exchange Commission (“SEC”) issued a formal order of investigation of the Company and certain officers, directors, employees and other individuals presently and formerly associated with the Company to determine whether any violations of the federal securities laws occurred during 1998 and 1999. The investigation relates to the Company’s revenue recognition policies, accounting controls, financial reports and other public disclosures during that time period. We believeThe Company believes that the investigation relates to, among other things, the same set of facts that gave rise to the restatements of ourits financial statements for those periods and to class action lawsuits by ourits shareholders that have now been settled. As part of its investigation, the SEC subpoenaed documents and testimony from ourthe Company’s current and former officers and employees and others.

 

On February 19, 2002, the staff of the SEC advised usthe Company that they intend to recommend that the SEC bring a civil injunctive action against usthe Company seeking a permanent injunction against usit for violations of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. These statutes and rules generally include the antifraud provisions of the Securities Act and the antifraud, reporting and record keeping provisions of Exchange Act and the rules thereunder. The recommendation of the SEC staff does not include civil penalties, fines or other claims for damages and is for the years 1998 and 1999.

 

We haveThe Company has engaged in discussions with the staff of the SEC in an attempt to reach a settlement of the legal action contemplated by the staff, but as of this date havehas been unable to reach agreement on the terms of settlement. We haveThe Company has also submitted a written statement to the SEC as to why we believethe Company believes the SEC should not bring the civil injunctive action recommended by the staff. At this time, we dothe Company does not know whether the SEC will authorize the commencement of the injunctive action recommended by its staff or whether the SEC will authorize any other legal action or commence any administrative actions against us.it. If we arethe Company is not able to negotiate a settlement with the SEC with regard to any such injunctive actions or administrative proceedings, we intendthe Company intends to vigorously defend against any such actions or proceedings.

 

An adverse finding against usthe Company by the SEC on the terms proposed by the staff could also result in the loss of ourthe Company’s ability to rely on the safe harbor for forward-looking statements provided by the Securities Litigation Reform Act of 1995. In addition, we expectthe Company expects to continue to incur expenses associated with responding to the investigation and any legal or administrative proceedings commenced by the SEC involving the Company or former or current officers, directors and employees, and any such proceedings may divert the efforts of ourthe management team from normal business operations.

 

 

The Company is also involved in other litigation and various legal matters that are being defended and handled in the ordinary course of business.

 

Except for the aforementioned claim, theThe ultimate results of the matters described above cannot presently be determined and managementthe Company does not expect that they will have a material adverse effect on the Company’s results of operations, financial position, or financial position.cash flows. Therefore, no adjustments other than the $0.6 million accrued for the estimated claim settlement costs, have been made to the accompanying financial statements relative to these matters.

 

 

The Company has determined its operating segments to be the ThermographyImaging and ImagingThermography market segments. The Thermography market is comprised of a broad range of commercial and industrial applications utilizing infrared cameras to provide precise temperature measurement. The Imaging market is comprised of a broad range of applications that is focused on providing enhanced night vision capabilities where temperature measurement is not required, although differences in temperatures are used to create an image. The Imaging market also includes high performance daylight camera applications. The Thermography market is comprised of a broad range of commercial and industrial applications utilizing infrared cameras to provide precise temperature measurement.

 

The accounting policies of each segment are the same. The Company evaluates performance based upon revenue for each segment and does not evaluate segment performance on any other income measurement.

 

Operating segment information for revenue is as follows (in thousands):

 

 

Long-lived assets by significant geographic location is as follows (in thousands):

 

 

 

 

 

Imaging revenue increased $9.3$14.6 million, or 32.551.1 percent, from $28.5$28.6 million in the second quarter of 2001 to $43.3 million in the second quarter of 2002. Imaging revenue for the first six months of 2002 increased $23.9 million, or 41.8 percent, from $57.2 million in the first quartersix months of 2001 to $37.8$81.1 million in the first quartersix months of 2002. The increase in Imaging revenue in the second quarter and the first quartersix months of 2002 was primarily due to an increase in salesunits delivered of the Company’s ground-based surveillanceand airborne imaging products.

 

Thermography revenue decreased by 7.510.7 percent, from $21.9$22.8 million in the firstsecond quarter of 2001 to $20.3 million in the firstsecond quarter of 2002. Revenue comparisons between 2002 and 2001Thermography revenue for the three-month period were negatively impactedfirst six months of 2002 decreased by foreign currency translations as9.1 percent, from $44.7 million in the US dollar has strengthened against European currencies. Excludingfirst six months of 2001 to $40.6 million in the negative impactfirst six months of the changing currency translation rates, Thermography revenue would have shown a decrease of 4.4 percent for the three-month period ended March 31, 2002. This decrease in Thermography revenue in the three-month periodsecond quarter of 2002 was primarily due to slightly lower capital spending relatedproduction delays involving the new E-Series and P-Series product lines and the effects of more stringent US export licensing requirements. The Company believes these delays to world economic conditions.be temporary and expects growth in Thermography revenues over the long term.

 

The timing of deliveries against large contracts, especially for the Company’s Imaging products, 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. The Company believes that the overall percentage increase in total revenue of 15.1 percent is indicative of the growth it expects for annual 2002 over that of 2001 but expects that the mix of revenue between ourthe Imaging and Thermography businesses and within certain product categories in ourthe Imaging business will vary from quarter to quarter.

 

As a percentage of revenue, international sales were 45.846.9 percent and 39.839.3 percent for the quarters ended March 31,June 30, 2002 and 2001, respectively. International sales for the first six months of 2002 and 2001 were 46.4 percent and 39.6 percent, respectively. While the percentage of revenue from international sales will continue to fluctuate from quarter to quarter due to the timing of shipments under international and domestic government contracts, management anticipates that revenue from international sales as a percentage of total revenue will continue to comprise a significant percentage of revenue.

 

 

 

The Company anticipates annual spending for research and development as a percentage of revenue to be comparable to the level experienced in the first threesix months of 2002. The overall level of research and development expense reflects the continued emphasis on product development and new product introductions.

 

 

 

 

 

At March 31,June 30, 2002, the Company had cash on hand, net of short-term borrowings of $4.1$7.2 million compared to short-term borrowings, net of cash on hand of $8.4 million at December 31, 2001. DuringThe increase in net cash is primarily due to the three months ended March 31, 2002, the Company repaidrepayment of all amounts outstanding under its December 16, 1999the Company’s Credit Agreement terminated such agreement and entered into a new credit agreement. At March 31, 2002, there were no amounts outstanding under the new credit agreement.early in 2002.

 

Cash provided by operating activities in the first threesix months of 2002 was $13.7$15.6 million, compared to $8.7$19.1 million for the first threesix months of 2001. Cash provided from operating activities was principally due to net earnings for the period and a reduction in accounts receivable, partially offset by an increase in inventories.inventories and other assets and a reduction in accounts payable.

 

Accounts receivable decreased from $58.0 million at December 31, 2001 to $50.9$55.5 million at March 31,June 30, 2002, primarily as a result of lower shipments in the seasonal decline in sales fromsecond quarter of 2002 compared to the fourth quarter to the first quarter.of 2001. Days sales outstanding decreased from 99 days at December 31, 2001 to 7983 days at March 31,June 30, 2002. The timing of sales, particularly the recording of large system sales, can significantly impact the calculation of days sales outstanding at any point in time.

 

At March 31,June 30, 2002, the Company had inventories on hand of $52.4$50.6 million compared to $46.6 million at December 31, 2001. The increase was primarily the result of the anticipation of increased future shipments and recent new product introductions.

 

At March 31,June 30, 2002, the Company had prepaid expenses and other current assets of $12.6$14.0 million compared to $11.5 million at December 31, 2001. The increase was primarily due to an increase in the number of sales demonstration units related to new products introduced in our Thermography business.

 

The Company had accounts payable of $22.0$14.5 million at March 31,June 30, 2002, compared to $18.4 million at December 31, 2001. The decrease is primarily due to the timing of vendor payments.

The Company had accrued payroll and other current liabilities of $27.5 million, compared to $22.5 million at December 31, 2001. The increase iswas primarily due to the increase in inventories.advance payments made by certain customers and the reclassification of $2.0 million from long-term liabilities related to the interest rate swap agreements, which the Company settled in July 2002.

 

The Company’s investing activities have consisted primarily of expenditures for fixed assets, which totaled $3.0$4.7 million and $1.8$3.4 million for threethe six months ended March 31,June 30, 2002 and 2001, respectively. The increased expenditures primarily relate to the relocation ofnew facilities for certain of its operations in Europe.

 

On March 22, 2002, the Company entered into a new Credit Agreement with Bank of America, N.A., KeyBank, N.A., and Union Bank of California, N.A. The agreement provides for a $35 million, three-year revolving line of credit with an option for an additional $25 million during the first two years. Under the Credit Agreement, borrowings will bear interest based upon the prime lending rate of the Bank of America or Eurodollar rates with a provision for a spread over such rates based upon the Company’s leverage ratio. The Credit Agreement contains four financial covenants that require the maintenance of certain fixed charge and leverage ratios in addition to minimum levels of EBITDA and consolidated net worth. The Credit Agreement is collateralized by substantially all assets of the Company. At March 31,June 30, 2002, the Company had no amounts outstanding under the Credit Agreement and was in compliance with all covenants.

 

Additionally, the Company, through one of its subsidiaries, has a 40,000,00060,000,000 Swedish Kronar (approximately $3.9$6.5 million) line of credit at 4.34.95 percent at March 31,June 30, 2002. At March 31,June 30, 2002, the Company had $3.7 million outstanding on this line. This credit line is secured primarily by accounts receivable and inventories of the subsidiary and is subject to automatic renewal on an annual basis.

 

We believeThe Company believes that our existing cash, cash generated by operating activities, available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. At the present, we dothe Company does not have any significant capital commitments for the coming year.

 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the Company’s business, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as those discussed from time to time in the Company’s Securities and Exchange Commission fillings and reports, including the Annual Report on Form 10-K for the year ending December 31, 2001. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report. If the Company does update or correct one or more forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

 

 

The Company reaffirms the critical accounting policies and ourthe use of estimates as reported in ourthe Company’s Form 10-K for the year ended December 31, 2001.

 

 

 

On June 8, 2000, the Securities and Exchange Commission (“SEC”) issued a formal order of investigation of the Company and certain officers, directors, employees and other individuals presently and formerly associated with the Company to determine whether any violations of the federal securities laws occurred during 1998 and 1999. The investigation relates to the Company’s revenue recognition policies, accounting controls, financial reports and other public disclosures during that time period. We believeThe Company believes that the investigation relates to, among other things, the same set of facts that gave rise to the restatements of ourits financial statements for those periods and to class action lawsuits by ourits shareholders that have now been settled. As part of its investigation, the SEC subpoenaed documents and testimony from ourthe Company’s current and former officers and employees and others.

 

On February 19, 2002, the staff of the SEC advised usthe Company that they intend to recommend that the SEC bring a civil injunctive action against usthe Company seeking a permanent injunction against usit for violations of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. These statutes and rules generally include the antifraud provisions of the Securities Act and the antifraud, reporting and record keeping provisions of Exchange Act and the rules thereunder. The recommendation of the SEC staff does not include civil penalties, fines or other claims for damages and is for the years 1998 and 1999.

 

We haveThe Company has engaged in discussions with the staff of the SEC in an attempt to reach a settlement of the legal action contemplated by the staff, but as of this date havehas been unable to reach agreement on the terms of settlement. We haveThe Company has also submitted a written statement to the SEC as to why we believeit believes the SEC should not bring the civil injunctive action recommended by the staff. At this time, we dothe Company does not know whether the SEC will authorize the commencement of the injunctive action recommended by its staff or whether the SEC will authorize any other legal action or commence any administrative actions against us.it. If we arethe Company is not able to negotiate a settlement with the SEC with regard to any such injunctive actions or administrative proceedings, we intendthe Company intends to vigorously defend against any such actions or proceedings.

 

Any legal or injunctive action or administrative proceedings that the SEC may bring against usthe Company could have a material adverse effect on our business, financial condition and results of operations. An adverse finding against usthe Company by the SEC on the terms proposed by the staff could also result in the loss of ourthe Company’s ability to rely on the safe harbor for forward-looking statements provided by the Securities Litigation Reform Act of 1995. In addition, we expectthe Company expects to continue to incur expenses associated with responding to the investigation and any legal or administrative proceedings commenced by the SEC involving the Company or former or current officers, directors and employees, and any such proceedings may divert the efforts of ourthe management team from normal business operations.

 

The Company is also involved in other litigation and various legal matters that are being defended and handled in the ordinary course of business.

 

Except for the aforementioned claim, theThe ultimate results of the matters described above cannot presently be determined and management does not expect that they will have a material adverse effect on the Company’s results of operations, financial position, or financial position.cash flows. Therefore, no adjustments other than the $0.6 million accrued for the estimated claim settlement costs, have been made to the accompanying financial statements relative to these matters.

 

 

 

 

 

 

 

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.