| Nature of Business and Significant Accounting Policies | Nature of Business and Significant Accounting Policies FLIR Systems, Inc. (the "Company") is a world leader in sensor systems that enhance perception and awareness. The Company was founded in 1978 and has since become a premier designer, manufacturer, and marketer of thermal imaging and other sensing products and systems. The Company’s advanced sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications in commercial, industrial, and government markets worldwide. The Company’s goal is to both enable its customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for its shareholders. The Company creates value for its customers by improving personal and public safety and security, providing advanced intelligence, surveillance, reconnaissance, and tactical defense capabilities, facilitating air, ground, and maritime-based situational awareness, detecting electrical, mechanical and building envelope problems, displaying process irregularities, detecting volatile organic gas emissions, and enhancing advanced driver-assistance systems and autonomous driving solutions, as well as a variety of other uses of thermal and other sensing technologies. The Company's business model and range of solutions allow it to sell products to various end markets, including industrial, original equipment manufacturing, military, homeland security, enterprise, infrastructure, and environmental. The Company sells off-the-shelf products in configurations to suit specific customer requirements in an efficient, timely, and affordable manner, and support those customers with training and ongoing support and services. Centered on the design of products for low-cost manufacturing and high-volume distribution, the Company's commercial operating model has been developed over time and provides it with a unique ability to adapt to market changes and meet its customers’ needs. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Reclassification The Company made certain reclassifications to the prior years' financial statements to conform them to the presentation as of and for the year ended December 31, 2019. These reclassifications had no effect on consolidated financial position, net earnings, shareholders' equity, or net cash flows for any of the periods presented. Foreign currency translation The assets and liabilities of the Company’s subsidiaries outside the United States are translated into United States dollars at current exchange rates in effect at the balance sheet date. Revenues and expenses are translated at monthly average exchange rates. Resulting translation adjustments are reflected in accumulated other comprehensive earnings (loss) within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in currencies other than the functional currency are reflected as other (income) expense, net, in the Consolidated Statements of Income as incurred. The cumulative translation adjustment included in accumulated other comprehensive earnings (loss) is a loss of $164.4 million and $148.4 million at December 31, 2019 and 2018 , respectively. Transaction gains and losses included in other expense (income), net, are net losses of $0.8 million , $1.3 million , and $0.2 million for the years ended December 31, 2019, 2018 and 2017 , respectively. Revenue recognition Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update ("ASU") 2014-09 and all the related amendments, "Revenue from Contracts with Customers (ASC 606)", which superseded all prior revenue recognition methods and industry-specific guidance. Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Revenue recognition - (Continued) The Company designs, markets and sells products primarily as commercial, off-the-shelf products. Certain customers request different system configurations, based on standard options or accessories that the Company offers. 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-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 cost 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 , " 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. Cost of goods sold Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation, occupancy costs, and purchasing, receiving and inspection costs. Research and development Expenditures for research and development activities are expensed as incurred. Cash equivalents and restricted cash The Company considers short-term investments that are highly liquid, readily convertible into cash and have maturities of less than three months when purchased to be cash equivalents. Cash equivalents at December 31, 2019 and 2018 were $0.7 million and $200.0 million , respectively, which were primarily investments in money market funds and overnight deposits. Restricted cash includes cash that is subject to a legal or contractual restriction by a third party and restricted as to withdrawal or use, including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used. The Company did not have any restricted cash balances at December 31, 2019 and 2018 , respectively. Accounts receivable and allowance for doubtful accounts Accounts receivable are stated at the amounts the Company expects to collect. Credit limits are established through a process of reviewing the financial history and stability of each customer. The Company regularly evaluates the collectability of its trade receivables balances based on a combination of factors. If it is determined that a customer will be unable to fully meet its financial obligation, the Company records a specific allowance to reduce the related receivable to the amount expected to be recovered. In addition, in certain instances, the Company also records an allowance based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company considers the principal or most advantageous market in which the asset or liability would transact, and if necessary, considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value measurements establishes a three-level fair value hierarchy that prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Inventories Inventories are stated at the lower of cost or net realizable value and include materials, labor, and manufacturing overhead. Cost is determined based on a currently adjusted standard cost basis that approximates actual manufacturing cost on a first-in, first-out basis. Inventory write-downs are recorded when conditions exist to indicate that inventories are likely to be in excess of anticipated demand or are obsolete based upon the Company’s assumptions about future demand for its products and market conditions. The Company regularly evaluates its ability to realize the value of inventories based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. When recorded, write-downs reduce the carrying value of the Company’s inventories to their net realizable value and create a new cost-basis in the inventories. Write-downs are reflected in cost of goods sold in the Consolidated Statements of Income. See Note 6 , " Inventories " for additional information and discussion on inventory write-downs associated with the Outdoor and Tactical Systems ("OTS") restructuring within the Commercial business unit ("CBU") operating segment recorded during the year ended December 31, 2019 as well as inventory write-downs associated with restructuring actions during the year ended December 31, 2018. Demonstration units The Company’s products which are being used as demonstration units are stated at the lower of cost or net realizable value and are included in prepaid expenses and other current assets in the Consolidated Balance Sheets. Demonstration units are available for sale and the Company periodically evaluates them as to marketability and realizable values. The carrying value of demonstration units was $30.4 million and $35.2 million at December 31, 2019 and 2018 , respectively. Property and equipment Property and equipment are stated at cost and are depreciated using a straight-line methodology over their estimated useful lives. Repairs and maintenance are charged to expense as incurred. Goodwill Effective January 1, 2019, the Company adopted the requirements of ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". Goodwill represents the excess purchase price of an acquired enterprise over the estimated fair value of identifiable net assets acquired. The Company assesses goodwill for potential impairment at the reporting unit level during the third quarter of each year, or whenever events or circumstances indicate that the carrying value of these assets may exceed their fair value. The Company may assess qualitative factors to make this determination, or bypass such a qualitative assessment and proceed directly to testing goodwill for impairment using a two-step process. As a result of the adoption of ASU 2017-04, if it is determined that the goodwill is impaired, it is no longer required to compare the implied fair value of the reporting unit goodwill associated with the carrying amount of that goodwill, which is commonly referred to as Step 2. Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Goodwill - (Continued) The Company elects to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. When performing a qualitative assessment, the Company considers factors including, but not limited to, current macroeconomic conditions, industry and market conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments and entity specific factors such as strategies and financial performance and other events relevant to the entity or reporting unit under evaluation. If, based on the review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, (of if the Company elected to bypass assessing the qualitative factors) the Company would perform a quantitative impairment test to identify goodwill impairment and measure the amount of goodwill impairment loss to be recognized (if any) by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would 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. The impairment tests performed in the current year did not indicate an impairment of goodwill in any of the reporting units with the exception of the OTS reporting unit which is part of the CBU operating segment. Based on the assessment of qualitative factors in the fourth quarter, it was determined that it was more likely than not that the fair value was less than the carrying value for the OTS reporting unit. As such, a quantitative impairment test was performed which determined that the fair value of the OTS reporting unit was approximately 63% of its carrying value. As a result, the Company recorded goodwill impairment charges in CBU operating segment during the fourth quarter of fiscal year 2019, which represents the difference between the carrying value and the fair value of the OTS reporting unit. The Company did not recognize any impairment charges on goodwill during the years ended December 31, 2018 and 2017 . See Note 9 , " Goodwill " for additional information and discussion on goodwill impairments associated with the OTS restructuring within CBU operating segment recorded during the year ended December 31, 2019. Intangible assets Intangible assets are amortized using the method that best reflects how their economic benefits are utilized, or, if a pattern of economic benefits cannot be reliably determined, are amortized using a straight-line methodology over their estimated useful lives. Intangible assets with indefinite useful lives are evaluated annually for impairment, or more frequently if required. See Note 10 , " Intangibles Assets " for additional information and discussion on impairment charges associated with the OTS restructuring within CBU operating segment recognized during the year ended December 31, 2019. The Company did not recognize any impairment charges on intangible assets with indefinite lives during the years ended December 31, 2018 and 2017 . Impairment of long-lived assets Long-lived asset groups are reviewed for impairment when circumstances indicate that the carrying amounts may not be recoverable. Impairment exists when the carrying value is greater than the expected undiscounted future cash flows expected to be provided by the asset group. If impairment exists, the asset group is written down to its fair value. Advertising costs Advertising costs, including social media, which are included in selling, general and administrative expenses, are expensed as incurred. Advertising costs for the years ended December 31, 2019, 2018 and 2017 were $10.7 million , $13.0 million and $19.5 million , respectively. Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Minority interest equity investments The Company holds certain investments in equity instruments of non-publicly traded companies. Equity investments in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. The Company's proportionate share of income or loss is recorded in other expense (income), net in the Consolidated Statement of Income. All other non-marketable equity investments are measured at cost less impairment, if any, adjusted for changes resulting from qualifying observable price changes. Prior to 2018, all other non-marketable equity investments were accounted for using the cost method. The Company periodically reviews its equity investments for impairment. During the year ended December 31, 2019 , the Company recognized impairments of $4.1 million associated with its equity investments which is included in other expense (income), net in the Consolidated Statement of Income. During the years ended December 31, 2018 and 2017 , the Company did not recognize any impairments on its minority interest equity investments. The carrying values of the minority interest equity investments were $19.9 million and $17.1 million at December 31, 2019 and 2018 , respectively, and are included in other assets in the Consolidated Balance Sheets. Contingencies The Company is subject to the possibility of loss contingencies arising in the normal course of business. An estimated loss is accrued when the Company determines that it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. The Company regularly evaluates current available information to determine whether such accruals and disclosures should be adjusted. Income Taxes The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities measured using the enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances against deferred tax assets are recorded when a determination is made that the deferred tax assets are not more likely than not to be realized in the future. In making that determination, on a jurisdiction by jurisdiction basis, the Company estimates the future taxable income based upon historical operating results and external market data. Future levels of taxable income are dependent upon, but not limited to, general economic conditions, competitive pressures and other factors beyond our control. The Company is subject to income taxes in the United States and in numerous foreign jurisdictions, and in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company records a benefit on a tax position when it is more likely than not that the position is sustainable upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions that are more likely than not to be sustained, the Company measures the tax position at the largest amount of benefit that has a greater than 50 percent likelihood of being realized when it is effectively settled, using information that is available at the reporting date. The Company reviews its tax positions as circumstances warrant, and update its liability for additional taxes as changes in available facts arise. Earnings per share Basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the weighted shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive, and the assumed issuance of shares upon vesting of restricted stock awards. The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands): Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Earnings per share - (Continued) Year Ended December 31, 2019 2018 2017 Numerator for earnings per share: Net earnings for basic and diluted earnings per share $ 171,597 $ 282,425 $ 107,223 Denominator for earnings per share: Weighted average number of common shares outstanding 135,016 137,815 137,456 Assumed exercise of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method 1,621 2,394 2,190 Diluted shares outstanding 136,637 140,209 139,646 The effect of stock-based compensation awards for the years ended December 31, 2019, 2018 and 2017 that aggregated 33,000 , 10,000 and 39,000 shares, respectively, have been excluded for purposes of diluted earnings per share since the effect of their inclusion would have been anti-dilutive. Supplemental cash flow disclosure (in thousands) Year Ended December 31, 2019 2018 2017 Cash paid for: Interest $ 21,544 $ 14,183 $ 15,394 Taxes $ 52,146 $ 83,259 $ 72,340 Stock-based compensation The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards and shares expected to be issued under the Company's employee stock purchase plan. Non-vested stock awards (referred to as restricted stock unit awards) are valued based on the fair market value of the Company's stock, discounted for expected dividends, on the date of grant. Restricted stock units containing performance-based vesting criteria are valued on the date of grant based on the fair value of the Company's stock, discounted for expected dividends and an estimate for illiquidity. The estimated discount for illiquidity is relevant for share based awards that require the plan participant to hold the shares for a specified period of time after the award vests and is estimated using the protective put method. The Company recognizes the compensation expense for all stock-based compensation awards on a straight-line basis over the requisite service period of each award. The following table sets forth the stock-based compensation expense recognized in the Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 (in thousands): Year Ended December 31, 2019 2018 2017 Cost of goods sold $ 3,704 $ 3,157 $ 2,665 Research and development 6,595 6,697 5,068 Selling, general and administrative 26,390 24,316 23,285 Stock-based compensation expense before income taxes $ 36,689 $ 34,170 $ 31,018 Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Stock-based compensation - (Continued) Stock-based compensation expense capitalized in the Consolidated Balance Sheets as of December 31, 2019, 2018 and 2017 is as follows (in thousands): December 31, 2019 2018 2017 Capitalized in inventory $ 1,122 $ 1,080 $ 1,062 As of December 31, 2019 , the Company had approximately $59.5 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of approximately two years . The fair value of the stock-based awards granted in the years ended December 31, 2019, 2018 and 2017 was estimated with the following weighted-average assumptions: 2019 2018 2017 Stock option awards: Risk-free interest rate — — 1.8 % Expected dividend yield — — 1.6 % Expected term — — 6.0 years Expected volatility — — 26.6 % Performance-based restricted stock awards: Expected dividend yield 1.3 % 1.2 % 1.6 % Employee stock purchase plan: Risk-free interest rate 2.0 % 2.3 % 1.0 % Expected dividend yield 1.3 % 1.3 % 1.6 % Expected term 6 months 6 months 6 months Expected volatility 25.0 % 26.4 % 20.9 % Discount for illiquidity — 10.5 % 10.5 % The Company uses the United States Treasury (constant maturity) interest rate on the date of grant as the risk-free interest rate and uses historical volatility as the expected volatility. The Company’s determination of expected term is based on an analysis of historical and expected exercise patterns. In 2017 and 2016, all stock options granted were time-based options. The Company uses an estimated forfeiture rate of 5 percent of the stock-compensation expense of non-executive employees based on an analysis of historical and expected forfeitures. During the years ended December 31, 2019, 2018 and 2017 , the Company granted approximately 867,000 , 594,000 and 773,000 time-vested restricted stock units, respectively. The fair value of time-vested restricted stock units is fixed and determined on the date of grant based upon the Company's stock price on the date of grant. The weighted average fair values of the time-vested restricted stock units granted during the years ended December 31, 2019, 2018 and 2017 were $50.45 , $52.93 and $36.20 per share, respectively. During the years ended December 31, 2019, 2018 and 2017 , the Company granted approximately 158,000 , 177,000 and 283,000 performance-based restricted stock units, respectively. These units are earned based upon the Company's return on invested capital over a three year period. The fair value of the performance-based restricted units granted during the years ended December 31, 2019, 2018 and 2017 was $49.57 , $52.32 and $35.08 per share, respectively. Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Stock-based compensation - (Continued) The total fair value of the restricted stock unit awards granted during the year ended December 31, 2019 in the table below of $51.6 million includes $7.8 million of grant date fair value associated with the performance-based restricted stock units. The total fair value of the restricted stock unit awards granted during the year ended December 31, 2018 in the table below of $40.7 million includes $9.2 million of grant date fair value associated with the performance-based restricted stock units. The total fair value of the restricted stock unit awards granted during the year ended December 31, 2017 in the table below of $37.9 million includes $9.9 million of grant date fair value associated with the performance-based restricted stock units. The weighted-average fair value of stock-based compensation awards granted and vested, and the intrinsic value of options exercised during the period were (in thousands, except per share amounts): Years Ended December 31, 2019 2018 2017 Stock option awards: Weighted average grant date fair value per share — $ — $ 8.55 Total fair value of awards granted — $ — $ 2,824 Total fair value of awards vested $ 1,340 $ 2,529 $ 4,203 Total intrinsic value of options exercised $ 16,124 $ 24,652 $ 20,631 Restricted stock unit awards: Weighted average grant date fair value per share $ 50.31 $ 52.79 $ 35.90 Total fair value of awards granted $ 51,578 $ 40,675 $ 37,906 Total fair value of awards vested $ 39,287 $ 48,705 $ 27,489 Employee stock purchase plan: Weighted average grant date fair value per share $ 11.72 $ 10.01 $ 7.66 Total fair value of shares estimated to be issued $ 2,399 $ 1,330 $ 1,087 The total amount of cash received from the exercise of stock options in the years ended December 31, 2019, 2018 and 2017 was $21.2 million , $23.7 million and $53.5 million , respectively, and the related tax benefits realized from the exercise of the stock options in the years ended December 31, 2019, 2018 and 2017 was $4.8 million , $8.7 million and $3.0 million , respectively. Concentration of risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable. Concentration of credit risk with respect to accounts receivable is limited because a relatively large number of geographically diverse customers make up the Company’s customer base, thus diversifying the trade credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs credit evaluations for all new customers and requires letters of credit, bank guarantees and advanced payments, if deemed necessary. A substantial portion of the Company’s revenue is derived from sales to United States and foreign government agencies (see Note 19 , " Operating Segments and Related Information "). The Company also purchases certain key components from sole or limited source suppliers. The Company maintains cash deposits with major banks that from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and instruments in which it invests and adjusts its investment balances to mitigate the risk of principal loss. Note 1 . Nature of Business and Significant Accounting Policies - (Continued) Use of estimates The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates and judgments made by management of the Company include matters such as collectability of accounts receivable, realizability of inventories, recoverability of deferred tax assets, impairment tests of goodwill, intangible assets and other long-lived assets, recognition and measurement of loss contingencies and adequacy of warranty accruals. Actual results could differ from those estimates. The Company believes that the estimates used are reasonable. Accumulated other comprehensive earnings (loss) Accumulated other comprehensive earnings (loss) includes cumulative translation adjustments, fair value adjustments on interest rate swap contracts, unrealized gains and losses on available-for-sale securities and changes in minimum liability for pension plans. Foreign currency translation adjustments included in comprehensive income were not tax affected as investments in international affiliates are deemed to be indefinite in duration. The following table sets forth the changes in the balances of each component of accumulated other comprehensive earnings (loss) for the year ended December 31, 2019 : Pension Plans Items Interest Rate Swap Contracts Available-For-Sale Items Foreign Currency Items Total Balance, December 31, 2018 $ (682 ) $ — $ (4 ) $ (148,406 ) $ (149,092 ) Other comprehensive loss before reclassifications, net of tax (58 ) (796 ) 4 (16,003 ) (16,853 ) Balance, December 31, 2019 $ (740 ) $ (796 ) $ — $ (164,409 ) $ (165,945 ) Recently Adopted Accounting Pronouncements Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, "Leases ("ASC 842"). 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 accountin |
