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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number 0-21918
FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)
| Oregon | 93-0708501 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 16505 S.W. 72nd Avenue, Portland, Oregon | 97224 | |
| (Address of principal executive offices) | (Zip Code) | |
(503) 684-3731
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
At October 29, 2004, there were 34,192,318 shares of the Registrant’s common stock, $0.01, par value, outstanding.
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CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||
Revenue | $ | 110,769 | $ | 70,232 | $ | 338,925 | $ | 214,565 | |||||
Cost of goods sold | 51,789 | 31,241 | 165,501 | 100,410 | |||||||||
Gross profit | 58,980 | 38,991 | 173,424 | 114,155 | |||||||||
Operating expenses: | |||||||||||||
Research and development | 11,324 | 6,255 | 32,706 | 21,638 | |||||||||
Selling, general and administrative | 21,997 | 14,967 | 65,983 | 45,519 | |||||||||
Total operating expenses | 33,321 | 21,222 | 98,689 | 67,157 | |||||||||
Earnings from operations | 25,659 | 17,769 | 74,735 | 46,998 | |||||||||
Interest expense | 1,954 | 2,240 | 6,061 | 2,862 | |||||||||
Other expenses (income), net | 429 | (35 | ) | 1,037 | 415 | ||||||||
Earnings before income taxes | 23,276 | 15,564 | 67,637 | 43,721 | |||||||||
Income tax provision | 6,452 | 4,699 | 20,204 | 13,991 | |||||||||
Net earnings | $ | 16,824 | $ | 10,865 | $ | 47,433 | $ | 29,730 | |||||
Net earnings per share: | |||||||||||||
Basic | $ | 0.50 | $ | 0.33 | $ | 1.41 | $ | 0.87 | |||||
Diluted | $ | 0.44 | $ | 0.32 | $ | 1.30 | $ | 0.84 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| September 30, 2004 | December 31, 2003 | |||||
| (Unaudited) | ||||||
| ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 94,895 | $ | 197,993 | ||
Accounts receivable, net | 92,569 | 79,332 | ||||
Inventories, net | 94,041 | 75,959 | ||||
Prepaid expenses and other current assets | 22,810 | 19,997 | ||||
Income taxes receivable | 2,950 | — | ||||
Deferred income taxes, net | 9,908 | 8,832 | ||||
Total current assets | 317,173 | 382,113 | ||||
Property and equipment, net | 32,462 | 22,758 | ||||
Deferred income taxes, net | 6,500 | 21,146 | ||||
Goodwill | 149,475 | 12,500 | ||||
Intangible assets, net | 48,524 | 4,036 | ||||
Other assets | 9,488 | 7,870 | ||||
| $ | 563,622 | $ | 450,423 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 33,931 | $ | 26,427 | ||
Deferred revenue | 5,713 | 4,540 | ||||
Accrued payroll and related liabilities | 16,574 | 12,778 | ||||
Accrued product warranties | 4,923 | 3,511 | ||||
Advance payments from customers | 9,360 | 12,112 | ||||
Other current liabilities | 12,472 | 8,227 | ||||
Accrued income taxes | — | 2,742 | ||||
Current portion of long-term debt | 128 | — | ||||
Total current liabilities | 83,101 | 70,337 | ||||
Long-term debt | 205,142 | 204,369 | ||||
Pension and other long-term liabilities | 11,758 | 10,875 | ||||
Commitments and contingencies | ||||||
Shareholders’ equity: | ||||||
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at September 30, 2004, and December 31, 2003 | — | — | ||||
Common stock, $0.01 par value, 100,000 shares authorized, 34,172 and 32,863 shares issued at September 30, 2004, and December 31, 2003, respectively, and additional paid-in capital | 207,159 | 156,154 | ||||
Retained earnings | 48,821 | 1,388 | ||||
Accumulated other comprehensive earnings | 7,641 | 7,300 | ||||
Total shareholders’ equity | 263,621 | 164,842 | ||||
| $ | 563,622 | $ | 450,423 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2004 | 2003 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 47,433 | $ | 29,730 | ||||
Earnings charges not affecting cash: | ||||||||
Depreciation and amortization | 10,870 | 4,514 | ||||||
Disposals and write-offs of property and equipment | (57 | ) | 36 | |||||
Income tax benefit of stock options | 18,338 | 3,657 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in accounts receivable | (7,023 | ) | (6,218 | ) | ||||
Increase in inventories | (10,422 | ) | (14,655 | ) | ||||
Increase in prepaid expenses and other current assets | (3,343 | ) | (5,330 | ) | ||||
Increase in other assets | (650 | ) | (262 | ) | ||||
Increase in accounts payable | 4,731 | 6,318 | ||||||
Decrease in deferred revenue | (107 | ) | (433 | ) | ||||
Increase in accrued payroll and other liabilities | 4,615 | 2,057 | ||||||
(Decrease) increase in accrued income taxes | (5,098 | ) | 1,502 | |||||
Increase in pension and other long-term liabilities | 1,233 | 1,341 | ||||||
Cash provided by operating activities | 60,520 | 22,257 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property and equipment | (9,590 | ) | (2,001 | ) | ||||
Proceeds on sale of property and equipment | 180 | 16 | ||||||
Acquisition of Indigo Systems Corporation, net of cash acquired | (159,961 | ) | — | |||||
Investment in insurance contracts | (1,000 | ) | (2,601 | ) | ||||
Other investments | (716 | ) | (485 | ) | ||||
Cash used by investing activities | (171,087 | ) | (5,071 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of convertible notes, net of issuance costs | — | 203,859 | ||||||
Repayment of capital leases and other long-term debt | (3,717 | ) | — | |||||
Repurchase of common stock | (3,144 | ) | (72,163 | ) | ||||
Proceeds from exercise of stock options | 11,325 | 4,903 | ||||||
Stock issued pursuant to employee stock purchase plan | 758 | 551 | ||||||
Cash provided by financing activities | 5,222 | 137,150 | ||||||
Effect of exchange rate changes on cash | 2,247 | 1,975 | ||||||
Net (decrease) increase in cash and cash equivalents | (103,098 | ) | 156,311 | |||||
Cash and cash equivalents, beginning of period | 197,993 | 46,606 | ||||||
Cash and cash equivalents, end of period | $ | 94,895 | $ | 202,917 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
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, consisting of only normal recurring 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, 2003.
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, 2004.
Note 2. Stock-based Compensation
The Company has two stock incentive plans for employees and consultants, one stock option plan for non-employee directors and one employee stock purchase plan, which are more fully described in Notes 1 and 14 in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
The Company follows the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based employee compensation plans. No stock-based employee compensation costs are reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Net earnings – as reported | $ | 16,824 | $ | 10,865 | $ | 47,433 | $ | 29,730 | ||||||||
Deduct: Total stock-based compensation expense determined under fair value method | (3,591 | ) | (1,732 | ) | (10,961 | ) | (5,363 | ) | ||||||||
Net earnings – pro forma | $ | 13,233 | $ | 9,133 | $ | 36,472 | $ | 24,367 | ||||||||
Earnings per share: | ||||||||||||||||
Basic – as reported | $ | 0.50 | $ | 0.33 | $ | 1.41 | $ | 0.87 | ||||||||
Diluted – as reported | $ | 0.44 | $ | 0.32 | $ | 1.30 | $ | 0.84 | ||||||||
Earnings per share: | ||||||||||||||||
Basic – pro forma | $ | 0.39 | $ | 0.28 | $ | 1.09 | $ | 0.72 | ||||||||
Diluted – pro forma | $ | 0.35 | $ | 0.27 | $ | 1.01 | $ | 0.69 | ||||||||
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 2. Stock-based Compensation—(Continued)
The fair value of the stock-based awards granted in the three and nine months ended September 30, 2004 and 2003 reported above was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
Employee Stock Option Plans: | ||||||||||||
Risk-free interest rate | 2.9 | % | 2.6 | % | 2.4 | % | 2.1 | % | ||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||
Expected life | 3 years | 3 years | 3 years | 3 years | ||||||||
Expected volatility | 50.6 | % | 57.6 | % | 54.2 | % | 60.1 | % | ||||
Employee Stock Purchase Plan: | ||||||||||||
Risk-free interest rate | 1.2 | % | 1.1 | % | 1.1 | % | 1.3 | % | ||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||
Expected life | 6 months | 6 months | 6 months | 6 months | ||||||||
Expected volatility | 37.4 | % | 35.2 | % | 37.3 | % | 48.4 | % | ||||
The effects of applying SFAS 123 in the above pro forma disclosures are not necessarily indicative of future amounts. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility.
Under the Black-Scholes option pricing model, the weighted-average estimated values of shares granted were (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
Employee Stock Option Plans: | ||||||||||||
Per share | $ | 22.90 | $ | 11.06 | $ | 15.20 | $ | 10.82 | ||||
Total estimated value | $ | 165 | $ | 313 | $ | 19,729 | $ | 1,469 | ||||
Employee Stock Purchase Plan: | ||||||||||||
Per share | $ | 11.84 | $ | 6.49 | $ | 9.67 | $ | 7.18 | ||||
Total estimated value | $ | 263 | $ | 162 | $ | 491 | $ | 370 | ||||
Note 3. Net 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 in a manner 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 from the assumed conversion of the $210 million convertible notes. The number of additional shares from the assumed exercise of stock options 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.
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 3. Net Earnings Per Share—(Continued)
During the quarter ended September 30, 2004, one of the terms that allow for conversion of the Company’s convertible notes, as described in the prospectus, was met. The Company’s stock closed at a price higher than $57.70 per share for no fewer than 20 of the last 30 trading days during the quarter ended September 30, 2004. As required by SFAS 128, “Earnings per Share,” the Company has reported diluted earnings per share for the three months and nine months ended September 30, 2004 using the “if converted” method. Under the “if converted” method, net earnings as used for purposes of computing diluted earnings per share is the reported net earnings adjusted for interest costs of the convertible notes, net of statutory tax, as if the convertible notes were converted at the beginning of the reported period when the conversion circumstances are met. Likewise, diluted shares outstanding are adjusted as if the conversion had taken place at the beginning of the reported period.
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 September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
Numerator for earnings per share: | ||||||||||||
Net earnings | $ | 16,824 | $ | 10,865 | $ | 47,433 | $ | 29,730 | ||||
Interest associated with convertible notes, net of taxes | 1,094 | — | 1,094 | — | ||||||||
Net earnings available to common stockholders – diluted | $ | 17,918 | $ | 10,865 | $ | 48,527 | $ | 29,730 | ||||
Denominator: | ||||||||||||
Weighted average number of common shares outstanding | 33,955 | 32,959 | 33,591 | 34,033 | ||||||||
Assumed exercises of stock options, net of shares assumed reacquired under the treasury stock method | 2,169 | 1,399 | 2,074 | 1,439 | ||||||||
Assumed conversion of convertible notes | 4,731 | — | 1,589 | — | ||||||||
Diluted shares outstanding | 40,855 | 34,358 | 37,254 | 35,472 | ||||||||
Stock options of 2,000 and 22,000 for the three months ended September 30, 2004 and 2003, respectively, and 2,000 and 13,000 for the nine months ended September 30, 2004 and 2003, respectively, were excluded for purposes of diluted earnings per share since the effect would have been anti-dilutive.
In July 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board issued a draft abstract for statement No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (EITF 04-08). EITF 04-08 addresses the issue of when the dilutive effects of contingently convertible debt instruments should be included in diluted earnings per share. This draft tentatively concludes that contingently convertible debt instruments should be included in diluted earnings per share regardless of whether any of the conversion criteria has been met. In addition, prior period earnings per share amounts presented for comparative purposes should be restated. EITF 04-08, as drafted, is expected to be effective for reporting periods ending after December 15, 2004. Accordingly, if EITF 04-08 is enacted as expected during the fourth quarter of 2004, the Company will restate diluted earnings per share to include the dilutive effect from the assumed conversion of the $210 million convertible notes beginning on the date of issuance.
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 3. Net Earnings Per Share – (Continued)
Pro forma disclosure of the Company’s diluted earnings per share using the “if converted” method, assuming conversion at the time of issuance (June 2003) of the convertible notes is as follows (in thousands, except per share amounts):
Three Months Ended 2003 | Nine Months Ended September 30, | ||||||||
| 2004 | 2003 | ||||||||
Net earnings – as reported | $ | 10,865 | $ | 47,433 | $ | 29,730 | |||
Add: Interest expense associated with convertible notes, net of tax | 1,096 | 3,289 | 1,342 | ||||||
Net earnings – “if converted” | $ | 11,961 | $ | 50,722 | $ | 31,072 | |||
Fully diluted shares outstanding | 34,358 | 37,254 | 35,472 | ||||||
Add: Diluted shares associated with convertible notes | 4,731 | 3,142 | 1,906 | ||||||
Fully diluted shares – “if converted” | 39,089 | 40,396 | 37,378 | ||||||
Diluted earnings per share – “if converted” | $ | 0.31 | $ | 1.26 | $ | 0.83 | |||
Note 4. Inventories
Inventories consist of the following (in thousands):
| September 30, 2004 | December 31, 2003 | |||||
Raw material and subassemblies | $ | 54,318 | $ | 41,190 | ||
Work-in-progress | 26,230 | 25,682 | ||||
Finished goods | 13,493 | 9,087 | ||||
| $ | 94,041 | $ | 75,959 | |||
Note 5. Accrued Product Warranties
The Company generally provides a one-year warranty on its products. A provision for the estimated future costs of warranty, based upon historical cost and product performance experience, is recorded when revenue is recognized. The following table summarizes the Company’s warranty liability and activity (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2004 | 2003 | |||||||
Accrued product warranties, beginning of year | $ | 3,511 | $ | 3,432 | ||||
Amounts paid for warranty services | (3,077 | ) | (3,025 | ) | ||||
Warranty provisions for products sold | 4,489 | 3,091 | ||||||
Aggregate changes related to pre-existing warranties | — | — | ||||||
Accrued product warranties, end of period | $ | 4,923 | $ | 3,498 | ||||
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 6. Credit Agreements
On April 28, 2004, the Company signed an amended and restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., Union Bank of California, N.A., and U.S. Bank National Association. The agreement provides for a $50 million, five year revolving line of credit, with an option for an additional $50 million until April 28, 2008. 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 under/over such rates based upon the Company’s leverage ratio. At September 30, 2004, the interest rate ranged from 3.04% to 4.50%. The Credit Agreement contains four financial covenants that require the maintenance of certain leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth and a maximum level of capital expenditures, and is collateralized by substantially all assets of the Company. At September 30, 2004, the Company had no amounts outstanding under the Credit Agreement and was in compliance with all covenants. The Company had $2.4 million of letters of credit outstanding under the Credit Agreement at September 30, 2004, which reduces the total available credit.
The Company, through two of its European subsidiaries, has a 40 million Swedish Kroner (approximately $5.4 million) line of credit at 2.7% interest and a $2 million line of credit at 6.25% interest at September 30, 2004. At September 30, 2004 and December 31, 2003, the Company had no amounts outstanding under these lines. The 40 million Swedish Kroner line of credit is secured primarily by accounts receivable and inventories of the applicable subsidiary and is subject to automatic renewal on an annual basis on December 31. The $2 million line of credit is secured by substantially all assets of the applicable subsidiary and is subject to renegotiation annually.
Note 7. Long-Term Debt
In June 2003, the Company issued $210 million of 3.0% senior convertible notes due 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The issuance was made through an initial offering of $175 million of the notes on June 11, 2003, and the subsequent exercise in full by the underwriters of their option to purchase an additional $35 million of the notes on June 17, 2003. The net proceeds from the issuance were approximately $203.9 million. Interest is payable semiannually on June 1 and December 1 of each year, beginning on December 1, 2003. The holders of the notes may convert all or some of their notes into shares of the Company’s common stock at a conversion rate of 22.5306 shares per $1,000 principal amount of notes prior to the maturity date in certain circumstances. The Company may redeem for cash all or part of the notes on or after June 8, 2010.
During the quarter ended September 30, 2004, one of the terms that allow for conversion of the Company’s convertible notes was met. The Company’s stock closed at a price higher than $57.70 per share for no fewer than 20 of the last 30 trading days during the quarter ended September 30, 2004.
As part of the acquisition of Indigo Systems Corporation (Note 12), the Company assumed a promissory note. The promissory note bears interest of 1.75% and is collateralized by certain assets purchased by the acquired subsidiary, prior to the acquisition by the Company. At September 30, 2004, $196,000 was outstanding on the promissory note.
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 8. Comprehensive Earnings
Comprehensive earnings includes cumulative translation adjustments, additional minimum pension liability adjustments, if any, on the Company’s Supplemental Executive Retirement Plan and fair value adjustments on available-for-sale securities that are reflected in shareholders’ equity instead of net earnings. The following table sets forth the calculation of comprehensive earnings for the periods indicated (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net earnings | $ | 16,824 | $ | 10,865 | $ | 47,433 | $ | 29,730 | |||||||
Unrealized loss on short-term investments | — | (485 | ) | — | (485 | ) | |||||||||
Realization of previously unrealized losses on short-term investments | — | — | 779 | — | |||||||||||
Translation adjustment | 2,514 | 2,900 | (438 | ) | 5,459 | ||||||||||
Total comprehensive earnings | $ | 19,338 | $ | 13,280 | $ | 47,774 | $ | 34,704 | |||||||
Translation adjustments represent unrealized gains/losses in the translation of the financial statements of the Company’s subsidiaries in accordance with SFAS 52, “Foreign Currency Translation.” The Company has no intention of liquidating the assets of the foreign subsidiaries in the foreseeable future.
Note 9. Pension Plans
The Company previously offered most of the employees outside the United States participation in a defined benefit pension plan that has been curtailed. In addition, the Company offers a Supplemental Executive Retirement Plan for certain US executive officers of the Company. These plans are more fully described in Note 14 in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Components of net periodic benefit costs are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
Service costs | $ | 84 | $ | 290 | $ | 252 | $ | 870 | ||||
Interest costs | 153 | 134 | 458 | 401 | ||||||||
Net amortization and deferral | 52 | 54 | 155 | 164 | ||||||||
Net periodic pension costs | $ | 289 | $ | 478 | $ | 865 | $ | 1,435 | ||||
Note 10. Contingencies
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. In accordance with SFAS 5, “Accounting for Contingencies,” the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company believes it has recorded adequate provisions for any probable and estimable losses.
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11. Operating Segments and Related Information
Operating Segments
The Company has determined its operating segments to be the Thermography and Imaging 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 vision capabilities where temperature measurement is not required, although differences in temperature are used to create an image. The Imaging market also includes high performance daylight imaging applications.
The accounting policies of each of the segments are the same. The Company evaluates performance based upon revenue and earnings from operations. On a consolidated basis, this amount represents income before interest, other expenses (net) and taxes as represented in the Consolidated Statement of Income. The Other segment consists of corporate expenses and certain other operating expenses not allocated to the operating segments for management reporting purposes.
Accounts receivable and inventories for operating segments are regularly reviewed by management and are reported below as segment assets. All remaining assets, liabilities, capital expenditures and depreciation are managed on a Company-wide basis.
Operating segment information is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Revenue: | ||||||||||||||||
Imaging | $ | 74,035 | $ | 43,019 | $ | 228,789 | $ | 134,661 | ||||||||
Thermography | 36,734 | 27,213 | 110,136 | 79,904 | ||||||||||||
| $ | 110,769 | $ | 70,232 | $ | 338,925 | $ | 214,565 | |||||||||
Earnings from operations: | ||||||||||||||||
Imaging | $ | 18,663 | $ | 11,904 | $ | 55,914 | $ | 32,988 | ||||||||
Thermography | 12,814 | 9,365 | 36,681 | 24,078 | ||||||||||||
Other | (5,818 | ) | (3,500 | ) | (17,860 | ) | (10,068 | ) | ||||||||
| $ | 25,659 | $ | 17,769 | $ | 74,735 | $ | 46,998 | |||||||||
| September 30, 2004 | December 31, 2003 | |||||
Segment assets (accounts receivable and inventories): | ||||||
Imaging | $ | 135,895 | $ | 107,339 | ||
Thermography | 50,715 | 47,952 | ||||
| $ | 186,610 | $ | 155,291 | |||
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11. Operating Segments and Related Information – (Continued)
Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
United States | $ | 72,360 | $ | 41,783 | $ | 206,928 | $ | 122,309 | ||||
Europe | 27,962 | 20,213 | 80,540 | 64,436 | ||||||||
Other foreign | 10,447 | 8,236 | 51,457 | 27,820 | ||||||||
| $ | 110,769 | $ | 70,232 | $ | 338,925 | $ | 214,565 | |||||
Long-lived assets are primarily comprised of net property and equipment and net identifiable intangible assets and goodwill. Long-lived assets by significant geographic locations are as follows (in thousands):
| September 30, 2004 | December 31, 2003 | |||||
United States | $ | 215,744 | $ | 22,929 | ||
Europe | 24,205 | 24,235 | ||||
| $ | 239,949 | $ | 47,164 | |||
Major Customers
Revenue derived from major customers is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
US Government | $ | 45,015 | $ | 19,690 | $ | 122,279 | $ | 53,115 | ||||
Note 12. Acquisition of Indigo Systems Corporation
On January 6, 2004, pursuant to the terms of the Agreement and Plan of Merger and Reorganization dated as of October 21, 2003 by and among the Company, Indigo Systems Corporation (“Indigo”), Fiji Sub, Inc., and William Parrish, as Shareholders’ Agent, Fiji Sub Inc. was merged with and into Indigo (the “Merger”). As a result of the Merger, Indigo became a wholly owned subsidiary of the Company. Prior to the Merger, Indigo was a privately held company that focused on developing and supplying advanced infrared cameras and components, covering the entire infrared spectrum. Indigo has provided infrared cameras, software, and enclosure solutions for commercial, industrial, security, military and research and development applications.
All outstanding shares of Indigo capital stock and certain warrants outstanding immediately prior to the Merger were converted into the right to receive cash in an amount equal to $25.3537 per share, or an aggregate of approximately $165,478,000. Each option to purchase Indigo capital stock outstanding immediately prior to the Merger was assumed by the Company. 709,945 shares of the Company’s common stock valued at $23,728,000 are issuable by the Company upon exercise of the Indigo stock options assumed by the Company in the Merger. Ninety percent of the cash consideration was paid out following the Merger with the remaining ten percent paid into and held in an escrow account, until the first anniversary of the Merger, to satisfy any indemnification claims against Indigo that may arise.
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12. Acquisition of Indigo Systems Corporation – (Continued)
The acquisition was accounted for as a business combination under SFAS 141, “Business Combinations.” The Consolidated Statement of Income for the nine months ended September 30, 2004 includes the results of operations of Indigo for the period beginning on January 6, 2004 through September 30, 2004. The Company allocated the purchase price of $192,134,000, which includes professional fees and other costs directly associated with the acquisition, as follows (in thousands):
| Fair Value at January 6, 2004 | ||||
Current assets | $ | 27,806 | ||
Property and equipment | 5,783 | |||
Other assets | 228 | |||
Current liabilities | (10,351 | ) | ||
Long-term debt | (2,737 | ) | ||
Net tangible assets | 20,729 | |||
Identifiable intangible assets | 48,000 | |||
Deferred tax liability | (13,570 | ) | ||
Goodwill | 136,975 | |||
Total purchase price | $ | 192,134 | ||
The following table lists the components of the identifiable intangible assets (in thousands):
| Fair Estimated Value | Estimated Life | ||||
Developed/core product technology | $ | 27,900 | 10 years | ||
Customer relationships | 17,800 | 7 years | |||
Trademark/trade name portfolio | 2,300 | 15 years | |||
Total identifiable intangible assets | $ | 48,000 | |||
The amortization expense associated with developed/core product technology is included in cost of goods sold and the amortization expense associated with customer relationships, trademarks and trade names is included in selling, general, and administrative expenses in the Consolidated Statement of Income.
The allocation of purchase price was based on a valuation of assets acquired and liabilities assumed determined with the assistance of an independent appraiser. This allocation was generally based on the fair value of these assets determined using the income approach.
$136,975,000 has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill will not be amortized but will be tested for impairment at least annually. Goodwill is not deductible for tax purposes. The amount of goodwill to be allocated to the Company’s two reporting segments has not yet been determined.
The purchase price allocation is substantially complete. Certain elements, such as the lapsing of the escrow period, may impact the final purchase price allocation. Although the Company does not anticipate significant revisions to the purchase price allocation, material adjustments could occur.
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FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12. Acquisition of Indigo Systems Corporation — (Continued)
The following pro forma information assumes the Indigo acquisition occurred as of the beginning of 2003. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the period presented.
| Three Months Ended September 30, 2003 | Nine Months Ended September 30, 2003 | |||||
Revenue | $ | 82,815 | $ | 251,535 | ||
Net earnings | $ | 9,919 | $ | 27,508 | ||
Net earnings per share: | ||||||
Basic | $ | 0.30 | $ | 0.81 | ||
Diluted | $ | 0.28 | $ | 0.76 | ||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) that are based on current expectations, estimates and projections about the Company’s business, management’s beliefs, and assumptions made by FLIR’s 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 other Securities and Exchange Commission filings and reports, including the Annual Report on Form 10-K for the year ended December 31, 2003. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date on which they were made and FLIR 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 updates or corrects one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect to other forward-looking statements.
Results of Operations
Revenue. The Company’s revenue for the three months ended September 30, 2004 increased 57.7 percent, from $70.2 million in the third quarter of 2003 to $110.8 million in the third quarter of 2004. Of the increase, $16.0 million was attributable to Indigo Systems Corporation (“Indigo”), which was acquired on January 6, 2004 (See Note 12 to the Consolidated Financial Statements). Not including Indigo, the increase in revenue was $24.5 million or 34.9 percent. The Company’s revenue for the nine months ended September 30, 2004 increased 58.0 percent from $214.6 million in the first nine months of 2003, to $338.9 million in the first nine months of 2004. Not including Indigo, the increase in revenue for the first nine months of 2004 was $77.7 million or 36.2 percent. The increases in revenue for both the three month and nine month periods were due to an increase in unit volumes due to growth in the demand for a number of applications for infrared technology and the ability of our products to meet those applications.
Imaging revenue increased $31.0 million, or 72.1 percent, from $43.0 million in the third quarter of 2003 to $74.0 million in the third quarter of 2004. Of the increase, $13.9 million was attributable to Indigo. Excluding Indigo, the increase in Imaging revenue was $17.1 million or 39.7 percent. Imaging revenue for the nine months ended September 30, 2004 increased 69.9 percent from $134.7 million in the first nine months of 2003, to $228.8 million in the first nine months of 2004. Excluding Indigo, the increase in Imaging revenue for the first nine months of 2004 was $57.0 million or 42.4 percent. The increase in Imaging revenue in the third quarter and in the first nine months of 2004 compared to the same periods in 2003 was primarily due to an increase in unit sales of the Company’s airborne and ground products.
Thermography revenue increased 35.0 percent, from $27.2 million in the third quarter of 2003 to $36.7 million in the third quarter of 2004. Of this increase, $2.1 million was attributable to Indigo. Without including this $2.1 million, the increase in Thermography revenue was $7.4 million or 27.3 percent in the third quarter of 2004. Thermography revenue for the nine months ended September 30, 2004 increased 37.8 percent, from $79.9 million in the first nine months of 2003, to $110.1 million in the first nine months of 2004. Without including Indigo, Thermography revenue increased $20.6 million, or 25.8 percent in the first nine months of 2004. Higher Thermography revenue in the third quarter and the first nine months of 2004 was primarily due to an increase in unit sales of the E-Series and the A20/A40 product lines.
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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 expects the overall increase in total annual revenue for 2004 over that of 2003 to be 51 percent to 54 percent and that the mix of revenue between our Imaging and Thermography businesses and within certain product categories in our Imaging business will vary from quarter to quarter.
As a percentage of revenue, international sales were 34.7 percent and 40.5 percent for the quarters ended September 30, 2004 and 2003, respectively, and 38.9 percent and 43.0 percent for the first nine months of 2004 and 2003, 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 will continue to comprise a significant percentage of revenue.
Gross profit. Gross profit for the quarter ended September 30, 2004 was $59.0 million compared to $39.0 million for the same quarter last year. As a percentage of revenue, gross profit decreased from 55.5 percent in the third quarter of 2003 to 53.2 percent in the third quarter of 2004. Gross profit for the nine months ended September 30, 2004 was $173.4 million, or 51.2 percent of revenue, compared to $114.2 million or 53.2 percent of revenue for the nine months ended September 30, 2003. The gross profit for the quarter and nine months ended September 30, 2004 included $698,000 and $2.1 million, respectively, of amortization expense attributable to developed technology intangibles acquired as part of the acquisition of Indigo. In addition, the gross profit for the nine months ended September 30, 2004 included $1.3 million of expense related to the recognition of the one-time stepped-up values of the acquired inventories of Indigo. Without these charges and the gross profit from Indigo, gross profit as a percentage of revenue for the third quarter and the first nine months of 2004 was 54.9 percent and 53.3 percent, respectively. The slight decrease in gross profit as a percentage of revenue, not including the Indigo inventory impact and amortization expense, was due to the product mix within the segments.
Research and development expenses. Research and development expenses for the third quarter of 2004 totaled $11.3 million, compared to $6.3 million in the third quarter of 2003. Research and development expenses for the first nine months of 2004 were $32.7 million, compared to $21.6 million for the same period in 2003. The increase in research and development expenses was due to the continued growth in the business and the inclusion of results from Indigo in 2004. As a percentage of revenue, research and development expenses were 10.2 percent and 8.9 percent for the three months ended September 30, 2004 and 2003, respectively, and 9.6 percent and 10.1 percent for the first nine months of 2004 and 2003, respectively. The overall level of research and development expense reflects the continued emphasis on product development and new product introductions.
Selling, general and administrative expenses.Selling, general and administrative expenses were $22.0 million for the quarter ended September 30, 2004, compared to $15.0 million for the quarter ended September 30, 2003. Selling, general and administrative expenses for the first nine months of 2004 were $66.0 million, compared to $45.5 million for the first nine months of 2003. The increase in selling, general and administrative expenses was due to the continued growth in the business and the inclusion of results from Indigo in 2004. Selling, general and administrative expenses as a percentage of revenue were 19.9 percent and 21.3 percent for the quarters ended September 30, 2004 and 2003, respectively, and 19.5 percent and 21.2 percent for the first nine months of 2004 and 2003, respectively. Included in selling, general and administrative expenses for the third quarter and first nine months of 2004 was $674,000 and $2.0 million, respectively, of amortization expense of intangible assets acquired as part of the acquisition of Indigo associated with customer relationships, trademarks, and trade names.
Interest expense.Interest expense for the third quarter of 2004 was $2.0 million compared to $2.2 million for the third quarter of 2003. Interest expense for the first nine months of 2004 and 2003 was $6.1 million and $2.9 million, respectively. The increase for the first nine months of 2004 was primarily due to the accrual of interest on the convertible notes that the Company issued in June 2003 and the related costs of the issuance of the notes.
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Other income/expense.For the quarter ended September 30, 2004, the Company recorded other expense of $429,000 compared to other income of $35,000 for the third quarter of 2003. The Company recorded other expense of $1.0 million and $415,000 for the first nine months of 2004 and 2003, respectively. The other expense for the first nine months of 2004 was primarily due to currency losses on certain foreign currency transactions in Europe. For the first nine months of 2003, currency losses were partially offset by interest income on invested cash.
Income taxes. The income tax provision of $6.5 million and $20.2 million for the three months and nine months ended September 30, 2004, respectively, is based on an annual effective tax rate of 30 percent. The Company expects the effective tax rate for 2004 to be 29 percent, based on its estimate of expected year-end earnings and losses and resultant taxes in its various domestic and foreign tax jurisdictions. The annual effective tax rate applied in the third quarter and the first nine months of 2003 was 32 percent.
Liquidity and Capital Resources
At September 30, 2004, the Company had cash and cash equivalents on hand of $94.9 million compared to cash on hand of $198.0 million at December 31, 2003. The decrease in cash and cash equivalents was primarily due to the use of $168.2 million for the Indigo acquisition and related costs offset by $8.2 million of cash acquired in the acquisition, $60.5 million of cash generated from operations and $9.6 million used for capital expenditures.
Accounts receivable increased from $79.3 million at December 31, 2003 to $92.6 million at September 30, 2004. The increase was primarily attributable to Indigo’s accounts receivable of $9.6 million at September 30, 2004.
At September 30, 2004, the Company had inventories of $94.0 million compared to $76.0 million at December 31, 2003. The increase was primarily due to the inclusion of Indigo’s inventories of $10.2 million and an anticipation of shipments in the fourth quarter of 2004.
Property and equipment increased from $22.8 million at December 31, 2003 to $32.5 million at September 30, 2004. The increase was primarily related to the acquisition of property and equipment from Indigo of $5.8 million and capital expenditures of $9.6 million.
The Company’s investing activities totaled $171.1 million and $5.1 million for the nine months ended September 30, 2004 and 2003, respectively. The higher level of investing in the first nine months of 2004 was primarily due to the acquisition of Indigo.
Deferred tax assets decreased from $30.0 million at December 31, 2003 to $16.4 million at September 30, 2004. The decrease was primarily related to the deferred tax liabilities recorded in relation to the Indigo acquisition.
The Company had accounts payable of $33.9 million at September 30, 2004, compared to $26.4 million at December 31, 2003. The increase was primarily due to the assumption of accounts payable of Indigo and higher inventories.
Accrued payroll and related liabilities increased from $12.8 million at December 31, 2003, to $16.6 million at September 30, 2004. The increase is primarily from the assumption of accrued payroll of Indigo and the timing of payroll payments.
On April 28, 2004, the Company signed an amended and restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., Union Bank of California, N.A., and U.S. Bank National Association. The agreement provides for a $50 million, five year revolving line of credit, with an option for an additional $50 million until April 28, 2008. 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 under/over such rates based upon the Company’s leverage ratio. At September 30, 2004, the interest rate ranged from 3.04% to 4.50%. The Credit Agreement contains four financial covenants that require the maintenance of certain
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leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth and a maximum level of capital expenditures, and is collateralized by substantially all assets of the Company. At September 30, 2004, the Company had no amounts outstanding under the Credit Agreement and was in compliance with all covenants. The Company had $2.4 million of letters of credit outstanding under the Credit Agreement at September 30, 2004, which reduces the total available credit.
The Company, through two of its European subsidiaries, has a 40 million Swedish Kroner (approximately $5.4 million) line of credit at 2.7% interest and a $2 million line of credit at 6.25% interest at September 30, 2004. At September 30, 2004 and December 31, 2003, the Company had no amounts outstanding under these lines. The 40 million Swedish Kroner line of credit is secured primarily by accounts receivable and inventories of the applicable subsidiary and is subject to automatic renewal on an annual basis on December 31. The $2 million line of credit is secured by substantially all assets of the applicable subsidiary and is subject to renegotiation annually.
In June 2003, the Company issued $210 million of 3.0% senior convertible notes due 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The issuance was made through an initial offering of $175 million on June 11, 2003, and the subsequent exercise in full by the underwriters of their option to purchase an additional $35 million on June 17, 2003. The net proceeds from the issuance were approximately $203.9 million. Issuance costs will be amortized over a period of seven years. Interest is payable semiannually on June 1 and December 1 of each year, beginning on December 1, 2003. The holders of the notes may convert all or some of their notes into shares of the Company’s common stock at a conversion rate of 22.5306 shares per $1,000 principal amount of notes prior to the maturity date in certain circumstances. The Company may redeem for cash all or part of the notes on or after June 8, 2010. The proceeds were used primarily for general corporate purposes, which included the acquisition of Indigo and other working capital and capital expenditure needs.
During the quarter ended September 30, 2004, one of the terms that allow for conversion of the Company’s convertible notes, as described in the prospectus, was met. The Company’s stock closed at a price higher than $57.70 per share for no fewer than 20 of the last 30 trading days during the current quarter.
We believe 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. We do not have any significant capital commitments for the coming year.
New Accounting Pronouncements
In July 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board issued a draft abstract for statement No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (EITF 04-08). EITF 04-08 addresses the issue of when the dilutive effects of contingently convertible debt instruments should be included in diluted earnings per share. This draft tentatively concludes that contingently convertible debt instruments should be included in diluted earnings per share regardless of whether any of the conversion criteria has been met. In addition, prior period earnings per share amounts presented for comparative purposes should be restated. EITF 04-08, as drafted, is expected to be effective for reporting periods ending after December 15, 2004.
During the quarter ended September 30, 2004, the Company met the market price trigger of its $210 million convertible notes and has reported diluted earnings per share using the “if converted” method to computed diluted earnings per share for the three months and nine months ended September 30, 2004, as required under SFAS 128, “Earnings per Share,” and will continue such treatment until EITF 04-08 has been adopted.
In March 2004, the Financial Accounting Standards Board issued an exposure draft No. 1102-100, “Share-Based Payment,” an amendment of SFAS 123, “Accounting for Stock-Based Compensation,” and SFAS 95, “Statement of Cash Flows.” The objective of the accounting that would be required under this amendment is to recognize in the financial statements the cost of employee services received in exchange for valuable equity instruments issued, and liabilities incurred, to employees in share-based payment transactions. The final Statement would be effective for any interim or annual period beginning after June 15, 2005.
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Critical Accounting Policies and Estimates
The Company reaffirms the critical accounting policies and our use of estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Company’s reported market risk since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, which was filed with the Securities and Exchange Commission on March 5, 2004.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2004, the Company carried out 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
In conjunction with its preparation toward compliance with Section 404 of the Sarbanes-Oxley Act of 2002, the Company has not identified any material weaknesses but has implemented or is in the process of implementing certain enhancements with respect to its internal control over financial reporting. These efforts have been discussed with the Company’s independent accountants and with the Company’s Audit Committee and Board of Directors. However, there were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies,” the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management believes it has recorded adequate provisions for any probable and estimable losses.
None.
Item 4. Submission of Matters to a Vote of Shareholders
None.
On November 4, 2004, the Company and Mellon Investor Services LLC entered into Amendment No. 2 to Rights Agreement dated as of November 4, 2004 (“Amendment No. 2”). Amendment No. 2 amends the Rights Agreement dated June 2, 1999, as amended as of June 5, 2003 by and between the Company and Mellon Investor Services LLC (formerly ChaseMellon Shareholder Services, L.L.C.) (the “Rights Agreement”). Amendment No. 2 amended the definition of “Purchase Price” under the Rights Agreement to change that price from $65.00 to $225.00.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits. |
| Number | Description | |
| 10.1 | Amendment No. 2 to Rights Agreement dated as of November 4, 2004 by and between FLIR Systems, Inc. and Mellon Investor Services LLC. | |
| 31.1 | Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302. | |
| 31.2 | Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302. | |
| 32.1 | Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906. | |
| 32.2 | Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 906. | |
| (b) | During the three months ended September 30, 2004, the Company filed or furnished the following reports on Form 8-K: |
| 1. | The Company furnished a current report on Form 8-K, on July 22, 2004, reporting under Item 7 and Item 12 on the issuance of a press release announcing its financial results for the quarter ended June 30, 2004 and its expectations as to revenue and net earnings for the year ending December 31, 2004. |
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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.
| FLIR SYSTEMS, INC. | ||
| Date November 5, 2004 | /s/ STEPHEN M. BAILEY | |
| Stephen M. Bailey | ||
| Sr. Vice President, Finance and Chief Financial Officer | ||
| (Principal Accounting and Financial Officer and Duly Authorized Officer) | ||
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