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, 1999
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 (I.R.S. Employer
incorporation or organization) 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 _____. No __X__.
At September 30, 1999, there were 14,347,766 shares of the Registrant's common
stock, $0.01, par value, outstanding.
FLIR Systems, Inc.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
and Nine Months Ended September 30, 1999 and 1998....... 3
Consolidated Balance Sheet - September 30, 1999 and
December 31, 1998....................................... 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1999 and 1998....................... 5
Notes to the Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities................................... 16
Item 6. Exhibits and Reports on Form 8-K........................ 16
Signatures.............................................. 17
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(restated- Note 6) (restated -Note 6)
Revenue:
Commercial......................... $36,191 $37,627 $92,479 $99,274
Government......................... 18,515 18,386 38,867 46,240
--------------- --------------- --------------- ---------------
Total revenue.................. 54,706 56,013 131,346 145,514
Cost of goods sold..................... 20,971 26,705 71,027 68,506
Research and development............... 6,354 6,334 20,167 19,852
Selling and other operating costs...... 13,241 14,089 41,535 41,576
Combination costs...................... -- -- 6,110 --
--------------- --------------- --------------- ---------------
40,566 47,128 138,839 129,934
Earnings (loss) from operations.... 14,140 8,885 (7,493) 15,580
Interest income........................ -- 250 18 715
Interest expense and other............. (1,576) (865) (3,841) (3,538)
--------------- --------------- --------------- ---------------
Earnings (loss) before income taxes 12,564 8,270 (11,316) 12,757
Provision (benefit) for income taxes... 4,020 2,539 (3,622) 3,788
--------------- --------------- --------------- ---------------
Net earnings (loss).................... $ 8,544 $ 5,731 $ (7,694) $ 8,969
=============== =============== =============== ===============
Net earnings (loss) per share
Basic.............................. $ 0.60 $ 0.41 $ (0.54) $ 0.71
=============== =============== =============== ===============
Diluted............................ $ 0.59 $ 0.40 $ (0.54) $ 0.68
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
3
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
ASSETS
September 30, December 31,
1999 1998
------------------- --------------------
(unaudited) (restated - Note 6)
Current assets:
Cash and cash equivalents.................................. $ 4,140 $ 4,793
Accounts receivable, net................................... 77,755 91,202
Inventories................................................ 75,119 70,312
Prepaid expenses........................................... 7,418 6,061
Deferred income taxes...................................... 6,776 6,776
------------------- --------------------
Total current assets................................... 171,208 179,144
Property and equipment, net.................................... 28,429 26,775
Software development costs, net................................ 282 488
Deferred income taxes, net..................................... 16,940 9,749
Intangible assets, net......................................... 15,105 15,936
Other assets................................................... 3,578 3,897
------------------- --------------------
$235,542 $235,989
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................. $ 68,317 $ 39,958
Accounts payable........................................... 23,337 24,031
Accrued payroll and other liabilities...................... 10,974 16,189
Accrued income taxes....................................... 6,089 3,893
Current portion of long-term debt.......................... 1,239 2,680
------------------- --------------------
Total current liabilities.............................. 109,956 86,751
Long-term debt................................................. 1,702 19,296
Pension liability.............................................. 4,007 3,960
Commitments and contingencies.................................. -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at September 30, 1999, and
December 31, 1998....................................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,347,766 and 14,133,403 shares issued at
September 30, 1999, and December 31, 1998, respectively... 144 141
Additional paid-in capital................................. 142,980 142,169
Accumulated deficit........................................ (21,949) (14,255)
Accumulated other comprehensive loss....................... (1,298) (2,073)
------------------- --------------------
Total shareholders' equity............................. 119,877 125,982
------------------- --------------------
$235,542 $235,989
=================== ====================
The accompanying notes are an integral part of these financial statements.
4
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
----------------------------------------------
1999 1998
-------------------- --------------------
(restated-Note 6)
Cash used by operations:
Net (loss) earnings.......................................... $ (7,694) $ 8,969
Income charges not affecting cash:
Depreciation............................................. 4,854 4,599
Amortization............................................. 2,041 1,934
Disposals and write-offs of property and equipment....... 471 265
Deferred income taxes.................................... (7,191) (6)
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable............... 13,447 (19,200)
Increase in inventories.................................. (4,807) (7,899)
Increase in prepaid expenses............................. (1,357) (354)
Decrease in other assets................................. 157 103
Decrease in accounts payable............................. (694) (5,969)
Decrease in accounts payable to related parties.......... -- (6,228)
Decrease in accrued payroll and other liabilities........ (5,215) (13,252)
Increase in accrued income taxes......................... 2,196 1,880
-------------------- --------------------
Cash used by operating activities............................ (3,792) (35,158)
-------------------- --------------------
Cash used by investing activities:
Additions to property and equipment.......................... (7,821) (10,077)
Software development costs................................... -- (239)
-------------------- --------------------
Cash used by investing activities................................ (7,821) (10,316)
-------------------- --------------------
Cash provided by financing activities:
Net increase in notes payable................................ 28,359 13,072
Proceeds from long term debt................................. 1,538 1,217
Repayment of long term debt including current portion........ (20,573) (5,684)
Increase in pension liability................................ 47 123
Proceeds from exercise of stock options...................... 814 1,273
Common stock issued.......................................... -- 32,676
Cost of common stock issued.................................. -- (551)
Common stock issued pursuant to stock option plans........... -- 971
-------------------- --------------------
Cash provided by financing activities........................ 10,185 43,097
-------------------- --------------------
Effect of exchange rate changes on cash.......................... 775 (697)
-------------------- --------------------
Net decrease in cash and cash equivalents........................ (653) (3,074)
Cash and cash equivalents, beginning of period................... 4,793 7,545
-------------------- --------------------
Cash and cash equivalents, end of period......................... $ 4,140 $ 4,471
==================== ====================
The accompanying notes are an integral part of these financial statements.
5
FLIR SYSTEMS, INC.
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. See Note 6 regarding the restatement of the Company's
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles 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 for the year ended December 31, 1998.
The accompanying financial statements include the accounts of FLIR Systems, Inc.
and its subsidiaries. All intercompany accounts and transactions have been
eliminated. The results of the interim period are not necessarily indicative of
the results for the entire year.
Certain reclassifications have been made to prior years' data to conform with
the current year's presentation. These reclassifications had no impact on
previously reported results of operations or shareholders' equity.
NOTE 2 -- REVENUE RECOGNITION:
Revenue on commercial sales is generally recognized upon shipment. Government
sales often require significant integration with other aircraft components and
related revenue is generally recognized when products are shipped from the
Company's facilities and realization is reasonably assured. Adjustments in
estimates, which can affect both revenues and earnings, are made in the period
in which the information necessary to make the adjustment becomes available.
Provisions for estimated losses on sales or related receivables are recorded
when identified.
NOTE 3 -- NET EARNINGS PER SHARE:
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the periods, computed
using the treasury stock method for stock options. In 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
6
The following table sets forth the reconciliation of the denominator utilized in
the computation of basic and diluted earnings per share (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
Weighted average number of common shares
outstanding................................. 14,311 13,862 14,213 12,604
Assumed exercise of stock options net of
shares assumed reacquired under the treasury
stock method................................ 212 407 -- 537
------------ ------------ ----------- ------------
Diluted shares outstanding..................... 14,523 14,269 14,213 13,141
============ ============ =========== ============
The effect of stock options aggregating 297,000 shares have been excluded for
purposes of diluted earnings per share for the nine months ended September 30,
1999, since the effect would have been anti-dilutive.
NOTE 4 -- INVENTORIES:
Inventories consist of the following (in thousands):
September 30, December 31,
1999 1998
------------------- -------------------
Raw material and subassemblies..................... $43,687 $36,315
Work-in-progress................................... 17,175 12,527
Finished goods..................................... 16,069 22,330
------------------- -------------------
76,931 71,172
Less - progress payments received from
Customers............................. (1,812) (860)
------------------- -------------------
$75,119 $70,312
=================== ===================
NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY:
Changes in Shareholders' Equity consist of the following (in thousands):
Accumulated
Additional Other Total
Preferred Common Paid-in Accumulated Comprehensive Comprehensive
Stock Stock Capital Deficit Income Total Loss
--------- ------ ---------- ----------- ------------- -------- -------------
Balance, December 31, 1998............... $ -- $141 $142,169 $(14,255) $(2,073) $125,982
Common stock options exercised........... -- 3 811 -- -- 814
Net loss for the nine month period....... -- -- -- (7,694) -- (7,694) $(7,694)
Translation adjustment................... -- -- -- -- 775 775 775
------- ---- -------- -------- ------- -------- -------
Balance, September 30, 1999.............. $ -- $144 $142,980 $(21,949) $(1,298) $119,877
======= ==== ======== ======== ======= ========
Comprehensive loss, nine months ended
September 30, 1999...................... $(6,919)
=======
7
Translation adjustment represents the Company's only other comprehensive income
item. Translation adjustment represents 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.
NOTE 6 - INFRAMETRICS MERGER:
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of March 19, 1999 by and among the Company, Irabu
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
the Company ("Merger Sub"), Inframetrics, Inc., a Delaware corporation
("Inframetrics") and the stockholders of Inframetrics, Merger Sub was merged
with and into Inframetrics effective as of March 30, 1999 (the "Effective
Time").
The shares of capital stock of Inframetrics outstanding immediately prior to the
Effective Time were converted into and exchanged for a total of 2,107,552 shares
of the Company's common stock (including 210,755 shares of the Company's common
stock to be held in escrow to secure the indemnification obligations of the
stockholders of Inframetrics until September 26, 1999). In addition, all
options to purchase Inframetrics common stock that were outstanding immediately
prior to the effective time were assumed by the Company. As of the Effective
Time of the merger, a total of 192,439 shares of the Company's common stock were
issuable upon the exercise of the stock options assumed by the Company in the
Merger.
The transaction was accounted for as a pooling of interests and, therefore,
financial statements for all periods presented have been restated to reflect
combined operations and financial position for all such periods. Such
restatement had no effect on previously reported separate results of operations
or shareholders' equity.
In conjunction with the merger, on March 31, 1999, the Company recognized a one-
time charge of $24.3 million consisting of the following (in thousands):
Incurred
through
Original September 30, Remaining
Description: Estimate 1999 Balance
- ---------------------------------------------- -------------- ----------------- ----------------
Reserve for duplicative inventories........... $18,150 $2,694 $15,456
Transaction related costs..................... 3,110 2,638 472
Costs to exit activities...................... 3,000 2,583 417
-------------- ----------------- ----------------
Total $24,260 $7,915 $16,345
============== ================= ================
The inventory reserve relates to duplicative product lines created by the merger
and is included in cost of goods sold. The Company intends to write-off and
dispose of the related inventories throughout 1999. The transaction related
costs consisted of investment advisor fees, legal and accounting fees and other
direct transaction costs. Such costs are included in combination costs, a
separate line item in operating expenses. The cost to exit activities amount
relates to estimated shut down costs related to duplicative facilities in the
United Kingdom, Germany and France. The related reserve is recorded in accrued
payroll and other liabilities on the balance sheet. Preliminary shutdown plans
have been identified and activities related to the shutdown of these
8
facilities has begun. It is expected that the shutdown of these facilitates will
be completed by December 31, 1999. Such costs are also included in combination
costs.
The following reconciles revenue and net earnings previously reported to the
restated information presented in the consolidated financial statements:
1998
-----------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -------------------
Revenue:
Previously reported................................. $41,261 $104,032
Inframetrics........................................ 14,752 41,482
------------------- -------------------
Restated............................................ $56,013 $145,514
=================== ===================
Net earnings:
Previously reported................................. $ 5,227 $ 8,272
Inframetrics........................................ 504 697
------------------- -------------------
Restated............................................ $ 5,731 $ 8,969
=================== ===================
NOTE 7: - SEGMENT INFORMATION:
The Company has determined its operating segments to be the commercial and
government market segments. The commercial segment comprises thermal imaging
applications including condition monitoring, research and development,
manufacturing process control and airborne observation and broadcast. The
government segment comprises thermal imaging applications including search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environment monitoring, and ground-based
security.
The accounting policies of the each segment are the same. The Company evaluates
performance based upon revenue and gross profit for each segment and does not
evaluate segment performance on any other income measurement.
Operating segment information including revenue and gross profit are as follows
(in thousands):
Nine Months Ended September 30,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Gross Gross
Revenue Profit Revenue Profit
-------------- -------------- -------------- --------------
Commercial......... $ 92,479 $40,307 $ 99,274 $52,615
Government......... 38,867 20,012 46,240 24,393
-------------- -------------- -------------- --------------
Total.............. $131,346 $60,319 $145,514 $77,008
============== ============== ============== ==============
9
All longed-lived assets are generally located in the United States with the
exception of property and equipment. Property and equipment is located in the
following geographic areas (in thousands):
September 30, December 31,
1999 1998
----------------- ------------------
United States.................................. $23,327 $18,577
Europe......................................... 5,102 8,198
----------------- ------------------
$28,429 $26,775
================= ==================
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
General. As a result of the merger with Inframetrics which was
accounted for as a pooling of interests (See Note 6), the financial statements
and all amounts included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations for all periods presented have
been restated to reflect combined operations and financial position for all such
periods. Such restatements had no effect on previously reported separate
results of operations or shareholders' equity.
Revenue. The Company's revenue for the three months ended September
30, 1999 decreased 2.3%, from $56.0 million in the third quarter of 1998 to
$54.7 million in the third quarter of 1999. Commercial revenue decreased 3.8%
from $37.6 million in the third quarter of 1998 to $36.2 million in the third
quarter of 1999. The decrease in commercial revenue was primarily due to
declines in the commercial broadcast and airborne law enforcement markets as a
result of the cyclical nature of the commercial broadcast market and a
pronounced shift in focus on capital expenditures away from capital goods and
toward expenditures to ensure Year 2000 compliance. Revenue from the sale of
systems to government customers increased slightly to $18.5 million in the third
quarter of 1999 compared with $18.4 million in the third quarter of 1998. The
relatively consistent government revenue was primarily due to continued strong
sales of the Company's Star SAFIRE/TM/ product. The revenue for the quarter was
impacted due to supply constraints on cooled detectors for the MilCam/TM/
products. The Company has experienced a significant increase in demand for
cooled detectors used in the MilCam and the Mark III/TM/ products and the
Company continues to work with its suppliers to increase production to meet the
demand.
Revenue for the nine months ended September 30, 1999 decreased 9.7%, from $145.5
million in the first nine months of 1998 to $131.3 million in the first nine
months of 1999. Commercial revenue for the nine months ended September 30, 1999
decreased 6.8% from $99.3 million in the first nine months of 1998 to $92.5
million in first nine months of 1999. The decrease in commercial revenue was
primarily due to disruptions encountered in the distribution channel as a result
of the four month delay in consummating the merger with Inframetrics caused by
the delayed approval of the transaction from the Federal Trade Commission and
the Department of Justice and to decreased sales to commercial broadcasters and
law enforcement agencies. This delay created uncertainty in the Company's
customer base and management believes that many orders that would have been
placed earlier in 1999 were delayed until the merger was completed and the
surviving product lines were identified. While this delay impacted the first two
quarters of 1999, management believes that market has recovered as evidenced by
increased thermography orders. Revenues from the sale of systems to government
customers for the nine months ended September 30, 1999 totaled $38.9 million, a
decrease of 15.9% from the $46.2 million in revenue generated in the first nine
months of 1998. The significant decline in government revenue was due to issues
encountered primarily in the first quarter and the early portion of the second
quarter by agencies of the U.S. Government and other NATO countries in obtaining
release of 1999 procurement funds due to the funding uncertainties caused by the
NATO campaign in Kosovo, and the continued depressed economic conditions in
several international markets.
11
The Company's commercial products continued to account for the majority of the
Company's total revenue. As a percentage of total revenue, commercial revenue
for the third quarter of 1999 decreased slightly to 66.2% as compared to 67.2%
in the third quarter of 1998. For the nine months ended September 30, 1999,
commercial revenue increased to 70.4% of total revenue, as compared to 68.2% for
the first nine months of 1998.
Revenue from sales outside the United States increased as a percentage of total
revenue from approximately 34.7% to approximately 40.0% for the quarters ended
September 30, 1998 and 1999, respectively. The increase in the percentage of
international sales was primarily due to increased deliveries of thermography
products in Europe and increased deliveries on existing international government
contracts. For the first nine months of 1999, revenue from sales outside the
United States constituted 36.0% of total revenue, as compared to 36.8% for the
first nine months of 1998. 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.
Gross profit. As a percentage of revenue, gross profit increased
from 52.3% in the third quarter of 1998 to 61.7% in the third quarter of 1999.
The increase in gross profit as a percentage of revenue was principally
attributable to the higher proportion of commercial revenue generated from
uncooled commercial products, which, as a result of the favorable cost structure
of the uncooled commercial products and through manufacturing cost control
efforts, exceed those margins experienced from the sale of cooled commercial
products.
As a percentage of revenue, gross profit decreased from 52.9% to 45.9% for the
nine month periods ended September 30, 1998 and 1999, respectively. The primary
reason for this significant decline was the inclusion in cost of goods sold for
the nine month period ended September 30, 1999 of a one-time charge of $18.2
million related to duplicate inventories and products which were determined to
have reached the end of life, both created by overlapping product lines as a
result of the merger with Inframetrics. Without this charge, gross profit as a
percentage of revenue would have increased from 52.9% to 59.7% for the nine
months ended September 30, 1998 and 1999, respectively. This increase in gross
profit as a percentage of revenue was principally attributable to the higher
proportion of total revenue derived from the sale of commercial products which,
as a result of the favorable cost structure of the uncooled commercial products,
now generally exceed those margins experienced from the sale of cooled imaging
products and imaging systems to the government market. The increase in gross
profit as a percentage of revenue was mitigated in part by an increase in
shipments to instrumentalities of the U.S. Government which typically have lower
margins than those of other customers in the government market and aggregated
$22.4 million in the first nine months of 1999 compared to $18.6 million in the
first nine months of 1998.
Research and development. Research and development expense for the
quarter increased slightly, from $6.3 million for the third quarter of 1998 to
$6.4 million for the third quarter of 1999. As a percentage of revenue, research
and development expense increased from 11.3% to 11.6% for the three months ended
September 30, 1998 and 1999. In absolute dollar terms, the relatively
consistent level of research and development expense reflects the continued
emphasis on product development offset by continued cost control efforts and
efficiencies realized as a result of the Inframetrics transaction.
12
Research and development expense increased 1.6% for the nine months ended
September 30, 1999, from $19.9 million in the first nine months of 1998 to $20.2
million in the first nine months of 1999. As a percentage of revenue, research
and development expense increased from 13.6% to 15.4% for the nine months ended
September 30, 1998 and 1999, respectively. In absolute dollar terms, the
increase in research and development expense was primarily due to engineering
efforts related to the introduction of new products including the FireFLIR/TM/,
UltraMedia LE/TM/, Maritime FLIR and UltraMedia III/TM/, as well as on-going new
product development and existing product enhancements. This increase was
mitigated by increased cost control efforts and efficiencies realized as a
result of the Inframetrics transaction. The overall level of research and
development expense reflects the continued emphasis on product development and
new product introductions.
Selling and other operating costs. Selling and other operating
costs for the quarter decreased 6.0%, from $14.1 million for the third quarter
of 1998 to $13.2 million for the third quarter of 1999. As a percentage of
revenue, selling and other operating costs decreased from 25.2% to 24.2% for the
three months ended September 30, 1998 and 1999, respectively. The decrease in
absolute dollar terms was primarily due to management's cost control efforts and
efficiencies realized as a result of the Inframetrics transaction.
Selling and other operating costs decreased slightly for the nine months ended
September 30, 1999, from $41.6 million in the first nine months of 1998 to $41.5
million in the first nine months of 1999. As a percentage of revenue, selling
and other operating costs increased from 28.6% to 31.6% for the nine months
ended September 30, 1998 and 1999, respectively. The relatively consistent
level in absolute dollar terms was due to the costs related to increased
personnel as part of the continued shift from a primarily representative based
sales force to a more direct sales force and increased personnel required for
new markets, primarily the fire-fighting market. This increase was mitigated by
management's cost control efforts and efficiencies realized as a result of the
Inframetrics transaction. Selling and other operating costs are expected to
continue to increase in absolute dollar terms, however, as a percentage of
revenue they are expected to decline throughout the rest of the year.
Inframetrics Merger. Effective March 30, 1999, the Company completed
its merger with Inframetrics, Inc., a privately held infrared imaging company
headquartered in Billerica, Massachusetts, by issuing approximately 2.3 million
shares of the Company's common stock (including approximately 192,000 shares
reserved for issuance upon the exercise of outstanding options) for all the
outstanding stock of Inframetrics. Additionally, the Company assumed and paid
off approximately $24 million of Inframetrics, Inc.'s short- and long-term debt.
In conjunction with the merger, during the quarter ended March 31, 1999, the
Company recorded a one-time charge of $24.3 million. The charge consisted of
$18.2 million of inventories due to the creation of duplicative product lines,
which is included in cost of goods sold, and $6.1 of transaction related costs,
which are included in combination costs, a separate line in operating expenses.
These charges and related reserves are more fully discussed in Note 6 to the
consolidated financial statements.
Interest expense and other. Interest expense and other includes costs
related to short-term and long-term debt, capital lease obligations, foreign
currency transaction gains and losses and miscellaneous bank charges. The
increase from $865,000 for the third quarter of 1998 to $1.6 million for the
third quarter of 1999, and the increase from $3.5 million in the first nine
months of 1998 to $3.8 in the first nine months of 1999 was primarily due to
higher interest rates and increased debt levels to support working capital
needs.
13
Income taxes. The provision for income taxes for the three and nine
months ended September 30, 1999 resulted in an effective tax rate of 32.0%
compared to 30.7% for the third quarter of 1998 and 29.7% for the nine months
ended September 30, 1998. The increase in the effective tax rate was primarily
due to limitations on the timing and recognition of the Company's net operating
loss carryforwards and tax credits. The effective tax rate remained below
statutory rates due to utilization of net operating loss carryforwards, various
tax credits, and benefits from the favorable tax treatment of international
revenue.
Liquidity and Capital Resources
At September 30, 1999, the Company had short term borrowings net of cash on hand
of $64.2 million compared to $62.7 million at June 30, 1999 and compared to
$35.2 million at December 31, 1998. The increase in short-term borrowings
during the nine months ended September 30, 1999, was principally caused by the
repayment of Inframetrics' existing long-term debt which aggregated $18.3
million at December 31, 1998 and the continued high levels of inventories and
receivables.
At September 30, 1999, the Company had inventories on hand of $75.1 million
compared to $70.3 million at December 31, 1998. The primary reason for the
increase is the build-up of component inventory in anticipation of shipments to
government customers during the last quarter of 1999, which typically is the
largest revenue quarter of the year and build-up of component inventories for
FireFLIR and Maritime FLIR systems in anticipation of deliveries of these new
products. The level of inventory decreased $1.1 million from the June 30, 1999
balance of $76.2 million. This decrease, in a quarter in which the Company
normally experiences an increase in inventory in anticipation of the volume of
shipment in the fourth quarter, reflects the results of management's continued
efforts to increase inventory turns.
At September 30, 1999, the Company had accounts receivable in the amount of
$77.8 million compared to $91.2 million at December 31, 1998. The decrease in
the level of accounts receivable was primarily due to decreased shipments during
the first nine months of 1999. Also contributing to the decrease was the greater
percentage of total receivables that represent sales to commercial customers
which typically have a shorter collection cycle than sales to government
customers. Days sales outstanding decreased from 150 at June 30, 1999 to 122 at
September 30, 1999.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $7.8 million and $10.1 million for the nine months
ended September 30, 1999 and 1998, respectively. The Company has budgeted for
approximately $7.0 million related to the replacement of the Company's
Enterprise Resource Planning (ERP) system to address Year 2000 and other issues
and has expended approximately $6.1 million through September 30, 1999.
The Company has available a $70.0 million line of credit which bears interest at
LIBOR plus 1.5% (6.8% at September 30, 1999) secured by all the Company's
assets. Additionally, the Company, through one of its subsidiaries, has a
40,000,000 Swedish Krone (approximately $4.7 million) line of credit at 5.1% at
September 30, 1999. At September 30, 1999, the Company had $68.3 million
outstanding on these lines. The Company is currently negotiating an increase to
the $70.0 million line of credit to $100.0 million. The new operating line is
expected to be effective in early December.
The Company believes that its existing cash and available credit facilities,
financing available from other sources and continuing efforts to expedite the
collection of accounts receivable and management of inventory levels will be
sufficient to meet its cash requirements for the foreseeable future.
14
Quantitative and Qualitative Disclosure about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its short-term and long-term debt obligations. The Company
currently hedges interest rate exposure through the use of long-term interest
rate swaps. The Company believes that its net income or cash flow exposure
relating to rate changes for short-term and long-term debt obligations are
immaterial. Interest expense is affected by the general level of U.S. interest
rates and/or LIBOR.
The foreign subsidiaries of the Company generally use their local currency as
the functional currency. The Company does not currently enter into any foreign
exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. To
date, such exposure has been immaterial. The Company does maintain small cash
balances denominated in currencies other than the U.S. Dollar. If foreign
exchange rates were to weaken against the U.S. Dollar, the Company believes that
the fair value of these foreign currency amounts would decline by an immaterial
amount.
Impact of the Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company or its significant
suppliers or customers fail to make necessary modifications, conversions and
contingency plans on a timely basis, the Year 2000 issue could have a material
adverse effect on the Company's business, operations, cash flows and financial
conditions.
The Year 2000 issue affects the Company's internal systems as well as any of the
Company's products that include date-sensitive software. The Company has
conducted a comprehensive review of its computer systems to identify the systems
that could be affected by the Year 2000 issue. The Company identified that the
internal manufacturing system acquired by the Company in connection with the
acquisition of AGEMA is not Year 2000 compliant, and has completed the
installation of a new enterprise resource planning system, both hardware and
software, to correct this deficiency. The Company's existing product lines have
been tested and reviewed to ensure Year 2000 compliance and the Company's
products under development are being designed to be Year 2000 compliant.
Additionally, the Company has evaluated Year 2000 compliance on products from
its suppliers and partners. Both internal and external resources are being
employed to identify, correct or reprogram, and test the systems for Year 2000
compliance. The total cost of the project is estimated to be approximately $7.0
million and is being funded through existing cash resources. A contingency plan
has not been finalized for dealing with the most reasonably likely worst-case
scenario, as such scenario has not yet been clearly identified. The Company
currently plans to complete such analysis and contingency planning by December
31, 1999.
There can be no assurance, however, that the systems or products of other
companies on which the Company's systems also rely will be timely converted or
that any such failure to convert by a vendor, customer or another company would
not have an adverse effect on the Company's systems. Additionally, we cannot
completely ensure that the Company's computer systems and software products do
not contain undetected problems associated with Year 2000 Compliance. Such
problems, should they occur, may result in adverse effects on future operating
results.
15
Forward-Looking Statements
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. 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter, the Company sold securities without registration under the
Securities Act of 1933, as amended (the "Securities Act") upon the exercise of
certain stock options granted under the Company's 1984 Stock Incentive Plan. An
aggregate of 11,600 shares of Common Stock were issued at exercise prices
ranging from $1.625 to $5.225. These transactions were effected in reliance
upon the exemption from registration under the Securities Act provided by Rule
701 promulgated by the Securities and Exchange Commission pursuant to authority
granted under Section 3 (b) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Contract for the Supply of Uncooled Imaging Modules, dated August 8,
1999*
27.1 Financial Data Schedule
*Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under 17 C.F.R. (S)240.24b-2.
(b) During the three months ended September 30, 1999, the Company did not file
any reports on Form 8-K.
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SIGNATURES
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 15, 1999 /s/ J. Mark Samper
---------------------------- -------------------
J. Mark Samper
Sr. Vice President, Finance and
Chief Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
17