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FLIR > SEC Filings for FLIR > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for FLIR SYSTEMS INC

Form 10-Q for FLIR SYSTEMS INC


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This Quarterly Report on Form 10-Q (the "Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries ("FLIR" or the "Company") that are based on management's current expectations, estimates, projections, and assumptions about the Company's business. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. 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 the "Risk Factors" section of the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 2012, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company's other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations
The following discussion of operating results provides an overview of our operations by addressing key elements in our Consolidated Statements of Income. The "Segment Operating Results" section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Given the nature of our business, we believe revenue and earnings from operations (including operating margin percentage) are most relevant to an understanding of our performance at a segment level as revenue levels are the most significant indicators of business conditions for each of the respective segments and earnings from operations reflect our ability to manage each of our segments as revenue levels change. Additionally, at the segment level we disclose backlog, which represents orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.
Revenue. Consolidated revenue for the three months ended September 30, 2013 increased by 7.8 percent year over year, from $332.2 million in the third quarter of 2012 to $358.1 million in the third quarter of 2013. Consolidated revenue for the nine months ended September 30, 2013 increased by 7.6 percent year over year, from $1,019.0 million in the first nine months of 2012 to $1,096.1 million in the first nine months of 2013. Our Thermal Vision and Measurement ("TVM"), Raymarine, and Integrated Systems segments reported increases in revenue year over year, while our other two segments reported decreases in year over year revenues. The increase in revenue from our TVM segment was due to revenue from two companies acquired late in 2012, while the increase in revenue from our Integrated Systems segment resulted from higher year over year deliveries on large programs for that business. The timing of orders, scheduling of backlog and fluctuations in demand in various regions of the world can give rise to quarter to quarter and year over year fluctuations in the mix of revenue. Consequently, year over year comparisons for any given quarter may not be indicative of comparisons using longer time periods. While we currently expect total annual revenue for 2013 to be approximately three to seven percent higher than 2012 revenue, unexpected changes in economic conditions from key customer markets or other major unanticipated events may cause total revenue, and the mix of revenue between our segments, to vary from quarter to quarter during the year.
International sales accounted for 46.6 percent and 44.2 percent of total revenue for the quarters ended September 30, 2013 and 2012, respectively, and 47.4 percent for both the three and nine months ended September 30, 2013 and 2012, respectively. The proportion of our international revenue compared to total revenue will fluctuate from quarter to quarter due to normal variation in order activity across various regions as well as specific factors that may affect one region and not another. Overall we anticipate that revenue from international sales will continue to comprise a significant percentage of total revenue. Cost of goods sold. Cost of goods sold for the three and nine months ended September 30, 2013 was $185.3 million and $549.1 million, respectively, compared to cost of goods sold for the three and nine months ended September 30, 2012 of $158.9 million and $492.9 million, respectively. The year over year increase in cost of goods sold primarily relates to increases in revenues and changes in product mix.


Gross profit. Gross profit for the quarter ended September 30, 2013 was $172.9 million compared to $173.4 million for the same quarter last year. Gross profit for the nine months ended September 30, 2013 was $546.9 million compared to $526.1 million for the same period of 2012. The increases in gross profit were primarily due to increases in revenues. Gross margin, defined as gross profit divided by revenue, decreased from 52.2 percent in the third quarter of 2012 to 48.3 percent in the third quarter of 2013 and from 51.6 percent in the first nine months of 2012 to 49.9 percent in the first nine months of 2013. The decreases in gross margins were primarily due to lower gross margins of products sold by Lorex, a portion of our TVM segment that was acquired in December 2012, and product mix changes in our Integrated Systems and Surveillance segments. Research and development expenses. Research and development expenses for the third quarter of 2013 totaled $33.0 million, compared to $29.6 million in the third quarter of 2012. Research and development expenses for the first nine months of 2013 and 2012 were $109.3 million and $103.7 million, respectively. Research and development expenses as a percentage of revenue was 9.2 percent and 10.0 percent for the three and nine months ended September 30, 2013, respectively. Research and development expenses as a percentage of revenue was 8.9 percent and 10.2 percent for the three and nine months ended September 30, 2012, respectively. Over the five annual periods through December 31, 2012, our annual research and development expenses have varied between 8.0 percent and 9.8 percent of revenue, and we currently expect these expenses to remain within that range in the near future.
Selling, general and administrative expenses. Selling, general and administrative expenses were $76.4 million for the quarter ended September 30, 2013, compared to $69.5 million for the quarter ended September 30, 2012. Selling, general and administrative expenses for the first nine months of 2013 and 2012 were $234.7 million and $219.2 million, respectively. The increases in selling, general and administrative expenses for the third quarter year over year were attributable to the addition of operating expenses of businesses acquired in December of 2012, offset by cost containment efforts taken across the Company in 2012 in response to the lower revenues during that year. Selling, general and administrative expenses as a percentage of revenue were 21.3 percent and 20.9 percent for the quarters ended September 30, 2013 and 2012, respectively and 21.4 percent and 21.5 percent for the nine months ended September 30, 2013 and 2012, respectively. Over the five annual periods through December 31, 2012, our annual selling, general and administrative expenses have varied between 19.2 percent and 23.8 percent of revenue.
Interest expense. Interest expense for the third quarter and first nine months of 2013 was $3.7 million and $10.4 million, respectively, compared to $3.1 million and $8.9 million for the same periods of 2012. Interest expense is primarily associated with the $250 million aggregate principal amount of 3.750% senior unsecured Notes due September 1, 2016 issued in August 2011 and the $150 million term loan that was drawn on April 5, 2013.
Income taxes. The income tax provision of $13.6 million for the three months ended September 30, 2013 represents a quarterly effective tax rate of 22.6 percent. We expect the annual effective tax rate for the full year of 2013 to be approximately 24 percent, excluding discrete items. The effective tax rate is lower than the US Federal tax rate of 35 percent because of the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits and discrete adjustments.

Segment Operating Results
Thermal Vision and Measurement
Thermal Vision and Measurement operating results are as follows (in millions):

                            Three Months Ended         Nine Months Ended
                              September 30,              September 30,
                             2013         2012         2013         2012
Revenue                  $   177.1      $ 149.5     $   519.5     $ 447.9
Earnings from operations      43.7         42.9         125.5       109.7
Operating margin              24.7 %       28.7 %        24.2 %      24.5 %
Backlog, end of period                                    183         167

Revenue for the three and nine months ended September 30, 2013 increased by 18.4 percent and 16 percent, respectively, compared to the same periods of 2012. The increases in the three and nine months ended September 30, 2013 are primarily due to the combined revenue of $32.9 million and $86.4 million, respectively, reported by Lorex and Traficon, which were acquired in December 2012. For the nine months ended September 30, 2013 there were slightly lower revenues in several of our other product lines, a portion of which was due to lower demand from cores and components customers, including US Government funded customers. The increases in earnings from operations for the three and nine months ended September 30, 2013 compared to the same periods of 2012 were primarily due to the cost containment efforts taken during the second quarter of 2012 and the


earnings from operations of the acquired businesses. The rise in backlog at September 30, 2013 compared to September 30, 2012 was a result of the addition of backlog reported by Lorex and Traficon. Raymarine
Raymarine operating results are as follows (in millions):

                            Three Months Ended         Nine Months Ended
                              September 30,              September 30,
                             2013          2012        2013         2012
Revenue                  $    35.8       $ 31.7     $   127.1     $ 125.4
Earnings from operations       2.1          0.4          14.3         9.9
Operating margin               5.7 %        1.2 %        11.3 %       7.9 %
Backlog, end of period                                      5           6

Revenue for the three and nine months ended September 30, 2013 increased by 13.1 percent and 1.3 percent, respectively, compared to the same periods of 2012. The year over year increase in revenue for the three month period is primarily due to increased deliveries in the Americas and Europe, partially related to new product introductions. The increases in earnings from operations for the three and nine months ended September 30, 2013 compared to the same periods of 2012 were primarily due to realizing the benefit in 2013 of cost containment efforts taken during the second quarter of 2012 and higher revenues. Surveillance
Surveillance operating results are as follows (in millions):

                            Three Months Ended         Nine Months Ended
                              September 30,              September 30,
                             2013         2012         2013         2012
Revenue                  $   103.0      $ 115.9     $   331.8     $ 350.0
Earnings from operations      30.5         39.2         100.8       115.0
Operating margin              29.7 %       33.9 %        30.4 %      32.8 %
Backlog, end of period                                    276         289

Revenue for the three and nine months ended September 30, 2013 decreased by 11.2 percent and 5.2 percent, respectively, compared to the same periods of 2012 due to reduced procurement activity by both US and international government agencies. The decrease in earnings from operations for both the three month and nine month periods were primarily due to lower revenues and lower gross margins due to changes in product mix.

Detection
Detection operating results are as follows (in millions):

                            Three Months Ended         Nine Months Ended
                              September 30,              September 30,
                             2013          2012         2013         2012
Revenue                  $    13.1       $ 15.4     $    40.0      $ 50.5
Earnings from operations       1.4          1.1           3.3         0.8
Operating margin              10.3 %        7.3 %         8.2 %       1.6 %
Backlog, end of period                                     24          24

Revenue for the three and nine months ended September 30, 2013 decreased by 14.9 percent and 20.7 percent, respectively, compared to the same periods of 2012, which was primarily due to lower research and development contract revenues. Earnings from operations increased for the three and nine month periods year over year due to reductions in operating expenses, which included $2.8 million of restructuring charges in the nine months ended September 30, 2012 partially offset by lower revenues.


Integrated Systems
Integrated Systems operating results are as follows (in millions):

                                   Three Months Ended         Nine Months Ended
                                     September 30,              September 30,
                                    2013          2012         2013         2012
Revenue                         $    29.2       $ 19.7     $    77.7      $ 45.1
(Loss) earnings from operations      (0.1 )        1.3           0.1         1.3
Operating margin                     (0.3 )%       6.8 %         0.1 %       2.8 %
Backlog, end of period                                            35          79

Revenue for the three and nine months ended September 30, 2013 increased by 48.0 percent and 72.1 percent, respectively, compared to the same periods of 2012, which was primarily due to the timing of large program deliveries during both the three and nine months ended September 30, 2013. The decreases in earnings from operations for the three and nine months ended September 30, 2013 compared to the same periods of 2012 were primarily due to lower margins recognized on program deliveries in 2013. Margins are expected to improve in 2014. Backlog at September 30, 2013 reflects a decrease of $44 million compared to September 30, 2012 due to those program deliveries in 2013 and the reduced intake of program orders in 2013, particularly from US government customers.

Liquidity and Capital Resources
At September 30, 2013, we had a total of $492.2 million in cash and cash equivalents, of which $236.9 million was in the United States and $255.3 million was at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 2012 of $321.7 million, of which $150.3 million was in the United States and $171.4 million was at our foreign subsidiaries. The increase in cash and cash equivalents was primarily due to $150 million borrowed against a term loan facility and cash from operations, partially offset by $133.0 million spent for the repurchase of shares of our common stock, capital expenditures of $37.0 million, and dividends paid of $38.7 million during the period.
Cash provided by operating activities totaled $249.8 million for the nine months ended September 30, 2013, which primarily consisted of net earnings, adjusted for non-cash charges for depreciation and amortization and stock-based compensation, and net collections of our accounts receivable, partially offset by net increases in other working capital components.
Cash used by investing activities totaled $57.1 million for the nine months ended September 30, 2013, primarily consisting of the acquisition of Marine and Remote Sensing Solutions, Ltd for $3.2 million, the acquisition of certain tangible assets and intellectual property of DigitalOptics Corporation East for $14.9 million, and capital expenditures of $37.0 million.
Cash used by financing activities totaled $23.6 million for the nine months ended September 30, 2013, which primarily consisted of cash received from the term loan offset by the repurchase of shares of our common stock and the payment of dividends.
On February 8, 2011, we signed a Credit Agreement ("Credit Agreement") with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other Lenders. The Credit Agreement provides for a $200 million, five-year revolving line of credit. On April 5, 2013, the Credit Agreement was amended to extend the maturity of the revolving credit facility from February 8, 2016 to April 5, 2018 in addition to incorporating a $150 million term loan facility maturing April 5, 2019. We have the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the line of credit by an additional $150 million until April 5, 2018. The Credit Agreement allows us and certain designated subsidiaries to borrow in US dollars, euros, Swedish Kronor, pound sterling and other agreed upon currencies. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on the Company's leverage ratio, which ranges from 0.25 percent to 0.40 percent. The Credit Agreement contains two financial covenants that require the maintenance of certain leverage ratios with which we were in compliance at September 30, 2013. The five-year revolving line of credit available under the Credit Agreement and the term loan facility are not secured by any of our assets.
As noted above, the Credit Agreement amendment of April 5, 2013 incorporated a $150 million term loan facility that matures on April 5, 2019. On April 5, 2013 we drew down $150 million under the term loan facility. Interest is accrued at the one-month LIBOR rate plus the scheduled spread and paid monthly. By entering into interest rate swap agreements, we have effectively fixed the basis for calculating the interest rate on the term loan. The effective interest rate paid is equal to the fixed rate in the swap agreements plus the credit spread then in effect. At September 30, 2013, the effective interest rate on the term loan was 2.49


percent. Principal payments of $3.8 million are made in quarterly installments which commenced on June 30, 2013 and will continue through December 31, 2018 with the final maturity payment including any accrued interest due on April 5, 2019.
At September 30, 2013, we had no amounts outstanding under the Credit Agreement and the commitment fee on the amount of unused credit was 0.25 percent. We had $13.2 million of letters of credit outstanding at September 30, 2013, which reduced the total available credit under the Credit Agreement.
On August 19, 2011, we issued $250 million aggregate principal amount of our 3.750% senior unsecured notes due September 1, 2016 (the "Notes"). The net proceeds from the issuance of the Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest is payable on the Notes semiannually in arrears on March 1 and September 1. The proceeds from the Notes are being used for general corporate purposes, which may include working capital and capital expenditure needs, business acquisitions and repurchases of our common stock.
On February 6, 2013, our Board of Directors authorized the repurchase of up to 25.0 million shares of our outstanding common stock. As of September 30, 2013, there were approximately 20.0 million shares still remaining for repurchase under this authorization, which expires on February 6, 2015.
United States income taxes have not been provided for on accumulated earnings of certain subsidiaries outside of the United States as we currently intend to reinvest the earnings in operations outside the United States indefinitely. Should we subsequently elect to repatriate foreign earnings, we would need to accrue and pay United States income taxes, thereby reducing the amount of our cash.
We believe that our existing cash combined with the cash we expect to generate from operating activities and our 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 current year nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.

Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02") which establishes new requirements for disclosing reclassifications of items out of accumulated other comprehensive income and includes identification of the line items in net earnings affected by the reclassifications. ASU 2013-02 is effective for annual and interim periods for fiscal years beginning after December 15, 2012. Accordingly, the Company adopted ASU 2013-02 on January 1, 2013. The Company did not have any reclassifications during the first nine months of 2013 that would require additional disclosure under this pronouncement.
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05") which addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective for annual and interim periods beginning after December 15, 2014. Accordingly, the Company currently intends to adopt ASU 2013-05 on January 1, 2015 and does not expect the adoption of ASU 2013-05 to have a material impact on its consolidated financial statements.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss ("NOL") carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013, and early adoption is permitted. Since ASU 2013-11 relates only to the presentation of unrecognized tax benefits, we do not expect our adoption of ASU 2013-11 in January 2014 will have a material effect on our financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates The Company reaffirms the critical accounting policies and our use of estimates as reported in our Form 10-K for the fiscal year ended December 31, 2012. As described in Note 1, Nature of Business and Significant Accounting Policies," of the Notes to the Consolidated Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2012, the determination of fair value for stock-based compensation awards requires the use of management's estimates and judgments.


Contractual Obligations
There were no material changes to our contractual obligations outside the ordinary course of our business during the quarter ended September 30, 2013.


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