Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FLIR > SEC Filings for FLIR > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for FLIR SYSTEMS INC

Form 10-Q for FLIR SYSTEMS INC


12-May-2014

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, 2013, "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.
In February 2014, we announced a realignment of our business which resulted in the elimination of our division structure and the formation of six reporting segments effective as of January 1, 2014. The six reporting segments are:
Surveillance, Instruments, OEM and Emerging Markets, Maritime, Security and Detection. See Note 17, "Operating Segments and Related Information" of the Notes to the Consolidated Financial Statements for additional information on the six reporting segments. The segment operating results for the three months ended March 31, 2013 below have been adjusted to conform to the new operating segment structure.
Revenue. Consolidated revenue for the three months ended March 31, 2014 increased by 0.8 percent year over year, from $348.6 million in the first quarter of 2013 to $351.5 million in the first quarter of 2014. Increases in year over year revenues in our Instruments, OEM and Emerging Markets, and Maritime segments offset a decline in revenues in our Detection segment. 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 2014 to be up to four percent higher than 2013 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 54.0 percent and 50.9 percent of total revenue for the quarters ended March 31, 2014 and 2013, respectively. The increase in the percentage of international revenue is primarily due to higher deliveries to our customers in the Europe, Middle East and Africa ("EMEA") region, partially attributable to the improving economic conditions in that region. 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 months ended March 31, 2014 was $183.0 million, compared to cost of goods sold for the three months ended March 31, 2013 of $164.6 million. The year over year increase in cost of goods sold primarily relates to changes in product mix.
Gross profit. Gross profit for the quarter ended March 31, 2014 was $168.5 million compared to $184.0 million for the same quarter last year. Gross margin, defined as gross profit divided by revenue, decreased from 52.8 percent in the first quarter of 2013 to 47.9 percent in the first quarter of 2014. The decreases in gross margins were primarily due to relatively higher year over year sales by lower margin product lines, particularly in our OEM and Emerging Markets segment and our Security segment, and deliveries in 2014 on two large lower margin programs in our Surveillance segment.
Research and development expenses. Research and development expenses for the first three months of 2014 and 2013 were $36.3 million and $36.7 million, respectively. Research and development expenses as a percentage of revenue was 10.3 percent and 10.5 percent for the three months ended March 31, 2014 and 2013, respectively. Over the five annual periods through December 31, 2013, our annual research and development expenses have varied between 8.0 percent and 9.9 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 $81.9 million for the quarter ended March 31, 2014, compared to $78.2 million for the quarter ended March 31, 2013. The increases in selling, general and administrative expenses for the first quarter year over year were primarily related to an increase of $4.4 million in corporate expenses mainly related to higher legal expenses incurred for litigation matters in the ordinary course of business. Selling, general and administrative expenses as a percentage of revenue were 23.3 percent and 22.4 percent for the quarters ended March 31, 2014 and 2013, respectively. Over the five annual periods through December 31, 2013, our annual selling, general and administrative expenses have varied between 19.2 percent and 23.9 percent of revenue.
Restructuring expenses. During the three months ended March 31, 2014, we incurred $8.4 million in pre-tax restructuring expenses, of which $7.8 million is recorded in operating expenses and $0.6 million is included in costs of goods sold. Of the first quarter 2014 charges, $4.8 million relates to operational realignment initiatives announced in the fourth quarter of 2013 and $3.6 million relates to employee termination costs incurred as a result of our decision to eliminate our division structure and realign into six new reporting segments as of January 1, 2014.
Interest expense. Interest expense for the first three months of 2014 was $3.7 million compared to $2.9 million for the same period of 2013. Interest expense is primarily associated with the $250 million aggregate principal amount of 3.750 percent 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 $9.3 million for the three months ended March 31, 2014 represents a quarterly effective tax rate of 23.8 percent. We expect the annual effective tax rate for the full year of 2014 to be approximately 23.8 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
Surveillance
Surveillance operating results are as follows (in millions):

                            Three Months Ended
                                March 31,
                             2014         2013
Revenue                  $   117.2      $ 118.0
Earnings from operations      20.4         33.7
Operating margin              17.4 %       28.6 %
Backlog, end of period         280          303

Revenue for the three months ended March 31, 2014 decreased by 0.7 percent compared to the same period of 2013. The decrease in earnings from operations for the three months ended March 31, 2014 compared to the same period of 2013 was primarily due to changes in product mix, reduced gross margins on two 2014 deliveries, and $4.1 million of restructuring expenses recorded in the first quarter of 2014. The decrease in backlog at March 31, 2014 compared to March 31, 2013 was a result of reduced United States government procurement activity and deliveries during the past twelve months on several major programs, partially offset by an approximately $32 million order from a Middle East customer that was received in the first quarter of 2014.


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

                            Three Months Ended
                                March 31,
                             2014          2013
Revenue                  $    84.1       $ 78.6
Earnings from operations      20.5         20.0
Operating margin              24.3 %       25.5 %
Backlog, end of period          29           30

Revenue for the three months ended March 31, 2014 increased by 7.0 percent compared to the same period of 2013. The year over year increase in revenue was related to increased deliveries in all geographic regions and across all product lines, particularly for products introduced within the last year. The slight increase in earnings from operations for the three months ended March 31, 2014 compared to the same period of 2013 was due to the increase in revenues and resultant gross profit being essentially offset by restructuring expenses of $3.5 million.
OEM and Emerging Markets
OEM and Emerging Markets operating results are as follows (in millions):

                            Three Months Ended
                                March 31,
                             2014          2013
Revenue                  $    53.8       $ 50.3
Earnings from operations      11.7         14.6
Operating margin              21.8 %       29.0 %
Backlog, end of period         122          113

Revenue for the three months ended March 31, 2014 increased by 7.0 percent compared to the same period of the prior year primarily due to the revenues in our optical components group which is a business that was acquired in August of 2013. The decrease in earnings from operations for the three months ended March 31, 2014 compared to the same period in the prior year was due to an unfavorable mix of products sold, including the relatively low margin products out of the optical components group, and increases in operating expenses related to the development of our new Lepton camera core and related products. Maritime
Maritime operating results are as follows (in millions):

                            Three Months Ended
                                March 31,
                             2014          2013
Revenue                  $    52.6       $ 50.5
Earnings from operations       8.8          8.1
Operating margin              16.8 %       16.1 %
Backlog, end of period          15           10

Revenue for the three months ended March 31, 2014 increased by 4.2 percent compared to the same period of 2013 due to higher deliveries in the EMEA region, the effects of new or enhanced products introduced in 2013, and year over year unit volume increases across certain product lines. The increase in earnings from operations for the three months ended March 31, 2014 compared to the same period of the prior year was primarily due to the increase in revenues.


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

                            Three Months Ended
                                March 31,
                             2014          2013
Revenue                  $    29.3       $ 29.5
Earnings from operations       1.7          4.4
Operating margin               5.8 %       14.9 %
Backlog, end of period          23            7

Revenue for the three months ended March 31, 2014 decreased by 0.6 percent compared to the same period of the prior year. Earnings from operations declined by 61.6 percent year over year due to changes in product mix, including lower deliveries of our relatively higher margin, high-end thermal security cameras and increased research and development and marketing expenses related to new products. The increase in backlog at March 31, 2014 compared to March 31, 2013 was primarily due to an approximately $10 million order from a Middle East customer that was received in the first quarter of 2014

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

                            Three Months Ended
                                March 31,
                             2014          2013
Revenue                  $    14.6       $ 21.8
Earnings from operations      (1.8 )        2.5
Operating margin             (12.3 )%      11.7 %
Backlog, end of period          45           43

Revenue for the three months ended March 31, 2014 decreased by 33.1 percent compared to the same period of 2013, which was primarily due to deliveries of $5.5 million on a major program in 2013. The decline in year over year revenues and restructuring expenses of $0.6 million resulted in the Detection segment reporting a loss from operations of $1.8 million for the three months ended March 31, 2014 compared to earnings from operations of $2.5 million in the prior year.

Liquidity and Capital Resources
At March 31, 2014, we had a total of $584.1 million in cash and cash equivalents, of which $251.9 million was in the United States and $332.2 million was at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 2013 of $542.5 million, of which $221.0 million was in the United States and $321.5 million was at our foreign subsidiaries. The increase in cash and cash equivalents was primarily due to cash from operations, partially offset by $1.8 million spent for the repurchase of shares of our common stock, capital expenditures of $9.6 million, and dividends paid of $14.1 million during the period.
Cash provided by operating activities totaled $59.8 million for the three months ended March 31, 2014, 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 $9.6 million and $12.6 million for the three months ended March 31, 2014 and March 31, 2013, respectively, consisting of capital expenditures in the ordinary course of business.
Cash used by financing activities totaled $7.8 million for the three months ended March 31, 2014, which primarily consisted of the payment of dividends and the quarterly term loan principal payment, partially offset by amounts provided by our stock compensation plans. Cash used by financing activities totaled $120.1 million for the three months ended March 31, 2013, which primarily consisted of cash used for 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 March 31, 2014. 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 March 31, 2014, the effective interest rate on the term loan was 2.49 percent. Principal payments of $3.75 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 March 31, 2014, we had no amounts outstanding under the Credit Agreement and the commitment fee on the amount of unused credit was 0.3 percent. We had $29.4 million of letters of credit outstanding at March 31, 2014, 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 percent senior unsecured notes due September 1, 2016 (the "Notes"). The interest on the Notes is payable 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 March 31, 2014, there were approximately 19.0 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 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.

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, 2013. 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, 2013, 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 March 31, 2014.


  Add FLIR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FLIR - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.