<PAGE>
================================================================================
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, 1998
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 X . No .
------- ------
At September 30, 1998, there were 11,940,434 shares of the Registrant's common
stock, $0.01, par value, outstanding.
<PAGE>
FLIR Systems, Inc.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
and Nine Months Ended September 30, 1998 and 1997....... 3
Consolidated Balance Sheet -- September 30, 1998 and
December 31, 1997....................................... 4
Consolidated Statement of Cash Flows -- Nine Months
Ended September 30, 1998 and 1997....................... 5
Notes to the Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 14
Signatures.............................................. 14
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Government..................................... $15,833 $12,946 $ 39,061 $32,325
Commercial..................................... 25,428 10,969 64,971 27,350
------- ------- -------- -------
Total revenue................................ 41,261 23,915 104,032 59,675
Cost of goods sold............................... 18,831 11,130 45,619 27,654
Research and development......................... 5,261 3,187 16,103 8,532
Selling and other operating costs................ 9,608 5,930 28,939 16,889
------- ------- -------- -------
33,700 20,247 90,661 53,075
Earnings from operations..................... 7,561 3,668 13,371 6,600
Interest income.................................. 28 32 364 52
Interest expense and other....................... (423) (533) (2,275) (1,405)
------- ------- -------- -------
Earnings before income taxes................. 7,166 3,167 11,460 5,247
Provision for income taxes....................... 1,939 730 3,188 1,269
------- ------- -------- -------
Net earnings..................................... $ 5,227 $ 2,437 $ 8,272 $ 3,978
======= ======= ======== =======
Net earnings per share
Basic.......................................... $ 0.44 $ 0.44 $ 0.79 $ 0.73
======= ======= ======== =======
Diluted........................................ $ 0.44 $ 0.41 $ 0.76 $ 0.68
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 2,576 $ 5,884
Accounts receivable, net..................................... 74,476 55,463
Inventories.................................................. 39,573 34,724
Prepaid expenses............................................. 3,919 3,516
-------- --------
Total current assets....................................... 120,544 99,587
Property and equipment, net.................................... 23,337 18,423
Deferred income taxes, net..................................... 16,879 16,873
Intangible assets, net......................................... 13,290 14,013
Other assets................................................... 4,236 4,961
-------- --------
$178,286 $153,857
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable................................................ $ 36,017 $ 26,558
Accounts payable............................................. 9,928 15,493
Accounts payable to related parties.......................... -- 6,228
Accrued payroll and other liabilities........................ 7,277 19,105
Accrued income taxes......................................... 2,064 363
Current portion of long-term debt............................ 641 5,273
-------- --------
Total current liabilities.................................. 55,927 73,020
Long-term debt................................................. 1,223 1,679
Pension liability.............................................. 4,092 3,969
Commitments and contingencies.................................. -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at September 30, 1998, and
December 31, 1997........................................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 11,940,434 and 9,756,458 shares issued at
September 30, 1998, and December 31, 1997, respectively..... 119 98
Additional paid-in capital................................... 132,032 97,684
Accumulated deficit.......................................... (14,059) (22,331)
Cumulative foreign translation adjustment.................... (1,048) (262)
-------- --------
Total shareholders' equity................................. 117,044 75,189
-------- --------
$178,286 $153,857
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash used by operations:
Net earnings............................................... $ 8,272 $ 3,978
Adjustments to reconcile net earnings to net cash used
by operating activities:
Depreciation............................................. 3,811 1,971
Amortization............................................. 1,203 68
Disposals and write-offs of property and equipment....... 265 185
Deferred income taxes.................................... (6) --
Changes in certain assets and liabilities:
Increase in accounts receivable.......................... (19,013) (15,712)
Increase in inventories.................................. (4,849) (617)
(Increase) decrease in prepaid expenses.................. (403) 300
Decrease (increase) in other assets...................... 566 (224)
(Decrease) in accounts payable........................... (5,565) (1,850)
(Decrease) increase in accounts payable to related (6,228) 748
parties................................................
(Decrease) increase in accrued payroll and other (11,828) 435
liabilities............................................
Increase in accrued income taxes......................... 1,701 1,031
Increase in pension liability............................ 123 --
-------- --------
Cash used by operating activities.......................... (31,951) (9,687)
-------- --------
Cash used by investing activities:
Additions to property and equipment........................ (9,311) (5,455)
-------- --------
Cash provided by financing activities:
Net increase in notes payable.............................. 9,459 14,941
Proceeds from long term debt............................... -- 1,728
Repayment of long term debt including current portion...... (5,088) (969)
Proceeds from public stock offering........................ 32,675 --
Cost of common stock issuance.............................. (550) --
Proceeds from exercise of stock options.................... 1,273 1,140
Common stock issued pursuant to stock option plans......... 971 --
-------- --------
Cash provided by financing activities...................... 38,740 16,840
-------- --------
Effect of exchange rate changes on cash...................... (786) 62
-------- --------
Net (decrease) increase in cash and cash equivalents......... (3,308) 1,760
Cash and cash equivalents, beginning of period............... 5,884 775
-------- --------
Cash and cash equivalents, end of period..................... $ 2,576 $ 2,535
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The accompanying consolidated financial statements 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 annual consolidated financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with 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 financial
statements and the notes thereto for the year ended December 31, 1997.
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 the prior year 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 is recognized when products are shipped or when services are performed,
except for certain long-term contracts which are recorded on the percentage-of-
completion method. The percentage-of-completion method is used for research
and development contracts and for production contracts which require significant
amounts of initial engineering and development costs. The percentage-of-
completion is determined by relating the actual costs incurred to date to total
costs to complete the respective contract.
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
<PAGE>
The following table sets forth the reconciliation of the denominator utilized in
the computation of basic and diluted earnings per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding............................. 11,754 5,542 10,496 5,485
Assumed exercise of stock options net of
shares assumed reacquired under the
treasury stock method................... 215 438 345 371
------- ------- ------- -------
Diluted shares outstanding............... 11,969 5,980 10,841 5,856
======= ======= ======= =======
</TABLE>
NOTE 4 -- INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Materials......................................... $23,426 $26,631
Work-in-progress.................................. 8,843 9,995
Finished goods.................................... 8,768 894
------- -------
41,037 37,520
Less - progress payments received from customers.. (1,464) (2,796)
------- -------
$39,573 $34,724
======= =======
</TABLE>
NOTE 5 - COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
The Company has adopted the standard as of January 1, 1998. Total comprehensive
income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income........................... $5,227 $2,437 $8,272 $3,978
Cumulative foreign translation
adjustment.......................... 184 (66) (786) 62
------ ------ ------ ------
Total comprehensive income........... $5,411 $2,371 $7,486 $4,040
====== ====== ====== ======
</TABLE>
The cumulative foreign translation adjustment represents the Company's only
other comprehensive income item. The cumulative foreign 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.
7
<PAGE>
NOTE 6 -- CHANGES IN SHAREHOLDERS' EQUITY:
Changes in Shareholders' Equity consist of the following (in thousands):
<TABLE>
<CAPTION>
Cumulative
Additional Retained Foreign
Preferred Common Paid-in Earnings Translation
Stock Stock Capital (Deficit) Adjustment Total
--------- -------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997.............. $ -- $ 98 $ 97,684 $(22,331) $ (262) $ 75,189
Common stock options exercised.......... -- 1 1,272 -- -- 1,273
Proceeds from public stock offering..... -- 20 32,655 -- -- 32,675
Cost of common stock issuance........... -- -- (550) -- -- (550)
Common stock issued pursuant to stock
option plans........................... -- -- 971 -- -- 971
Net earnings for the nine month period..
-- -- -- 8,272 -- 8,272
Foreign translation adjustment.......... -- -- -- -- (786) (786)
------- ---- -------- -------- ------- --------
Balance, September 30, 1998............. $ -- $119 $132,032 $(14,059) $(1,048) $117,044
======= ==== ======== ======== ======= ========
</TABLE>
On July 6, 1998, the Company completed a secondary public offering of 2,399,130
shares of common stock, including 1,638,630 shares of common stock issued and
sold by the Company. Additionally, on July 24, 1998, the underwriters
exercised the over-allotment option related to the secondary offering and the
Company issued and sold an additional 359,870 shares of common stock. The net
proceeds of $32.1 million were utilized to repay in full a payable to a related
party, which aggregated approximately $5.0 million, and to reduce amounts
outstanding under the Company's lines of credit.
NOTE 7 -- RECENT ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of an
Enterprise and Related Information." Additionally, in 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers Disclosure about Pensions and Other Post-
retirement Benefits" and Statement of Financial Accounting Standards No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." The
Company plans to adopt SFAS 131 and SFAS 132 in 1998 and SFAS 133 in 2000,
however, management believes that the impact of adoption will not have a
significant effect on the Company's financial position or results of operations.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
Overall. Net earnings for the three months ended September 30, 1998
increased 114.5%, from $2.4 million (or $0.41 per diluted share) in the third
quarter of 1997 to $5.2 million (or $0.44 per diluted share) in the third
quarter of 1998. Net earnings increased 107.9%, from $4.0 million (or $0.68 per
diluted share) for the nine months ended September 30, 1997 to $8.3 million (or
$0.76 per diluted share) for the nine months ended September 30, 1998. Earnings
from operations for the three months ended September 30, 1998 increased 106.1%,
from $3.7 million in the third quarter of 1997 to $7.6 million in the third
quarter of 1998. Earnings from operations for the nine months ended September
30, 1998 increased 102.6%, from $6.6 million in 1997 to $13.4 million in 1998.
These results reflect the inclusion of the operations of AGEMA, which was
acquired effective December 1, 1997.
Revenue. The Company's revenue for the three months ended September 30, 1998
increased 72.5%, from $23.9 million in the third quarter of 1997 to $41.3
million in the third quarter of 1998. Revenue from the sale of the Company's
products to government customers increased 22.3%, from $12.9 million in the
third quarter of 1997 to $15.8 million in the third quarter of 1998. This growth
was primarily due to the initial deliveries of the Company's new Star SAFIRE(TM)
thermal imaging system, continued strong sales of the SAFIRE(TM) thermal imaging
system and sales of the AGEMA 1000(TM), a ground based surveillance infrared
imager. Revenue from the sale of the Company's products to commercial customers
continued to show strong growth, increasing 131.8%, from $11.0 million in the
third quarter of 1997 to $25.4 million in the third quarter of 1998. The
increased deliveries of the Company's full range of products, including the
AGEMA 550(TM) and the AGEMA 570(TM), the Company's first uncooled technology
product, contributed to the growth in commercial revenue. In particular,
deliveries of the AGEMA 570 contributed substantially to the growth and for the
first time contributed a higher percentage of revenue than the cooled products.
The growth in commercial revenue was also attributable to additional deliveries
of the Company's airborne observation systems for the commercial broadcast
market.
Revenue for the nine months ended September 30, 1998 increased 74.3%, from $59.7
million in the first nine months of 1997 to $104.0 million for the first nine
months of 1998. Revenue from the sale the Company's products to governmental
customers increased 20.8%, from $32.3 million in the first nine months of 1997
to $39.1 million in the first nine months of 1998. This growth was primarily due
to continued strong sales of the SAFIRE thermal imaging system, revenue from the
initial deliveries of the Star SAFIRE and sales of the AGEMA 1000. Revenues from
the sale of the Company's products to commercial customers increased 137.6%,
from $27.4 million in the first nine months of 1997 to $65.0 million in the
first nine months of 1998. The increase was principally from sales of the
Company's hand held imaging systems, particularly the AGEMA 550(TM) and 570(TM)
and continued strong sales of the Company's airborne observation systems for the
commercial broadcast market.
As a result of the acquisition of AGEMA in December of 1997, sales of the
Company's commercial products now account for the majority of the Company's
total revenue. As a percentage of total revenue, commercial revenue for the
third quarter of 1998 increased to 61.6%, as compared to 45.9% in the third
quarter of 1997. For the nine months ended September 30, 1998, commercial
revenue increased to 62.4% of total revenue, as compared to 45.8% for the first
nine months of 1997. The Company expects that commercial revenue will continue
to comprise the majority of total revenue.
9
<PAGE>
Revenue from international sales decreased as a percentage of total revenue from
approximately 52.8% to approximately 45.1% for the quarters ended September 30,
1997 and 1998, respectively. For the first nine months of 1998, international
sales accounted for approximately 49.3% of the Company's revenue. The decrease
in percentage of international revenue for the quarter ended September 30, 1998,
was primarily due to increased deliveries to U.S. Government customers,
principally the U.S. Marine Corps. While the percentage of revenue from
international sales will continue to fluctuate from quarter to quarter due to
the timing of shipments under existing international and domestic government
contracts, the Company expects 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 slightly
from 53.5% in the third quarter of 1997 to 54.4% in the third quarter of 1998
and increased from 53.7% for the first nine months of 1997 to 56.1% for the
first nine months of 1998. The 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 AGEMA commercial products, now generally exceed those
margins experienced from the sale of imaging systems to the government market.
This increase in gross profit as a percentage of revenue was partially mitigated
by increased shipments to instrumentalities of the U.S. Government which
typically have lower margins than those of other customers in the government
market and aggregated $15.6 million in the first nine months of 1998 compared to
$12.8 million in the first nine months of 1997. Gross profit percentages are
affected by a variety of factors, including the mix of domestic and
international revenue, the more competitive nature of the commercial imaging
market, and the impact of competitive bids for significant government contracts.
Research and development. Research and development expense increased 65.1%,
from $3.2 million for the third quarter of 1997 to $5.3 million for the third
quarter of 1998 and increased 88.7%, from $8.5 million for the first nine months
of 1997 to $16.1 million for the first nine months of 1998. As a percentage of
revenue, research and development expense decreased from 13.3% to 12.8% for the
three months ended September 30, 1997 and 1998, respectively, and increased from
14.3% for the first nine months of 1997 to 15.5% for the first nine months of
1998. In absolute dollar terms, the increase in research and development expense
was primarily due to increased engineering efforts related to the introduction
of the Star SAFIRE(TM), inclusion of research and development expenses of AGEMA
operations, as well as on-going new product development and existing product
enhancements. The overall level of research and development expense reflects the
Company's continuing emphasis on product development and new product
introduction. While the Company expects the absolute dollar amount of research
and development to continue to increase, research and development expense as a
percentage of total revenue should continue to decline as revenues increase.
Selling and other operating costs. Selling and other operating costs for the
quarter increased 62.0%, from $5.9 million for the third quarter of 1997 to $9.6
million for the third quarter of 1998 and increased 71.3%, from $16.9 million
for the first nine months of 1997 to $28.9 million for the first nine months of
1998. Selling and other operating costs decreased as a percentage of revenue
from 24.8% for the third quarter of 1997 to 23.3% for the third quarter of 1998
and decreased from 28.3% for the first nine months of 1997 to 27.8% for the
first nine months of 1998. This increase, in absolute dollar terms, was due to
the inclusion of AGEMA's operations, costs related to increased personnel, and
the recognition of amortization of patents and the excess of the purchase price
over net assets acquired related to the December 1997 acquisition of AGEMA. Such
amortization amounted to $288,000 for the third quarter of 1998 and $864,000 for
the nine months ended September 30, 1998.
10
<PAGE>
Interest expense and other. Interest expense and other includes interest on
short term and long term borrowings, costs related to capital lease obligations,
foreign currency transaction gains and losses and miscellaneous charges.
Interest expense and other for the quarter decreased 20.6%, from $533,000 in the
third quarter of 1997 to $423,000 in the third quarter of 1998 and increased
61.9%, from $1.4 million in the first nine months of 1997 to $2.3 million for
the first nine months of 1998. The increase for the nine months ended September
30, 1998 was due to the increased usage of the Company's line of credit. The
slight decrease for the quarter was primarily due to the reduction of the line
of credit during the quarter as a result of the proceeds from the secondary
public stock offering completed in July 1998. See Liquidity section below.
Income taxes. The Company's effective income tax rates for the quarters
ended September 30, 1998 and 1997 were 27.1% and 23.1%, respectively, and for
the nine month periods ended September 30, 1998 and 1997 were 27.8% and 24.2%,
respectively. 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 substantially
below statutory rates due to utilization of net operating loss carryforwards,
various tax credits, and benefits from the favorable tax treatment of
international operations.
Liquidity and Capital Resources
On July 6, 1998, the Company completed a secondary public offering of 2,399,130
shares of common stock, including 1,638,630 shares of common stock issued and
sold by the Company. Additionally, on July 24, 1998, the underwriters exercised
the over-allotment option related to the secondary offering and the Company
issued and sold an additional 359,870 shares of common stock. The net proceeds
of $32.1 million were utilized to repay in full a payable to a related party,
which aggregated approximately $5.0 million, reduce amounts owed to vendors and
to reduce amounts outstanding under the Company's lines of credit.
At September 30, 1998, the Company had short-term borrowings net of cash on hand
of $33.4 million compared with $20.7 million at December 31, 1997 and $35.6
million at June 30, 1998. The increased use of cash during the nine months ended
September 30, 1998, was principally attributable to increased working capital
needs, primarily increased accounts receivable levels, increased inventories,
and payment of accrued payroll and other liabilities, primarily incentive
bonuses to employees and commissions to representatives.
At September 30, 1998, the Company had inventories on hand of $39.6 million
compared to $34.7 million at December 31, 1997 and $39.5 million at June 30,
1998. Consistent with the prior quarter, the efforts to reduce inventory levels
for existing product lines were offset by the increase in inventory needed to
support the higher volume production requirements for the AGEMA 570 and AGEMA
1000 products. Further, because of the extremely long lead times for many of the
Company's most expensive components, it is necessary to have inventory on hand
to meet required delivery schedules.
At September 30, 1998, the Company had accounts receivable in the amount of
$74.5 million compared to $55.5 million at December 31, 1997 and $56.9 million
at June 30, 1998. The increase in accounts receivable is primarily due to the
significant level of shipments in the last month of the quarter as a result of
the light production schedule during the summer vacation period in Sweden and
the production startup process for the delivery of the Company's new Star
SAFIRE. Additionally, there remains a significant amount of receivables related
to sales to aircraft integrators and OEM's for government orders. In some cases
the Company has accepted payment terms that are related to the receipt of the
aircraft by the customer. While the Company
11
<PAGE>
expects the receivable balance will continue to be relatively large due to the
nature of the government market, the Company continues to focus on decreasing
days sales outstanding.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $9.3 million and $5.5 million for the nine months
ended September 30, 1998 and 1997, respectively. The Company has budgeted for
approximately $3.0 million related to the replacement of the Company's
Enterprise Resource Planning (ERP) system to address Year 2000 and other issues.
The Company has available a $42.0 million line of credit which bears interest at
IBOR plus 1.50% (7.125% at September 30, 1998) secured by all the Company's
assets. Additionally, the Company, through one of its subsidiaries, has a
40,000,000 Swedish Krone (approximately $5.0 million) line of credit at 4.7% at
September 30, 1998. At September 30, 1998, the Company had $36.0 million
outstanding on these lines.
The increased use of cash by operating activities is consistent with prior years
and is primarily due to the increase in accounts receivable and inventories and
payment of accrued liabilities discussed above. While use of the credit facility
will vary significantly and is heavily dependent upon the timing of collections
of significant receivables, the Company believes that existing cash, available
credit facilities and cash to be collected will be sufficient to meet its cash
requirements for the foreseeable future.
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 product that include date-sensitive software. The Company is
currently conducting a comprehensive review of its computer systems and software
products to identify the systems that could be affected by the Year 2000 issue
and is in the process of implementing and conducting the required processes to
become Year 2000 compliant. Specifically, the Company has identified that the
internal manufacturing system acquired by the Company in connection with the
acquisition of AGEMA is not Year 2000 compliant. The Company has begun the
installation of a new enterprise resource planning system, both hardware and
software, to correct this deficiency. Additionally, the Company is evaluating
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 $5.0 million and is being funded through
operational cash flow. A contingency plan has not been developed for dealing
with the most reasonably likely worst case scenario, and 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 a adverse effect on the Company's systems. Additionally, we cannot
completely ensure that the Company's 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.
12
<PAGE>
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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1998.
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 13, 1998 /s/ J. Mark Samper
-------------------------- ------------------------------------
J. Mark Samper
Vice President of Finance and
Chief Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
14
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<PAGE>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,576
<SECURITIES> 0
<RECEIVABLES> 76,868
<ALLOWANCES> (2,392)
<INVENTORY> 39,573
<CURRENT-ASSETS> 120,544
<PP&E> 43,792
<DEPRECIATION> (20,455)
<TOTAL-ASSETS> 178,286
<CURRENT-LIABILITIES> 55,927
<BONDS> 1,223
0
0
<COMMON> 119
<OTHER-SE> 116,925
<TOTAL-LIABILITY-AND-EQUITY> 178,286
<SALES> 104,032
<TOTAL-REVENUES> 104,032
<CGS> 45,619
<TOTAL-COSTS> 45,619
<OTHER-EXPENSES> 45,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,911
<INCOME-PRETAX> 11,460
<INCOME-TAX> 3,188
<INCOME-CONTINUING> 8,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,272
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.76
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