<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, 2000
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 October 31, 2000, there were 14,499,504 shares of the Registrant's common
stock, $0.01, par value, outstanding.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months
and Nine Months Ended September 30, 2000 and 1999....... 3
Consolidated Balance Sheet -- September 30, 2000 and
December 31, 1999....................................... 4
Consolidated Statement of Cash Flows -- Nine Months
Ended September, 2000 and 1999.......................... 5
Notes to the Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 3. Quantitative and Qualitative Disclosures About Market 19
Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 20
Item 3. Default Upon Senior Securities.......................... 20
Item 4. Submission of Matters to a Vote of Shareholders......... 20
Item 6. Exhibits and Current Reports on Form 8-K................ 21
Signatures.............................................. 22
</TABLE>
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,
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- -------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Commercial.......................... $ 21,113 $27,093 $ 72,335 $ 78,832
Government.......................... 17,426 19,914 54,923 53,312
-------------- ------------- -------------- -------------
38,539 47,007 127,258 132,144
Cost of goods sold...................... 27,427 21,576 72,519 81,974
Research and development................ 6,816 6,354 23,251 20,167
Selling and other operating costs....... 17,792 16,466 53,543 46,384
Combination costs....................... -- 524 1,217 5,152
-------------- ------------- -------------- -------------
52,035 44,920 150,530 153,677
Earnings (loss) from operations.... (13,496) 2,087 (23,272) (21,533)
Interest expense........................ 2,772 1,576 7,619 3,579
Other income - net...................... (242) -- (258) (18)
-------------- ------------- -------------- -------------
Earnings (loss) before income taxes (16,026) 511 (30,633) (25,094)
Income tax provision.................... 2,569 550 733 917
-------------- ------------- -------------- -------------
Net loss................................ $(18,595) $ (39) $(31,366) $(26,011)
============== ============= ============== =============
Net loss per share:
Basic................................ $(1.28) $(0.00) $(2.17) $(1.83)
============== ============= ============== =============
Diluted.............................. $(1.28) $(0.00) $(2.17) $(1.83)
============== ============= ============== =============
</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>
ASSETS
September 30, December 31,
2000 1999
-------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 5,648 $ 4,255
Accounts receivable, net................................ 36,627 57,777
Inventories............................................. 59,256 64,374
Prepaid expenses........................................ 3,076 6,040
Deferred income taxes................................... 9,887 7,216
--------- --------
Total current assets.................................. 114,494 139,662
Property and equipment, net................................. 17,099 20,796
Deferred income taxes, net.................................. 16,710 16,499
Intangible assets, net...................................... 16,976 17,932
Other assets................................................ 654 1,829
--------- --------
$ 165,933 $196,718
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................................... $ 96,945 $ 81,247
Accounts payable........................................ 11,647 22,128
Accrued payroll and other liabilities................... 21,991 21,474
Accrued income taxes.................................... 1,356 3,207
Current portion of long-term debt....................... 978 1,084
--------- --------
Total current liabilities............................. 132,917 129,140
Long-term debt.............................................. 780 1,497
Pension liability........................................... 3,471 3,879
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at September 30, 2000,
and December 31, 1999................................. -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,494,993 and 14,388,600 shares issued at
September 30, 2000, and December 31, 1999,
respectively.......................................... 145 144
Additional paid-in capital.............................. 143,850 143,318
Accumulated deficit..................................... (110,127) (78,761)
Accumulated other comprehensive loss.................... (5,103) (2,499)
--------- --------
Total shareholders' equity............................ 28,765 62,202
--------- --------
$ 165,933 $196,718
========= ========
</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,
--------------------------------------
2000 1999
----------------- ----------------
(Restated)
<S> <C> <C>
Cash used by operations:
Net loss.................................................. $(31,366) $(26,011)
Income charges not affecting cash:
Depreciation.......................................... 6,850 4,854
Amortization.......................................... 1,201 2,041
Disposals and write-offs of property and equipment.... 2,485 471
Deferred income taxes................................. (2,882) (1,013)
Changes in certain working capital components:
Decrease in accounts receivable....................... 21,150 21,343
Decrease in inventories............................... 5,118 1,364
Decrease (increase) in prepaid expenses............... 2,964 (1,834)
Decrease in other assets.............................. 958 157
(Decrease) increase in accounts payable............... (10,481) 205
Increase (decrease) in accrued payroll and other
liabilities.......................................... 517 (6,126)
(Decrease) increase in accrued income taxes........... (1,851) 557
----------------- ----------------
Cash used by operating activities......................... (5,337) (3,992)
----------------- ----------------
Cash used by investing activities:
Additions to property and equipment....................... (5,966) (7,621)
----------------- ----------------
Cash used by investing activities......................... (5,966) (7,621)
----------------- ----------------
Cash provided by financing activities:
Net increase in notes payable............................. 15,698 28,359
Proceeds from long term debt.............................. -- 1,538
Repayment of long-term debt including current portion..... (823) (20,573)
(Decrease) increase of pension liability.................. (408) 47
Proceeds from exercise of stock options................... 241 814
Stock issued pursuant to employee stock purchase plan..... 292 --
----------------- ----------------
Cash provided by financing activities..................... 15,000 10,185
----------------- ----------------
Effect of exchange rate changes on cash....................... (2,304) 775
----------------- ----------------
Net increase (decrease) in cash and cash equivalents.......... 1,393 (653)
Cash and cash equivalents, beginning of period................ 4,255 4,793
----------------- ----------------
Cash and cash equivalents, end of period...................... $ 5,648 $ 4,140
================= ================
</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 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 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 consolidated financial statements and the
notes thereto for the year ended December 31, 1999.
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 to the
current year's presentation.
NOTE 2 - SPECIAL CHARGES:
Results of operations for the nine months ended September 30, 2000 include
certain charges totaling $21.2 million, or $1.47 per share. The charges were
$12.7 million, $7.3 million and $1.2 million recorded in the third, second and
first quarters, respectively.
Charges to the third quarter were to adjust inventory carrying values and other
expenses associated with streamlining the Company's manufacturing and corporate
operations. These charges include charges of $9.2 million to cost of sales
primarily for inventory reserves related to certain low margin products and
older products that the company is phasing out, and $3.5 million of charges to
operating and other expenses associated with workforce reductions and related
costs, and write-offs of certain assets.
The second quarter charges of $7.3 million include $6.9 million recorded to
adjust accounting entries from prior years. These charges relate to cost
accumulation entries for inventory, research and development and other costs
that were made in prior years. The effect of each of these charges on prior
years is not material. There were also workforce reduction charges of $0.4
million recorded in the quarter.
The charge of $1.2 million in the first quarter was for the write-off of certain
assets related to the merger with Inframetrics. These charges are included in
combination costs, a separate line item in operating expenses.
6
<PAGE>
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. 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,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding............................. 14,484 14,311 14,452 14,213
Dilutive stock options................... -- -- -- --
----------- ----------- ------------ ---------
Diluted shares outstanding............... 14,484 14,311 14,452 14,213
=========== =========== ============ =========
</TABLE>
Potentially dilutive securities that are not included in the diluted earnings
per share calculation because they would have been anti-dilutive include the
following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Stock Options............................ 2,153 1,574 2,153 1,574
=========== ============ =========== ============
</TABLE>
NOTE 4 -- INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- --------------------
<S> <C> <C>
Raw material and subassemblies..................... $31,483 $32,452
Work-in-progress................................... 14,847 15,261
Finished goods..................................... 12,926 16,661
------------------- --------------------
$59,256 $64,374
=================== ====================
</TABLE>
NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY:
Changes in Shareholders' Equity consist of the following (in thousands):
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-in Accumulated Comprehensive Comprehensive
Stock Stock Capital Deficit Loss Total Loss
---------- ------ ---------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999............... $ -- $144 $143,318 $ (78,761) $(2,499) $ 62,202
Common stock options exercised........... -- -- 241 -- -- 241
Stock issued pursuant to employee share
purchase plan........................... -- 1 291 -- -- 292
Net loss for the nine month period....... -- -- -- (31,366) -- (31,366) $(31,366)
Foreign translation adjustment........... -- -- -- -- (2,604) (2,604) (2,604)
--------- ---- -------- --------- ------- -------- --------
Balance, September 30, 2000.............. $ -- $145 $143,850 $(110,127) $(5,103) $ 28,765
========= ==== ======== ========= ======= ========
Comprehensive loss, nine months ended
September 30, 2000...................... $(33,970)
========
</TABLE>
7
<PAGE>
Cumulative foreign translation adjustment represents the Company's only other
comprehensive income item. 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.
NOTE 6 - LITIGATION:
Beginning on March 13, 2000, five complaints alleging violations of the federal
securities laws were filed against the Company and certain of its former
officers in the United States District Court for the District of Oregon. Upon
order of the Court, plaintiffs in those actions filed a consolidated complaint
on July 24, 2000. The consolidated complaint names the Company, Robert P.
Daltry, J. Kenneth Stringer, III, and J. Mark Samper as defendants. The
complaint purports to be filed on behalf of a class of purchasers of the
Company's common stock between March 3, 1999 and March 3, 2000 and alleges that
the defendants violated the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by intentionally issuing false and/or misleading
statements regarding the Company's financial results in the Company's SEC
filings and in press releases and other public statements. The complaint does
not specify the amount of damages that plaintiffs seek. The Company intends to
contest the litigation vigorously and has filed a motion to dismiss the
complaint, based on the specificity requirements of the Private Securities
Litigation Reform Act of 1995, which will be heard in mid-November.
The Company was involved in other litigation, investigations of a routine nature
and various legal matters during the first nine months of 2000 that are being
defended and handled in the ordinary course of business.
While the ultimate results of the matters described above cannot presently be
determined, management does not expect that they will have a material adverse
effect on the Company's results of operations or financial position. Therefore,
no adjustments have been made to the accompanying financial statements relative
to these matters.
NOTE 7 - INFRAMETRICS MERGER:
In conjunction with the merger with Inframetrics, Inc., on March 31, 1999, the
Company recognized a one-time charge of $23.8 million consisting of a reserve
for duplicative inventories of $20.1 million, transaction related costs of $3.2
million and cost to exit activities of $0.5 million. During the course of 1999
the Company recorded additional costs related to the merger including an
increase to the reserve for duplicative inventories of $5.2 million and an
increase of costs to exit activities of $5.6 million. Additionally, during the
quarter ended March 31, 2000, the Company recorded a charge of $1.2 million
related to the write-off of certain assets related to the merger.
The inventory reserve relates to duplicative product lines created by the merger
and was included in cost of goods sold. As of September 30, 2000 the Company had
written-off and disposed of inventories totaling $20.1 million. The transaction
related costs consisted of investment advisor fees, legal and accounting fees
and other direct transaction costs. Such costs were 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 sales offices
in the United Kingdom,
8
<PAGE>
Germany and France. As of September 30, 2000 the Company has no remaining
accruals related to the transaction costs and cost to exit activities.
Consolidated results of operations for the three months ended March 31, 1999 of
the Company and Inframetrics on a stand-alone basis, excluding one time charges
for duplicative inventories created as a result of overlapping product lines,
reserve for shutdown of duplicate sales offices and other direct transaction
costs are as follows (in thousands):
<TABLE>
<CAPTION>
FLIR Inframetrics
----------------- -----------------
<S> <C> <C>
Revenue.......................... $25,171 $13,650
----------------- -----------------
Net (loss) earnings.............. $(3,279) $ 177
================= =================
</TABLE>
NOTE 8 - 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 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):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------
2000 1999
------------------------------- --------------------------------
Gross Gross
Revenue Profit Revenue Profit
-------------- -------------- -------------- --------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Commercial......... $ 72,335 $36,417 $ 78,832 $39,069
Government......... 54,923 18,322 53,312 11,101
-------------- -------------- -------------- --------------
Total.............. $127,258 $54,739 $132,144 $50,170
============== ============== ============== ==============
</TABLE>
All long-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):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- ------------------
<S> <C> <C>
United States................................ $13,858 $16,968
Europe....................................... 3,241 3,828
------------------- ------------------
$17,099 $20,796
=================== ==================
</TABLE>
9
<PAGE>
NOTE 9 - RESTATEMENT:
In November 2000, the Company determined that it was necessary to revise its
financial statements for the quarterly periods ended September 30, 1999 and
December 31, 1999, respectively. The restatements were required because of the
incorrect timing and recording of certain revenue and expense items as between
the quarters ended September 30, 1999 and December 31, 1999, respectively, that
were not identified and corrected through previous restatements for 1999.
Because these restatements had no impact on financial statements for the year
ended December 31, 1999, no restatement is necessary for the year ended December
31, 1999. For the quarter ended September 30, 1999, the restatement resulted in
a reduction of $6.1 million in revenue and a corresponding reduction of $1.8
million in cost of goods sold and an increase of $2.5 million in other operating
costs, thereby reducing net earnings by $6.2 million for the period.
Corresponding and offsetting increases in revenue, cost of goods sold and net
earnings and a decrease in other operating costs are recognized in the
restatements to the quarter ended December 31, 1999. Other changes in revenue
reflect the reclassification of revenue between revenue segments to be
consistent with segment reporting for 2000.
The financial statements and related notes set forth in this Form 10-Q for the
three and nine months ended September 30, 1999 and as of September 30, 1999
reflect all such restatements, including the change to the tax provision.
A summary of the impact of the restatements follows (in thousands except per
share amounts):
<TABLE>
<CAPTION>
Results of Operations Three Months Ended Nine Months Ended
--------------------- September 30, 1999 September 30, 1999
-------------------------------- ---------------------------------
Previously As Previously As
Reported Restated Reported Restated
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Commercial............................. $35,624 $27,093 $ 90,855 $ 78,832
Government............................. 17,515 19,914 47,421 53,312
--------------- -------------- --------------- --------------
53,139 47,007 138,276 132,144
Cost of goods sold......................... 23,370 21,576 83,768 81,974
Research and development................... 6,354 6,354 20,167 20,167
Selling and other operating costs.......... 13,966 16,466 43,884 46,384
Combination costs.......................... 524 524 5,152 5,152
--------------- -------------- --------------- --------------
44,214 44,920 152,971 153,677
Earnings (loss) from operations....... 8,925 2,087 (14,695) (21,533)
Interest expense........................... 1,576 1,576 3,579 3,579
Other income - net......................... -- -- (18) (18)
--------------- -------------- --------------- --------------
Earnings (loss) before income taxes... 7,349 511 (18,256) (25,094)
Income tax provision....................... 1,170 550 1,537 917
--------------- -------------- --------------- --------------
Net earnings (loss)........................ $ 6,179 $ (39) $(19,793) $(26,011)
=============== ============== =============== ==============
Net earnings (loss) per share:
Basic................................... $0.43 $(0.00) $(1.39) $(1.83)
=============== ============== =============== ==============
Diluted................................. $0.43 $(0.00) $(1.39) $(1.83)
=============== ============== =============== ==============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Financial Position September 30, 1999
------------------ --------------------------------
Previously As
Reported Restated
-------------- --------------
<S> <C> <C>
Accounts receivable, net $ 69,231 $ 63,099
Inventories 68,258 70,052
Total current assets 156,300 151,962
Total assets 220,434 216,096
Accrued payroll and other liabilities 17,954 20,454
Accrued income taxes 5,070 4,450
Total current liabilities 116,816 118,696
Accumulated deficit (43,917) (50,135)
Total shareholders' equity 97,909 91,691
Total liabilities and shareholders' equity 220,434 216,096
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (1999 amounts have been restated as discussed in Note 9):
Overview. The Company recorded a net loss of $18.6 million, or $1.28 per
share, for the third quarter of 2000, compared to a net loss of $0.0 million, or
$0.00 per share for the third quarter of 1999. For the nine months ended
September 30, 2000, the Company recorded a net loss of $31.4 million, or $2.17
per share, compared to a net loss of $26.0 million, or $1.83 per share, for the
nine months ended September 30, 1999.
Results of operations for the nine months ended September 30, 2000 include
certain charges totaling $21.2 million, or $1.47 per share. The charges were
$12.7 million, $7.3 million and $1.2 million recorded in the third, second and
first quarters, respectively. During the course of the year, the Company, under
new management, has been restructuring its operations to improve profitability.
As a result, the Company has recorded certain costs associated with realigning
its operations to focus on higher margin products, eliminate aged or lower
margin products, improve manufacturing efficiencies and reduce production and
distribution costs.
Charges to the third quarter were to adjust inventory carrying values and other
expenses associated with streamlining the Company's manufacturing and corporate
operations. These charges include charges of $9.2 million to cost of sales
primarily for inventory reserves related to certain low margin products and
older products that the company is phasing out, and $3.5 million of charges to
operating and other expenses associated with workforce reductions and related
costs, and write-offs of certain assets.
The second quarter charges of $7.3 million include $6.9 million recorded to
adjust accounting entries from prior years. These charges relate to cost
accumulation entries for inventory, research and development and other costs
that were made in prior years. The effect of each of these charges on prior
years is not material. There were also workforce reduction charges of $0.4
million recorded in the quarter.
The charge of $1.2 million in the first quarter was for the write-off of certain
assets related to the merger with Inframetrics. These charges are included in
combination costs, a separate line item in operating expenses.
Revenue. The Company's revenue for the three months ended September 30,
2000 decreased 18.0 percent, from $47.0 million in the third quarter of 1999 to
$38.5 million in the third quarter of 2000. Commercial revenue declined 22.1
percent, from $27.1 million in the third quarter of 1999 to $21.1 million in the
third quarter of 2000. The decrease in commercial revenue of $6.0 million was
due in part to delays in approval of U.S. export licenses for certain of the
Company's thermography products ($2.5 million), delays in orders in anticipation
of the introduction of the new thermography products ($2.5 million) and the
impact of currency translations on sales in Europe ($1.0 million).
Revenue from the sale of systems to government customers decreased $2.5 million
or 12.5 percent, from $19.9 million in the third quarter of 1999 to $17.4
million in the third quarter of 2000. The decrease in government revenue was
primarily due to the timing of deliveries on certain government programs.
12
<PAGE>
Revenue for the nine months ended September 30, 2000 decreased $4.8 million or
3.7 percent, from $132.1 million in the first nine months of 1999 to $127.3
million in the first nine months of 2000. Commercial revenue for the nine months
ended September 30, 2000 declined $6.5 million or 8.2 percent from $78.8 million
in the first nine months of 1999 to $72.3 million in the first nine months of
2000. The decrease in commercial revenue was due in part to delays in approval
of U.S. export licenses for certain of the Company's thermography products and
the impact of currency translation on sales in Europe, as well as delays in
orders in anticipation of the introduction of new thermography products.
Revenue from the sale of systems to government customers for the nine months
ended September 30, 2000 totaled $54.9 million, an increase of $1.6 million or
3.0 percent from the $53.3 million in revenue generated in the first nine months
of 1999.
Revenue from sales outside the United States increased as a percentage of total
revenue from 33.4 percent to 45.6 percent for the quarters ended September 30,
1999 and 2000, respectively. For the first nine months of 2000, revenue from
sales outside the United States constituted 43.8 percent of total revenue, as
compared to 37.5 percent for the first nine months of 1999. 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. Gross profit for the quarter ended September 30, 2000 was
$11.1 million compared to $25.4 million for the same quarter last year. As a
percentage of revenue, gross profit declined to 28.8 percent in the third
quarter of 2000 compared to 54.1 percent in the third quarter of 1999. The
decline was primarily due to charges in the quarter totaling $9.2 million to
adjust inventory carrying values and record other expenses associated with
refocusing the Company's manufacturing operations on higher margin products and
improving manufacturing efficiencies. Without these charges, gross profit would
have been 52.7 percent.
Gross profit for the nine months ended September 30, 2000 was $54.7 million
compared to $50.2 million for the nine months ended September 30, 1999. As a
percentage of revenue, gross profit was 43.0 percent for the nine months ended
September 30, 2000 compared to 38.0 percent for the nine months ended September
30, 1999. Without the current year charges to adjust accounting entries from
prior years totaling $4.0 million recorded in the second quarter and other
charges in the nine months totaling $9.3 million, gross profit would have been
$68.0 million or 53.4 percent of revenue.
Included in cost of goods sold for the nine months ended September 30, 1999 is a
one-time charge of $20.1 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 been 53.2
percent for the nine months ended September 30, 1999.
Research and development. Research and development expense for the third
quarter of 2000 totaled $6.8 million, compared to $6.4 million in the third
quarter of 1999. Research and development expense as a percentage of revenue
increased from 13.5 percent to 17.7 percent for the three months ended September
30, 1999 and 2000, respectively. Research and development
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<PAGE>
expense in the third quarter includes a $0.9 million charge for expenses
associated with the realignment of the Company's operations. Without this
charge, research and development expense would have been $5.9 million or 15.4
percent of revenue for the three months ended September 30, 2000.
Research and development expense for the first nine months of 2000 totaled $23.3
million, an increase from $20.2 million in the first nine months of 1999.
Research and development expense as a percentage of revenue increased from 15.3
percent to 18.3 percent for the nine months ended September 30, 1999 and 2000,
respectively. Research and development expense in the nine month period ended
September 30, 2000 includes second quarter charges to adjust accounting entries
from prior years totaling $2.1 million and the $1.0 million charges in the nine
months for expenses associated with streamlining the Company's manufacturing
operations. Without these charges, research and development expense would have
been $20.2 million or 15.8 percent of revenue for the nine months ended
September 30, 2000.
The overall level of research and development expense reflects the continued
emphasis on product development and new product introductions. Due to the timing
of revenue during the year, research and development expense as a percentage of
revenue is typically higher in the first half of the year than on a full year
basis.
Selling and other operating costs. Selling and other operating costs
increased from $16.5 million to $17.8 million for the quarters ended September
30, 1999 and 2000, respectively. Selling and other operating costs as a
percentage of revenue increased from 35.0 percent to 46.2 percent. Selling and
other operating costs for the third quarter of 2000 included charges totaling
$2.4 million associated with the streamlining of the Company's manufacturing and
corporate operations. Without these charges, selling and other operating costs
would have been $15.4 million or 39.9 percent of revenue for the quarter ended
September 30, 2000, a $1.1 million decrease from the quarter ended September 30,
1999.
Selling and other operating costs increased from $46.4 million in the first nine
months of 1999 to $53.5 million in the first nine months of 2000. Selling and
other operating costs as a percentage of revenue increased from 35.1 percent to
42.1 percent. Selling and other operating costs for the nine month period ended
September 30, 2000 includes charges to adjust accounting entries from prior
years totaling $0.8 million and charges totaling $2.6 million associated with
refocusing the Company's manufacturing and corporate operations. Without
theses charges, selling and other operating costs as a percentage of revenue was
39.4 percent for the nine months ended September 30, 2000. In addition to the
charges to adjust accounting entries from prior years, the increase in absolute
dollar terms was due to increases in audit and legal fees ($1.2 million),
increased depreciation ($1.0 million) related to the Company's enterprise
resource planning system implemented in April, 1999, and other selling,
marketing, and administrative overhead expense increases.
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 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.
14
<PAGE>
In conjunction with the merger, during the quarter ended March 31, 1999, the
Company recorded a one-time charge of $23.8 million. The charge consisted of a
$20.1 million inventory reserve due to the creation of duplicative product
lines, which is included in cost of goods sold, and $3.7 million of transaction
related costs, which are included in combination costs, a separate line in
operating costs. During the three months ended June 30, 1999 the Company
incurred additional charges of $1.0 million for transaction related costs. These
charges and related reserves are more fully discussed in Note 7 to the
consolidated financial statements.
During the quarter ended March 31, 2000, the Company recorded a charge of $1.2
million for the write-off of certain assets related to the merger. This charge
is reported on the combination costs line in the financial statements.
Interest expense. Interest expense increased from $1.6 million in the
third quarter of 1999 to $2.8 million for the quarter ended September 30, 2000,
due to increased debt levels and increased interest rates. Interest expense
increased from $3.6 million in the first nine months of 1999 to $7.6 million in
the first nine months of 2000 due to these same factors.
Income taxes. The income tax provision of $2.6 million and $0.7 million
for the three months and nine months ended September 30, 2000, respectively,
reflects revisions to the Company's estimate of expected year-end earnings and
losses in its various tax jurisdictions. Certain foreign subsidiaries are
expected to have taxable income while the combined entities are expected to have
a consolidated loss. Given the recurring losses in certain tax jurisdictions, no
benefit has been provided for in the income statement for such losses.
Management is continuing to assess the extent and timing of future
profitability. If management's forecast of future earnings differs from actual
results, the Company may need to record a further valuation against its deferred
tax assets.
Liquidity and Capital Resources
At September 30, 2000, the Company had short-term borrowings net of cash on hand
of $91.3 million compared to $89.7 million at June 30, 2000 and compared to
$77.0 million at December 31, 1999. The increase in short-term borrowings during
the nine months ended September 30, 2000, was primarily due to operating losses
and capital expenditures during the period.
Accounts receivable decreased from $57.8 million at December 31, 1999 to $36.6
million at September 30, 2000. The Company has increased its collection efforts
and tightened its credit policies. Days sales outstanding decreased from 112 at
December 31, 1999 to 79 at September 30, 2000. The timing of sales, particularly
the recording of large system sales, can significantly impact the calculation of
days sales outstanding at any point in time.
At September 30, 2000 the Company had inventories on hand of $59.3 million
compared to $64.4 million at December 31, 1999. The decrease was primarily the
result of adjustments to
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inventory carrying values partially offset by higher inventory levels as a
result of lower than anticipated revenues in the third quarter.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $6.0 million and $7.6 million for the nine months
ended September 30, 2000 and 1999, respectively.
The Company has a Credit Agreement with a number of banks that provides it with
a $95.5 million revolving line of credit. Interest on borrowings under the
agreement is at a fluctuating rate generally equal to the higher of the Federal
Funds Rate plus 0.50% or the prime rate of the primary lender for domestic
borrowings, and LIBOR for offshore borrowings. The interest rates on borrowings
under the agreement increase as the Company's consolidated debt level increases.
The weighted average interest rate on borrowings at September 30, 2000 was 12.1
percent.
The Company's obligations under the Credit Agreement are secured by
substantially all the assets of the Company. The Credit Agreement includes
negative covenants that, among other things, impose limitations on the Company's
ability to incur additional indebtedness, engage in certain acquisition or
disposition transactions, incur lease obligations and make investments, capital
expenditures and certain other payments. The Credit Agreement also includes
certain financial covenants, including consolidated tangible net worth, interest
coverage ratio and leverage ratio.
As of December 31, 1999 and for the year then ended, the Company was in
violation of certain of these covenants. Pursuant to an amendment to the Credit
Agreement dated as of April 13, 2000, the lenders waived their rights to declare
a default based upon such covenant violations as of December 31, 1999 and
through December 30, 2000. The amendment to the Credit Agreement also modified
the consolidated tangible net worth covenant, added covenants with respect to
minimum levels of revenue and EBITDA and increased the interest rates applicable
to offshore borrowings under the Credit Agreement.
As of March 31, 2000 and September 30, 2000 and for the quarters then ended, the
Company was in violation of the new minimum revenue and minimum EBITDA covenants
and the consolidated tangible net worth covenant under the Credit Agreement, as
amended. As of June 30, 2000 and for the quarter then ended, the Company was in
violation of the new minimum EDITDA covenant and the consolidated tangible net
worth covenant.
The Company currently has a forbearance agreement in place with the lenders
under the Credit Agreement until December 15, 2000. This forbearance is related
to the defaults under the Credit Agreement as amended due to the violation of
the new financial covenants. All advances currently bear interest at the default
rate (currently at 12.25 percent) provided in the Credit Agreement. Presently
the Company and the lenders are exploring the prospective development of a
longer-term loan agreement. If the Company is unable to negotiate a longer-term
financing arrangement with the banks, renegotiate the terms of the Credit
Agreement or obtain additional forebearance from the lenders by December 15,
2000, the lenders may exercise their rights under the Credit Agreement,
including acceleration of all amounts due under the Credit Agreement. The
renegotiation of this lending facility is a critical step in the future
liquidity of the Company and the inability to renegotiate such terms by the
Company could have a material adverse affect on the Company. The Company has
been advised by its independent public accountants that if these uncertainties
are not resolved prior to the completion of their audit of the Company's
financial statements for the year ending December 31, 2000, their auditors'
report on those financial statements may be modified for a going concern
uncertainty.
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<PAGE>
Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Kroner (approximately $4.2 million) line of credit bearing interest at
4.3 percent at September 30, 2000.
At September 30, 2000, the Company had $95.5 million outstanding under the
Credit Agreement and $1.4 million outstanding under the Swedish Kroner line of
credit.
The use of cash for operating activities in the first nine months of 2000 was
$5.3 million, compared to $4.0 million for the first nine months of 1999. Use of
cash increased as the result of increased net loss. The Company believes that
its existing cash and available credit facilities, financing available from
other sources, continuing efforts to control costs, improved collection of
accounts receivable and management of inventory levels will be sufficient to
meet its cash requirements for the foreseeable future.
Impact of the Year 2000
The Company 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 was not Year 2000 compliant, and
installed a new enterprise resource planning system, both hardware and software,
to correct this deficiency. The Company's existing product line was tested and
reviewed to ensure Year 2000 compliance, and the Company's products under
development were designed to be Year 2000 compliant. Additionally, the Company
evaluated Year 2000 compliance on products from its suppliers and partners. A
contingency plan for dealing with the most reasonably likely worst-case scenario
was developed.
Both internal and external resources were employed to identify, correct or
reprogram, and test the systems for Year 2000 compliance. The total cost of the
project was approximately $7 million and was funded through existing cash
resources.
To date, the Company has not encountered any material Year 2000 problems with
respect to products, internal systems or any third party products or systems.
Revenue Recognition
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements." SAB 101 provides guidance for
public companies on the recognition, presentation and disclosure of revenue in
their financial statements. The Company recognizes revenue at the time products
are shipped to the end customer, all contractual terms are fulfilled and
shipping terms indicate title has passed to the customer.
The SEC has deferred implementation of SAB 101 to the fourth quarter of 2000.
The SEC will allow the cumulative effect of this change, if any, on the
Company's quarterly financial results to be reported in our annual financial
statements for the year ended December 31, 2000.
The Company is still evaluating the impact of implementing SAB 101, including
recently released interpretations by the SEC staff, and is currently unable to
predict if such final interpretations will materially affect the timing and
predictability of revenue recognition.
17
<PAGE>
New Accounting Pronouncements
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an
amendment to Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS 137 and 138 establish
accounting and reporting standards for all derivative instruments. SFAS 137 and
138 are effective for fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of these pronouncements to have a material impact
on its financial position or results of operations.
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.
18
<PAGE>
Item 3. 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 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 Company currently
does not hedge any interest rate exposure.
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 cash balances
denominated in currencies other than the U.S. Dollar.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to the notes to the consolidated financial statements.
Item 3. Default Upon Senior Securities
As of December 31, 1999 and for the year then ended, the Company was in
violation of certain financial covenants under its Credit Agreement. Pursuant to
an amendment to the Credit Agreement dated as of April 13, 2000, the lenders
waived their rights to declare a default based upon such covenant violations as
of December 31, 1999 and through December 30, 2000. The amendment to the Credit
Agreement also modified the consolidated tangible net worth covenant, added
covenants with respect to minimum levels of revenue and EBITDA and increased the
interest rates applicable to offshore borrowings under the Credit Agreement.
As of March 31, 2000 and September 30, 2000 and for the quarters then ended, the
Company was in violation of the new minimum revenue and minimum EBITDA covenants
and the consolidated tangible net worth covenant under the Credit Agreement, as
amended. As of June 30, 2000 and for the quarter then ended, the Company was in
violation of the new minimum EDITDA covenant and the consolidated tangible net
worth covenant. The Company currently has a forbearance agreement in place with
its creditors until December 15, 2000.
See further discussion of the Credit Agreement under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 4. Submission of Matters to a Vote of Shareholders
The Company's annual shareholders' meeting was held on Tuesday, August 15, 2000,
at which the following persons were elected to the Board of Directors by a vote
of the shareholders, by the votes and for the terms indicated:
<TABLE>
<CAPTION>
Vote
---------------------------------------
Withhold Term
Director For Authority Ending
----------------------------- ----------------- ------------------ ------------
<S> <C> <C> <C>
Earl R. Lewis 12,675,903 108,311 2003
Ronald L. Turner 12,674,403 109,811 2003
Steven E. Wynne 12,673,842 110,372 2003
</TABLE>
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
------ -----------
27.1 Financial Data Schedule for the three months and nine
months ended September 30, 2000
(b) During the three months ended September 30, 2000, the Company filed the
following reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated July 13, 2000,
reporting under Item 4 the engagement of Arthur Andersen LLP as its
independent auditors, and Item 5 the SEC investigation relating to the
Company.
2. The Company filed a current report on Form 8-K, dated August 15, 2000,
reporting under Item 5 and 7 its financial results for the quarter
ended June 30, 2000.
3. The Company filed a current report on Form 8-K, dated August 30, 2000,
reporting under Item 5 and 7 the press release on Company's workforce
reduction.
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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 14, 2000 /s/ Stephen M. Bailey
--------------------------- -------------------------
Stephen M. Bailey
Sr. Vice President, Finance and Chief
Financial Officer
(Principal Accounting and Financial
Officer and Duly Authorized Officer)
22
