<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 June 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 July 31, 2000, there were 14,479,080 shares of the Registrant's common stock,
$0.01, par value, outstanding.
1
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations -- Three Months and Six
Months Ended June 30, 2000 and 1999............................. 3
Consolidated Balance Sheet - June 30, 2000 and December 31, 1999 4
Consolidated Statement of Cash Flows -- Six Months Ended June
30, 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........................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 17
Item 3. Default Upon Senior Securities.................................. 17
Item 6. Exhibits and Current Reports on Form 8-K........................ 17
Signatures...................................................... 18
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 Six Months Ended
June 30, June 30,
------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-------------- ------------- ------------ --------------
Revenue:
Commercial........................ $25,744 $27,245 $ 51,222 $ 55,231
Government........................ 27,147 19,071 37,497 29,906
-------------- ------------- ------------ --------------
52,891 46,316 88,719 85,137
Cost of goods sold.................... 28,914 21,571 45,092 60,398
Research and development.............. 9,514 6,836 16,435 13,813
Selling and other operating costs..... 18,906 14,861 35,751 29,918
Combination costs..................... -- 974 1,217 4,628
-------------- ------------- ------------ --------------
57,334 44,242 98,495 108,757
Earnings (loss) from operations.. (4,443) 2,074 (9,776) (23,620)
Interest expense...................... 2,753 981 4,846 2,207
Other (income) expense - net.......... 67 (204) (15) (222)
-------------- ------------- ------------ --------------
Earnings (loss) before income
taxes........................... (7,263) 1,297 (14,607) (25,605)
Income tax provision (benefit)........ -- 367 (1,836) 367
-------------- ------------- ------------ --------------
Net earnings (loss)................... $(7,263) $ 930 $(12,771) $(25,972)
============== ============= ============ ===============
Net earnings (loss) per share:
Basic.............................. $(0.50) $0.07 $(0.88) $(1.83)
============== =============================== ==============
Diluted............................ $(0.50) $0.06 $(0.88) $(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
<S> <C> <C>
June 30, 2000 December 31, 1999
------------------- -------------------
(Unaudited)
Current assets:
Cash and cash equivalents............................... $ 6,627 $ 4,255
Accounts receivable, net................................ 43,481 57,777
Inventories............................................. 67,559 64,374
Prepaid expenses........................................ 3,617 6,040
Deferred income taxes................................... 9,887 7,216
------------------- -------------------
Total current assets................................ 131,171 139,662
Property and equipment, net................................. 19,160 20,796
Deferred income taxes, net.................................. 16,499 16,499
Intangible assets, net...................................... 17,316 17,932
Other assets................................................ 610 1,829
------------------- -------------------
$184,756 $196,718
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................................... $ 96,305 $ 81,247
Accounts payable........................................ 12,307 22,128
Accrued payroll and other liabilities................... 19,175 21,474
Accrued income taxes.................................... 1,464 3,207
Current portion of long-term debt....................... 947 1,084
------------------- -------------------
Total current liabilities........................... 130,198 129,140
Long-term debt.............................................. 1,067 1,497
Pension liability........................................... 3,759 3,879
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at June 30, 2000, and
December 31, 1999..................................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,478,749 and 14,388,600 shares issued at
June 30, 2000, and December 31, 1999, respectively.... 145 144
Additional paid-in capital.............................. 143,766 143,318
Accumulated deficit..................................... (91,532) (78,761)
Accumulated other comprehensive loss.................... (2,647) (2,499)
------------------- -------------------
Total shareholders' equity.......................... 49,732 62,202
------------------- -------------------
$184,756 $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>
Six Months Ended June 30,
----------------------------------------------
<S> <C> <C>
2000 1999
------------------ -------------------
Cash used by operations:
Net loss.................................................. $(12,771) $(25,972)
Income charges not affecting cash:
Depreciation.......................................... 4,617 3,453
Amortization.......................................... 800 1,175
Disposals and write-offs of property and equipment.... 1,318 471
Deferred income taxes................................. (2,671) (1,013)
Changes in certain working capital components:
Decrease in accounts receivable....................... 14,296 24,261
Increase in inventories............................... (3,185) (556)
Decrease (increase) in prepaid expenses............... 2,423 (4,186)
Decrease in other assets.............................. 1,035 230
(Decrease) increase in accounts payable............... (9,821) 8,478
Decrease in accrued payroll and other liabilities (2,299) (10,207)
(Decrease) increase in accrued income taxes........... (1,743) 885
------------------ -------------------
Cash used by operating activities......................... (8,001) (2,981)
------------------ -------------------
Cash used by investing activities:
Additions to property and equipment....................... (4,299) (4,544)
------------------ -------------------
Cash used by investing activities......................... (4,299) (4,544)
------------------ -------------------
Cash provided by financing activities:
Net increase in notes payable............................. 15,058 28,200
Repayment of long-term debt including current portion..... (567) (20,387)
Reduction of pension liability............................ (120) (127)
Proceeds from exercise of stock options................... 157 220
Stock issued pursuant to employee stock purchase plan .... 292 --
------------------ -------------------
Cash provided by financing activities..................... 14,820 7,906
------------------ -------------------
Effect of exchange rate changes on cash....................... (148) 262
------------------ -------------------
Net increase in cash and cash equivalents..................... 2,372 643
Cash and cash equivalents, beginning of period................ 4,255 4,793
------------------ -------------------
Cash and cash equivalents, end of period...................... $ 6,627 $ 5,436
================== ===================
</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. These reclassifications had no impact on previously
reported results of operations or shareholders' equity.
NOTE 2 -- CHARGES RELATED TO PRIOR YEARS:
Results of operations for the quarter ended June 30, 2000 include charges
totaling $6.9 million, or $0.48 per share, to adjust accounting entries from
prior years. These charges, identified during the course of the review of second
quarter results, relate to cost accumulation entries for inventory ($4.0
million), research and development costs ($2.1 million) and other costs ($0.8
million) that were made in prior years. The effect of each of these charges
on the financial results of prior years is not material.
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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding .................................. 14,461 14,197 14,437 14,163
Dilutive stock options......................... -- 274 -- --
----------- ----------- ----------- -----------
Diluted shares outstanding..................... 14,461 14,471 14,437 14,163
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
----------- ----------- ----------- -----------
Stock Options 1,795 915 1,795 1,747
=========== =========== =========== ===========
</TABLE>
NOTE 4 -- INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 2000 December 31, 1999
------------------- ------------------
Raw material and subassemblies..................... $36,668 $32,452
Work-in-progress................................... 13,984 15,261
Finished goods..................................... 16,907 16,661
------------------- ------------------
$67,559 $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 Income 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...... -- -- 157 -- -- 157
Stock issued pursuant to employee
share purchase plan................ -- 1 291 292
Net loss for the six month period... -- -- -- (12,771) -- (12,771) $(12,771)
Foreign translation adjustment...... -- -- -- -- (148) (148) (148)
---- ---- -------- -------- ------- -------- --------
Balance, June 30, 2000.............. $ -- $145 $143,766 $(91,532) $(2,647) $ 49,732
==== ==== ======== ======== ======= ========
Comprehensive loss, six months
ended June 30, 2000................ $(12,919)
========
</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.
The Company was involved in other litigation, investigations of a routine nature
and various legal matters during the first six 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 June 30, 2000 the Company had
written-off and disposed of inventories totaling $19.5 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, Germany and France. As of June 30, 2000 the Company has
no remaining accruals related to the transaction costs and cost to exit
activities.
8
<PAGE>
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>
Six Months Ended June 30,
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Revenue Gross Profit Revenue Gross Profit
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial......... $51,222 $28,029 $55,231 $19,689
Government......... 37,497 15,598 29,906 5,050
-------------- -------------- -------------- --------------
Total.............. $88,719 $43,627 $85,137 $24,739
============== ============== ============== ==============
</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>
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
United States.............. $15,536 $16,968
Europe..................... 3,624 3,828
-------------- --------------
$19,160 $20,796
============== ==============
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations:
Charges related to prior years. Results of operations for the quarter ended June
30, 2000 include charges totaling $6.9 million, or $0.48 per share, to adjust
accounting entries from prior years. These charges, identified during the course
of the review of second quarter results, relate to cost accumulation entries for
inventory ($4.0 million), research and development costs ($2.1 million) and
other costs ($0.8 million) that were made in prior years. The effect of each of
these charges on the financial results of prior years is not material.
Revenue. The Company's revenue for the three months ended June 30, 2000
increased 14.2 percent, from $46.3 million in the second quarter of 1999 to
$52.9 million in the second quarter of 2000. Commercial revenue declined 5.5
percent, from $27.2 million in the second quarter of 1999 to $25.7 million in
the second quarter 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.
Revenue from the sale of systems to government customers increased 42.3 percent,
from $19.1 million in the second quarter of 1999 to $27.1 million in the second
quarter of 2000. The increase in government revenue was primarily due to the
deferral of revenue on certain government sales during the first quarter of the
year, based upon their contractual terms related to transfer of ownership. Most
of these sales were recorded as revenue in the second quarter.
Revenue for the six months ended June 30, 2000 increased 4.2 percent, from $85.1
million in the first half of 1999 to $88.7 million in the first half of 2000.
Commercial revenue for the six months ended June 30, 2000 declined 7.3 percent
from $55.2 million in the first half of 1999 to $51.2 million in the first half
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.
Revenue from the sale of systems to government customers for the six months
ended June 30, 2000 totaled $37.5 million, an increase of 25.4 percent from the
$29.9 million in revenue generated in the first half of 1999. The increase in
government revenue was primarily due to increased deliveries of the Company's
Ultra 7000, MilCAM, Sea FLIR and Star SAFIRE thermal imaging systems to
government customers.
As a percentage of total revenue for the quarter ended June 30, 2000, revenue
from the sale of thermal imaging systems to the commercial market constituted
48.7 percent of total revenue compared to 58.8 percent for the second quarter of
1999. For the six months ended June 30, 2000, commercial revenue declined to
57.7 percent of total revenue, as compared to 64.9 percent for the first six
months of 1999.
Revenue from sales outside the United States increased as a percentage of total
revenue from 40.5 percent to 42.1 percent for the quarters ended June 30, 1999
and 2000, respectively. For the first half of 2000, revenue from sales outside
the United States constituted 44.5 percent of total revenue, as compared to 39.8
percent for the first half 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.
10
<PAGE>
Gross profit. Gross profit for the quarter ended June 30, 2000 was $24.0 million
compared to $24.7 million for the same quarter last year. As a percentage of
revenue, gross profit declined to 45.3 percent in the second quarter of 2000
compared to 53.4 percent in the second quarter of 1999. The decline was due to
the $4.0 million charge in the quarter to adjust accounting entries from prior
years and $0.5 million of current year adjustments. Without theses charge, gross
profit would have been 52.9 percent.
Gross profit for the six months ended June 30, 2000 was $43.6 million compared
to $24.2 million for the six months ended June 30, 1999. As a percentage of
revenue, gross profit was 49.2 percent for the six months ended June 30, 2000
compared to 29.1 percent for the six months ended June 30, 1999. Without the
$4.0 million charge to adjust accounting entries from prior years and the
current year adjustment, gross profit as a percentage of revenue for the first
six months of 2000 would have been 53.7 percent. The primary reason for this
significant increase compared to the first six months of 1999 was the inclusion
in cost of goods sold for the six months ended June 30, 1999 of 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 52.7 percent for the six
months ended June 30, 1999.
Research and development. Research and development expense for the second
quarter of 2000 totaled $9.5 million, compared to $6.8 million in the second
quarter of 1999. Research and development expense in the second quarter of 2000
includes a $2.1 million charge to adjust accounting entries from prior years.
Without this charge, research and development expense as a percentage of revenue
decreased from 14.8 percent to 14.0 percent for the three months ended June 30,
1999 and 2000, respectively.
Research and development expense for the first six months of 2000 totaled $16.4
million, an increase from $13.8 million in the first six months of 1999. Without
the $2.1 million charge recorded in the second quarter to adjust accounting
entries from prior years, research and development expense as a percentage of
revenue was 16.2 percent for the six months ended June 30, 1999 and 2000,
respectively.
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 $14.9 million to $18.9 million for the quarters ended June 30, 1999 and
2000, respectively. Selling and other operating costs for the second quarter of
2000 included charges totaling $0.8 million to adjust accounting entries from
prior years. The charges included $0.5 million for demo equipment and $0.3
million for sales commissions. Without these charges, selling and other
operating costs as a percentage of revenue increased from 32.1 percent in the
second quarter of 1999 to 34.2 percent in the second quarter of 2000. The
increase in selling and other operating costs also includes approximately $0.6
million of increased audit and legal fees.
11
<PAGE>
Selling and other operating costs increased from $29.9 million in the first half
of 1999 to $35.8 million in the first half of 2000. Without the $0.8 million of
charges to adjust accounting entries from prior years, selling and other
operating costs as a percentage of revenue increased from 35.1 percent to 39.4
percent for the six months ended June 30, 1999 and 2000, respectively. In
addition to the charges to adjust accounting entries from prior years, the
increase in absolute dollar terms was due to an increase of $0.9 million in
audit and legal fees, increased depreciation related to the Company's enterprise
resource planning system implemented in April, 1999, and other selling,
marketing, and administrative overhead expense increases.
Cost reduction initiatives announced in June of this year are expected to yield
annualized cost savings of approximately $10 million starting in the third
quarter of 2000.
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.
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 $1.0 million in the second
quarter of 1999 to $2.8 million for the quarter ended June 30, 2000, due to
increased debt levels and increased interest rates.
Income taxes. The Company recorded no income tax benefit for the loss in three
months ended June 30, 2000. Each quarter management assesses the extent and
timing of future profitability in order to determine the amount of the deferred
tax asset that is more likely than not to be realized in the future. The income
tax provision for the second quarter of 1999 resulted in an effective tax rate
of 28.3 percent.
For the six months ended June 30, 2000, the Company recorded an income tax
benefit of $1.8 million, resulting in an effective tax rate of 13.0 percent. For
the first six months of 1999, the Company recorded a tax provision of $0.4
million despite having a pre-tax loss of $25.6 million. The lack of tax benefit
in the first half of 1999 was primarily due to the fact that certain foreign
subsidiaries had taxable income while the combined entities had a net loss.
The Company's effective tax rate has historically been below the U.S. statutory
rate primarily due to utilization of net operating loss carryforwards, various
tax credits, benefits from the utilization of a foreign sales corporation, and
state and foreign tax rates. Management expects that the Company's effective tax
rate will continue to be below the U.S. Statutory rate. The effective tax rate
is very sensitive to the geographic mix of sales and profits, and therefore
could be higher or lower in the future depending on the actual profits realized.
12
<PAGE>
Liquidity and Capital Resources
At June 30, 2000, the Company had short-term borrowings net of cash on hand of
$89.7 million compared to $86.6 million at March 31, 2000 and compared to $77.0
million at December 31, 1999. The increase in short-term borrowings during the
six months ended June 30, 2000, was principally caused by increased working
capital needs.
Accounts receivable decreased from $57.8 million at December 31, 1999 to $43.5
million at June 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 75 at June 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 June 30, 2000 the Company had inventories on hand of $67.6 million compared
to $64.4 million at December 31, 1999. The increase was the result of a buildup
of materials in anticipation of increased shipments to government customers
throughout the balance of the year.
The Company's investing activities have consisted primarily of expenditures for
fixed assets, which totaled $4.3 million for the six months ended June 30,
2000 and $4.5 million for the six months ended June 30, 1999.
The Company has a Credit Agreement with a number of banks that provides it with
a $100 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 June 30, 2000 was 9.6
percent. The agreement allows the Company to elect any time prior to December 1,
2002, to convert the entire principal balance under the agreement into a term
loan that would be payable in 24 subsequent equal monthly payments plus
interest.
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.
13
<PAGE>
As of March 31, 2000 and for the quarter 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. As a result of these covenant violations, the lenders have the right
at any time to declare the full amount outstanding under the Credit Agreement
immediately due and payable. The Company and the lenders have discussed the
covenant violations. As of this date, the lenders have not taken any action to
enforce their rights under the Credit Agreement, nor have they waived their
rights to declare a default based upon such covenant violations.
Additionally, the Company, through one of its subsidiaries, has a 50,000,000
Swedish Kroner (approximately $5.8 million) line of credit at 4.3 percent at
June 30, 2000.
At June 30, 2000, the Company had $95.5 million outstanding under the Credit
Agreement and $0.8 million outstanding under the Swedish Kroner line of credit.
The use of cash by operating activities in the first half of 2000 was $8.0
million, compared to $3.0 million for the first half of 1999. Use of cash
increased as the result of increased working capital needs. 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.
14
<PAGE>
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
yet to be released interpretations by the SEC staff, and is currently unable to
predict if such final interpretations will materially effect the timing and
predictability of revenue recognition.
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.
15
<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. If foreign exchange rates
were to weaken against the U.S. Dollar, the Company believes that the fair value
of these foreign currency amounts would decline by an immaterial amount.
16
<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 for the quarter then ended, the Company was in
violation of the new minimum revenue and minimum EBITDA covenants and
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. As a result of these covenant violations, the lenders have the right
at any time to declare the full amount outstanding under the Credit Agreement
immediately due and payable. The Company and the lenders have discussed the
covenant violations. As of this date, the lenders have not taken any action to
enforce their rights under the Credit Agreement, nor have they waived their
rights to declare a default based upon such covenant violations.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
------------ ------------------------------------------------------
27.1 Financial Data Schedule for the three months and six
months ended June 30, 2000
(b) During the three months ended June 30, 2000, the Company filed the
following reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated April 17,
2000, reporting under Item 5 and Item 7 its financial results for
the year ended December 31, 1999 and restated financial results for
the fourth quarter and year ended December 31, 1998 and the first
three quarters of 1999.
2. The Company filed a current report on Form 8-K, dated May 2, 2000,
reporting under Item 4 and Item 7 the dismissal of
PricewaterhouseCoopers LLP as its independent auditors.
3. The Company filed a current report on Form 8-K, dated June 30,
2000, reporting under Item 5 and Item 7 its financial results for
the quarter ended March 31, 2000.
17
<PAGE>
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 August 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)
18
