10-Q 1 0001.txt FORM 10-Q ================================================================================ 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. INDEX PART I. FINANCIAL INFORMATION 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
2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements FLIR SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 -------------- ------------- -------------- ------------- (Restated) (Restated) 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) ============== ============= ============== =============
The accompanying notes are an integral part of these financial statements 3 FLIR SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share amounts)
ASSETS September 30, December 31, 2000 1999 -------------- ------------ (Unaudited) 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 ========= ========
The accompanying notes are an integral part of these financial statements 4 FLIR SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, -------------------------------------- 2000 1999 ----------------- ---------------- (Restated) 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 ================= ================
The accompanying notes are an integral part of these financial statements 5 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 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):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ------------ --------- 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 =========== =========== ============ =========
Potentially dilutive securities that are not included in the diluted earnings per share calculation because they would have been anti-dilutive include the following:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ------------ ----------- ------------ Stock Options............................ 2,153 1,574 2,153 1,574 =========== ============ =========== ============
NOTE 4 -- INVENTORIES: Inventories consist of the following (in thousands):
September 30, December 31, 2000 1999 ------------------- -------------------- 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 =================== ====================
NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY: Changes in Shareholders' Equity consist of the following (in thousands):
Accumulated Additional Other Total Preferred Common Paid-in Accumulated Comprehensive Comprehensive Stock Stock Capital Deficit Loss Total Loss ---------- ------ ---------- ----------- ------------- -------- ------------- 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) ========
7 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 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):
FLIR Inframetrics ----------------- ----------------- Revenue.......................... $25,171 $13,650 ----------------- ----------------- Net (loss) earnings.............. $(3,279) $ 177 ================= =================
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):
Nine Months Ended September 30, ------------------------------------------------------------------ 2000 1999 ------------------------------- -------------------------------- Gross Gross Revenue Profit Revenue Profit -------------- -------------- -------------- -------------- (Restated) (Restated) 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 ============== ============== ============== ==============
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):
September 30, December 31, 2000 1999 ------------------- ------------------ United States................................ $13,858 $16,968 Europe....................................... 3,241 3,828 ------------------- ------------------ $17,099 $20,796 =================== ==================
9 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):
Results of Operations Three Months Ended Nine Months Ended --------------------- September 30, 1999 September 30, 1999 -------------------------------- --------------------------------- Previously As Previously As Reported Restated Reported Restated --------------- -------------- --------------- -------------- 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) =============== ============== =============== ==============
10
Financial Position September 30, 1999 ------------------ -------------------------------- Previously As Reported Restated -------------- -------------- 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
11 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 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 13 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 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 15 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. 16 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 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 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 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:
Vote --------------------------------------- Withhold Term Director For Authority Ending ----------------------------- ----------------- ------------------ ------------ 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
20 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. 21 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