TELEDYNE FLIR, LLC Acquisition by Teledyne OnJanuary 4, 2021 , Teledyne and the Company announced that the companies have entered into the Merger Agreement under which Teledyne will acquire FLIR in a cash and stock transaction valued at approximately$8.0 billion . Under the terms of the Merger Agreement, FLIR stockholders will receive$28.00 per share in cash and 0.0718 shares of Teledyne common stock for each FLIR share, which implies a total purchase price of approximately$56.00 per FLIR share based on Teledyne's 5-day volume weighted average price as ofDecember 31, 2020 . The transaction is expected to close onMay 14, 2021 subject to the receipt of approvals of Teledyne and the Company stockholders and other customary closing conditions. We cannot guarantee that the Mergers contemplated by the Merger Agreement will be completed or that, if completed, it will be exactly on the terms as set forth in the Merger Agreement. Should the Mergers not be completed, the Company may receive or pay a breakup fee, as provided for in the Merger Agreement. Impact of COVID-19 The ongoing COVID-19 pandemic has caused significant disruptions tothe United States and global economy and has contributed to significant volatility in financial markets. Transmission of COVID-19 and efforts to contain its spread resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected theU.S. and global economy and financial environments. In addition, as cases have resurged in parts of theU.S. , including areas in which we maintain large facilities, we have seen governments slow or reverse efforts to reopen or shift into later phases of recovery, with increased risks to our operations. 21
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The health and safety of our employees across the globe remain our top priority during this crisis. We have enacted stringent safety protocols to protect our employees and ensure we can continue to service our customers. We initiated a site entry restriction policy for external visitors to our facilities. We have also developed contingency plans for staggered work schedules designed to reduce the number of employees working at a given time. We are regularly deep cleaning our facilities, advising all employees to follow safe hygiene practices, and requiring employees to stay home if they have any of the known symptoms or have come into contact with people who have tested positive for COVID-19. We have also implemented global employee travel restrictions and allowed employees to work remotely if they are able to do so. In aggregate, the outbreak did not have a material impact on our consolidated financial results for the three-month periods endedMarch 31, 2021 and 2020. However, during the three months endedMarch 31, 2021 , the Industrial Technologies segment experienced a reduced demand for its Elevated Skin Temperature ("EST") solutions, which were being deployed to help prevent the spread of COVID-19, when compared to the prior year quarter. The Defense Technologies segment experienced an increased volume on several unmanned systems programs during the three months endedMarch 31, 2021 when compared to the prior year quarter. We continue to monitor the evolving situation related to COVID-19. The extent to which COVID-19 impacts our operations or financial results will further depend on future developments, which are highly uncertain and cannot be predicted, including the status of state and local government reopening plans and any resurgence of illness and the reimposition of certain restrictions in connection therewith, additional actions taken by governments, businesses and individuals to contain the virus or address its impact, new information which may emerge concerning the severity or treatability of the virus, the successful rollout of vaccines, new strains of the virus, and the extent of the economic downturn resulting from the response to the virus, among others. Forward-Looking Statements This Quarterly Report on Form 10-Q (the "Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results ofFLIR Systems, Inc. and its consolidated subsidiaries ("FLIR," the "Company," "we," "us," or "our") that are based on management's current expectations, estimates, projections and assumptions about the Company's business. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements, including management's expectations regarding the Company's ability to keep manufacturing facilities operational, the ability of the Company to rely on existing suppliers and vendors in its supply chain and management's expectations to be able to mitigate future disruptions to the Company's business operations are based on current expectations, estimates, and projections about FLIR's business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks and uncertainties 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 "Risk Factors" section in Part II, Item 1A of this Report, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, as well as the following: •risks related to the pending acquisition of FLIR by Teledyne, including parties' ability to satisfy the conditions required to complete the transaction and, during the pendency of the transaction, diversion of management and employees' attention, retention and recruiting challenges, uncertainty in business relationships and restrictions on operations set forth in the definitive acquisition agreement; •risks related toUnited States government spending decisions and applicable procurement rules and regulations; •negative impacts to operating margins due to reductions in sales or changes in product mix; •impairments in the value of tangible and intangible assets; •unfavorable results of legal proceedings; •risks associated with international sales and business activities, including the regulation of the export and sale of our products worldwide and our ability to obtain and maintain necessary export licenses, as well as the imposition of significant tariffs or other trade barriers; •risks to our supply chain, production facilities or other operations, and changes to general, domestic, and foreign economic conditions, due to the COVID-19 pandemic; •risks related to subcontractor and supplier performance and financial viability as well as raw material and component availability and pricing; •risks related to currency fluctuations; 22
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•adverse general economic conditions or volatility in our primary markets; •our ability to compete effectively and to respond to technological change; •risks related to product defects or errors; •our ability to protect our intellectual property and proprietary rights; •cybersecurity and other security threats and technology disruptions; •our ability to successfully manage acquisitions, investments and divestiture activities and integrate acquired companies; •our ability to achieve the intended benefits of our strategic restructuring; •risks related to our senior unsecured notes and other indebtedness; •our ability to attract and retain key senior management and qualified technical, sales and other personnel; •changes in our effective tax rate and the results of pending tax matters; and •other risks discussed from time to time in filings and reports filed with theSecurities and Exchange Commission ("SEC"). COVID-19 may exacerbate one or more of the aforementioned and/or other risks, uncertainties and other factors more fully described in the Company's reports filed with theSEC . 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 except as required by law, the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this release, or for changes made to this document by wire services or internet service providers, whether as a result of new information, future events, or otherwise.
Consolidated Operating Results The following discussion provides an overview of our operating results by addressing key elements in our Consolidated Statements of Income. The "Segment Operating Results" section that follows describes the contributions of each of our business segments to our consolidated revenue and earnings from operations. Given the nature of our business, we believe revenue and earnings from operations, or operating income (including operating margin percentage), are most relevant to an understanding of our performance at a segment level. Additionally, at the segment level we disclose backlog, which represents orders received for products or services for which a sales agreement is in place and no revenue has been recognized. Backlog is not an absolute indicator of future revenue because a portion of the orders in backlog could be delayed or canceled at the customer's discretion. Further, due to the COVID-19 pandemic, as described above within "Impact of COVID-19," we are unsure how future results will compare to historic trends in the conversion of backlog to revenue. The following table summarizes our consolidated operating results for the periods presented (in thousands, except percentages):
Three Months Ended
March 31, Dollar Percent
2021 2020 Change Change
Revenue $ 467,313 $ 450,923 $ 16,390 3.6 %
Cost of goods sold 258,115 231,555 26,560 11.5 %
Gross profit 209,198 219,368 (10,170) (4.6) %
Gross Margin 44.8 % 48.6 %
Research and development 52,246 53,847 (1,601) (3.0) %
Selling, general and administrative 103,868 116,242 (12,374) (10.6) %
Restructuring expenses 622 20,784 (20,162) (97.0) %
Earnings from operations 52,462 28,495 23,967 84.1 %
Interest expense 6,115 6,961 (846) (12.2) %
Interest income (41) (349) 308 (88.3) %
Other income (loss), net (3,622) (1,315) (2,307) 175.4 %
Earnings before income taxes 50,010 23,198 26,812 115.6 %
Income tax provision 11,203 7,774 3,429 44.1 %
Net earnings $ 38,807 $ 15,424 $ 23,383 151.6 %
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Revenue. The increase for the three months endedMarch 31, 2021 as compared to the prior year quarter was attributable to increased volume on several unmanned systems programs in Defense Technologies as well as increased demand in certain commercial end markets such as maritime products in Industrial Technologies. The increase was partially offset by shipment timing and the completion of certain contracts that contributed to revenue in the prior year quarter in Defense Technologies and reduced volume for EST solutions in Industrial Technologies. The timing of orders, scheduling of backlog, and fluctuations in demand in various regions of the world can give rise to quarter to quarter and year over year fluctuations in the mix of revenue. Consequently, year over year comparisons for any given quarter may not be indicative of comparisons using longer time periods. We currently expect total annual revenue for 2021 to be in line with 2020 revenue; however, unexpected changes in economic conditions from key customer markets or other major unanticipated events may cause total revenue, and the mix of revenue between our segments, to vary from quarter to quarter during the year. International sales accounted for 45.3 percent and 51.4 percent of total revenue for the three months endedMarch 31, 2021 and 2020, respectively. The proportion of our international revenue compared to total revenue will fluctuate from quarter to quarter due to normal variation in order activity across various regions as well as specific factors that may affect one region and not another. Overall, we anticipate that revenue from international sales will continue to comprise a significant percentage of total revenue. Cost of goods sold. The increase for the three months endedMarch 31, 2021 as compared to the prior year quarter was primarily attributable to the increased revenue volume and unfavorable product mix in Defense Technologies. Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs. Research and development expenses. We have, and will continue to have, fluctuations in quarterly spending depending on product development needs and overall business spending priorities and believe that annual spending levels are most indicative of our commitment to research and development. Over the past five annual periods throughDecember 31, 2020 , our annual research and development expenses have varied between 8.9 percent and 10.9 percent of revenue, and we currently expect these expenses to remain within that approximate range, on an annual basis, for the foreseeable future. Selling, general, and administrative expenses. The decrease for the three months endedMarch 31, 2021 as compared to the prior year quarter was primarily attributable to operating expense reductions from Project Be Ready and decreases in marketing and travel costs. Restructuring expenses. In the first quarter of 2020, we initiated a strategy-driven restructuring plan, Project Be Ready, to simplify our product portfolio and better align resources with higher growth opportunities while reducing costs. Project Be Ready includes an organizational realignment, targeted workforce reductions, and facility optimization initiatives. All previously approved ongoing restructuring activities that were in process as ofJanuary 1, 2020 were consolidated into Project Be Ready. The decrease in net pre-tax restructuring charges recorded for these programs during the three months endedMarch 31, 2021 as compared to the prior year quarter was driven by reduced Project Be Ready activity including lower employee separation costs and reduced third party costs. Refer to Note 19, "Restructuring" of the Notes to the Consolidated Financial Statements for further discussion. Interest expense. Interest expense for the three months endedMarch 31, 2021 was primarily associated with our 2.500 percent senior unsecured notes (the "2030 Notes") in aggregate principal amount of$500.0 million that were issued and sold onAugust 3, 2020 and interest on amounts drawn under our credit facility. Interest expense for the three months endedMarch 31, 2020 was primarily associated with our previous 3.125 percent senior unsecured notes (the "2021 Notes") in aggregate principal amount of$425.0 million and interest on amounts drawn under our credit facility. The 2021 Notes were redeemed in full in connection with theAugust 2020 issuance of the 2030 Notes in a public offering. Other income (loss), net. The change in other income (loss), net for the three months endedMarch 31, 2021 as compared to the prior year quarter was primarily attributable to increased gains in our deferred compensation plans. Income taxes. Our income tax provision for the three months endedMarch 31, 2021 and 2020 represents an effective tax rate of 22.4 percent and 33.5 percent, respectively. The effective tax rate for the three months endedMarch 31, 2021 is higher than the United States Federal tax rate of 21 percent due to an increase in unrecognized tax benefits related to positions taken on prior year tax returns, higher tax rates applied to income earned in certain foreign jurisdictions,United States tax applied to global intangible income, and state taxes. These amounts were offset partially by benefits related toUnited States export sales, excess tax benefits from stock compensation, and research credits. 24
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The effective tax rate for the three months ended
Segment Operating Results
The Company is currently organized into two reportable segments. The two
reportable segments are Industrial Technologies and Defense Technologies. See
Note 17, "Operating Segments and Related Information" of the Notes to the
Consolidated Financial Statements for a description of each operating segment,
including the types of products and services from which each operating segment
derives its revenues.
Industrial Technologies Segment
Industrial Technologies operating results are as follows (in thousands, except
percentages):
Three Months Ended
March 31, Dollar Percent
2021 2020 Change Change
Revenue $ 274,864 $ 276,415 $ (1,551) (0.6) %
Segment operating income 76,906 64,265 12,641 19.7 %
Segment operating margin 28.0 % 23.2 %
Total backlog, end of period $ 273,483 $ 330,030 $ (56,547) (17.1) %
The decrease in revenue for the three months ended March 31, 2021 as compared to
the prior year quarter was primarily attributable to reduced volume for EST
solutions, partially offset by increased demand in certain commercial end
markets such as maritime products.
The increase in segment operating margin for the three months ended March 31,
2021 as compared to the prior year quarter was primarily attributable to
operating expense reductions from Project Be Ready and decreases in marketing
and travel costs.
The decrease in total backlog at March 31, 2021 as compared to the prior year
quarter was primarily the result of lower EST volume, partially offset by
increased order activity in certain commercial end markets such as maritime
products.
Defense Technologies Segment
Defense Technologies operating results are as follows (in thousands, except
percentages):
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Three Months Ended
March 31, Dollar Percent
2021 2020 Change Change
Revenue $ 192,449 $ 174,508 $ 17,941 10.3 %
Segment operating income 25,376 33,154 (7,778) (23.5) %
Segment operating margin 13.2 % 19.0 %
Total backlog, end of period $ 541,763 $ 529,306 $ 12,457 2.4 %
The increase in revenue for the three months ended March 31, 2021 as compared to
the prior year quarter was primarily attributable to increased volume on several
unmanned systems programs, partially offset by shipment timing and the
completion of certain contracts that contributed to revenue in the prior year
quarter.
The decrease in segment operating margin for the three months ended March 31,
2021 as compared to the prior year quarter was primarily attributable to the
ramp up of lower margin programs and product mix.
The increase in total backlog at March 31, 2021 as compared to the prior year
quarter was primarily due to program awards for unmanned systems.
Liquidity and Capital Resources
Overview
At March 31, 2021 , we had a total of $277.3 million in cash and cash
equivalents, $80.6 million of which was in the United States and $196.7 million
was at our foreign subsidiaries, compared to cash and cash equivalents at
December 31, 2020 of $297.8 million , of which $88.8 million was in the United
States and $209.0 million at our foreign subsidiaries.
At March 31, 2021 and December 31, 2020 , we had outstanding debt of $725.8
million and $738.4 million , respectively, which consists of unsecured term loans
and borrowings under the revolving credit facility that we entered into during
2019 (collectively referred to as the "Credit Agreement") and senior unsecured
notes. On August 3, 2020 , we issued and sold our 2030 Notes in an underwritten
public offering. The aggregate net proceeds from the offering were approximately
$494.2 million after deducting underwriting fees, debt discount and transaction
issuance costs. Interest on the 2030 Notes is payable semiannually in arrears on
February 1 and August 1 of each year beginning on February 1, 2021 . The net
proceeds from the sale of the 2030 Notes were used to redeem the 2021 Notes, and
for general corporate purposes, which may include funding for working capital,
investments in our subsidiaries, capital expenditures, acquisitions, and stock
repurchases. The Credit Agreement contains one financial covenant that requires
maintenance of a consolidated total leverage ratio with which we complied
at March 31, 2021 . We had $15.4 million of letters of credit outstanding under
the Credit Agreement at March 31, 2021 , which reduced the total availability
under the revolving commitments under the Credit Agreement. See Note 13, "Debt"
of the Notes to the Consolidated Financial Statements for more details.
On January 11, 2019 , a standby letter of credit not to exceed Swedish kronor 2.2
billion, was issued under a new bilateral letter of credit reimbursement
agreement ("L/C Agreement") to secure a payment guarantee required by the
Swedish Tax Authority in order to grant the original respite from paying the tax
reassessment described in Note 16, "Income Taxes" of the Notes to the
Consolidated Financial Statements. The outstanding amount of the L/C Agreement
was equivalent to approximately $254.6 million at March 31, 2021 . While
outstanding amounts under the L/C Agreement do not reduce the available
revolving credit from the Credit Agreement, they are considered indebtedness and
influence the incremental debt capacity governed by our Credit Agreement
covenants. The standby letter of credit was further amended on April 24, 2020 to
reflect the new respite.
We have repurchased shares of our common stock from time to time after
considering market conditions and in accordance with repurchase limits
authorized by our Board of Directors. To date, all share repurchases were
subject to applicable securities laws and were at times and in amounts as
management deemed appropriate. The repurchases were conducted through open
market transactions under the authorization by the Board of Directors on
February 7, 2019 to repurchase of up to 15.0 million shares of the Company's
outstanding common stock. This authorization expired on February 7, 2021 . During
the three months ended March 31, 2021 the Company did not repurchase shares.
We paid dividends of $22.3 million and $22.7 million during the three months
ended March 31, 2021 and March 31, 2020 , respectively.
We have entered into the Merger Agreement with Teledyne and have agreed to pay a
termination fee of $250.0 million to Teledyne if the Merger Agreement is
terminated under any of the following circumstances:
•the Company's Board makes a change in recommendation;
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•the Company enters into a definitive agreement to effect a superior proposal; or •the Company's stockholders do not approve the proposed transaction and an alternative proposal for the Company has been publicly disclosed and not withdrawn, the Company materially breaches the Merger Agreement and an alternative proposal for the Company has been publicly disclosed and not withdrawn or the Company willfully and materially breaches the non-solicitation covenant, in each case, only if within twelve months of such termination, the Company enters into a definitive agreement with respect to an alternative proposal that is subsequently consummated. Pursuant to the terms of the Merger Agreement, Teledyne would be required to pay the Company a termination fee of$250.0 million if the Merger Agreement is terminated under any of the following circumstances: •Teledyne's Board makes a change in recommendation; or •Teledyne's stockholders do not approve the proposed transaction and an alternative proposal for Teledyne has been publicly disclosed and not withdrawn or Teledyne materially breaches the Merger Agreement and an alternative proposal for Teledyne has been publicly disclosed and not withdrawn, in each case, only if within twelve months of such termination, Teledyne enters into a definitive agreement with respect to an alternative proposal that is subsequently consummated. In addition, the Company has incurred and expects to continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Mergers. The substantial majority of these costs will be non-recurring expenses relating to the Mergers. Many of these costs are payable regardless of whether or not the Mergers are consummated. For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through existing cash on hand, cash generated from operations and, if needed, amounts available on our existing credit facilities or financing available from other sources. However, as the impact of the COVID-19 pandemic on the global economy and our operations evolve, we will continue to assess our liquidity needs. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition, and could materially adversely impact our customers or suppliers. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. Summary of Cash Flows The following table summarizes cash flow information for the periods presented (in thousands):
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