| FLIR SYSTEMS INC ITEM 1A RISK FACTORS In addition to the factors discussed in the Forward-Looking Statements section provided at the beginning of this Annual Report on Form 10-K, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company |
| In addition, you should know that the risks and uncertainties described below are not the only ones we face |
| Unforeseen risks could arise and problems or issues that we now view as minor could become more significant |
| If we were unable to adequately respond to any risks, our business, financial condition and results of operations could be materially adversely affected |
| Additionally, we cannot be certain or give any assurances that any actions taken to reduce known risks and uncertainties will be effective |
| Fluctuations in our quarterly and annual operating results make it difficult to predict our future performance |
| Due to these fluctuations, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and should not be relied upon as indicators of future performance |
| Factors that may affect our future operating results include: • the timing, number and size of orders from, and shipments to, our customers, as well as the relative mix of those orders; • variations in the volume of orders for a particular product or product line in a particular quarter, may cause variations in revenue and gross margins; • a significant portion of our sales are made in the last month of each quarter, with sales frequently concentrated in the last week or days of the quarter; • the timing and market acceptance of our or our competitors’ new products, product enhancements or technologies; • our ability to obtain sufficient supplies of critical components; • the timing of the release of government funds for procurement of our products; • changes in our or our competitors’ pricing policies; • our ability to collect on trade receivables; • the timing and amount of any inventory write-downs; • foreign currency fluctuations; • the ability to secure export licenses for international sales orders; • costs and risks associated with the acquisition and integration of other businesses, product lines or technologies; and • general economic conditions, both domestically and internationally |
| 17 ______________________________________________________________________ [42]Table of Contents Seasonal fluctuations in our operating results, particularly the increase in sales we generally experience every year in the fourth quarter, result from: • the seasonal pattern of contracting by the United States and certain foreign governments; • the frequent requirement of international customers to take delivery of equipment prior to January due to funding considerations; and • the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration |
| We may be unable to successfully integrate recent or future acquisitions, into our operations, thereby disrupting our business and harming our financial condition and results of operations We have made numerous acquisitions of various sizes during our history |
| Our most recent acquisitions include Scientific Materials Corporation and Brysen Optical Corporation during 2005 and Indigo Systems Corporation in 2004 |
| The Indigo acquisition was large and significant effort was required to integrate Indigo’s operations into ours |
| While we believe this integration has been successful, there can be no assurances that we will be successful in integrating future acquisitions |
| The integration of Scientific Materials and Brysen Optical into our operations is ongoing |
| These acquisitions are smaller in size than Indigo, but there can be no assurance that we will successfully integrate them into our operations, nor can there be any assurance that the integration effort will not disrupt our operations or negatively affect our results of operations |
| This integration of businesses, personnel, product lines and technologies is typically difficult, time consuming and subject to significant risks |
| For example, we could lose key personnel from companies that we acquire, incur unanticipated costs, lose major sources of revenue, fail to integrate critical technologies, suffer business disruptions or incur unanticipated liabilities or expenses |
| Any of these difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and decrease our revenue |
| It is possible that we will make additional acquisitions in the future |
| Any future acquisitions are subject to the risks described above |
| Furthermore, we might assume or incur additional debt or issue additional equity securities to pay for future acquisitions |
| Additional debt may negatively impact our results and increase our financial risk, and the issuance of any additional equity securities could dilute our then existing shareholders’ ownership |
| We frequently evaluate strategic opportunities available to us and may in the near or long term pursue acquisitions of complementary businesses, product lines or technologies |
| No assurance can be given that we will realize anticipated benefits of any future acquisitions, or that any such acquisition or investment will not have a material adverse effect on our business, financial condition and results of operations |
| A reduction in government purchasing or our inability to act as a United States Government contractor could significantly decrease revenue |
| A substantial portion of our revenue is derived from sales to United States and foreign government agencies, and our business will continue to be substantially dependent upon such sales |
| Aggregate direct and indirect sales to United States Government agencies accounted for 33prca and 40prca of our revenue for the years ended December 31, 2005 and 2004, respectively |
| We have in the past and may in the future be adversely impacted by delays and uncertainties in the level and timing of government procurement activity and by governmental spending cuts and general budgetary constraints |
| We expect to continue seeking new government contracts for the design and long-term supply of thermal imaging devices |
| If we are not successful in winning such contracts, or do not perform our obligations on any such contracts we do secure, our future operating results may be adversely affected |
| Our ability to do business with the United States Government is conditioned upon our continuing eligibility to act as a federal contractor |
| A significant decline in our sales to United States or foreign governments or our disqualification from making such sales for any reason would have a material adverse effect on our business, financial condition and results of operations |
| 18 ______________________________________________________________________ [43]Table of Contents Our future success will depend on our ability to respond to the rapid technological change in the markets in which we compete |
| The thermal imaging industry is characterized by rapid technological developments and frequent new product introductions, enhancements and modifications |
| Our ability to develop new technologies that anticipate changing customer requirements, reduce cost and otherwise retain or enhance our competitive position will be an important factor in our future results from operations |
| We will continue to make substantial capital expenditures and incur significant research and development costs to improve our manufacturing capability, reduce costs and develop and introduce new products and enhancements |
| If we fail to develop and introduce new technologies in a timely manner, our business, financial condition and results of operations would be adversely affected |
| We may experience impairment in the value of our tangible and intangible assets Our industry is subject to rapid changes in technology, which may result in unexpected obsolescence or impairment of our assets |
| As of December 31, 2005, our intangible assets, including goodwill, totaled dlra194dtta1 million and represented 28prca of our total assets |
| Most of these intangibles are the result of acquisitions in which the total purchase price exceeded the value of the tangible assets acquired |
| We amortize certain of these intangibles over their anticipated useful life, and review goodwill for impairment annually |
| To date we have not experienced any impairment of our intangible assets, but there can be no assurance that we will not experience such impairment in the future |
| In addition, certain of our tangible assets such as inventory and machinery and equipment may experience impairment in their value as a result of such events as the introduction of new products, changes in technology or changes in customer demand patterns |
| We depreciate our machinery and equipment at levels we believe are adequate, however there can be no assurances that such depreciation will not result in future impairment that may have a material impact on our business, financial condition and results from operations |
| We must successfully introduce new or enhanced products, enter into new markets and manage the costs associated with producing numerous product lines to be successful |
| Our future success depends on our ability to continue to improve our existing products and to develop new products using the latest technology that can satisfy customer requirements |
| For example, our near-term success will depend on the continued acceptance of our major product lines such as the Star SAFIRE Imaging product line and the ThermaCam P-Series and E-Series Thermography product lines, sales of which we expect to generate a substantial amount of our revenue |
| We are also investing a significant percentage of our revenue on research and development with the objective of developing new products or enhancing existing products |
| We cannot be certain that our new products and product enhancements will be successful or that customers will accept any of our new products |
| In addition, the complexity associated with developing and maintaining multiple product lines may inhibit our ability to maintain or improve our profitability and may require significant management time and effort to effectively manage |
| Our failure to complete the enhancement of these products, the failure of our current or future products to gain or maintain market acceptance or our failure to successfully manage our cost of production could have a material adverse effect on our business, financial condition and results of operations |
| Competition in the markets for thermal imaging equipment is intense and our failure to compete effectively would adversely affect our business |
| Competition in the markets for our products is intense |
| The speed with which companies can identify new applications for thermal imaging, develop products to meet those needs and supply commercial quantities at low prices to the market are important competitive factors |
| We believe the principal competitive factors in our markets are product features, performance, reliability and price |
| Additionally, our products compete indirectly with numerous other products, such as image intensifiers and low-light cameras, for limited governmental and military funds |
| Finally, many of our competitors have greater financial, technical, research and development and 19 ______________________________________________________________________ [44]Table of Contents marketing resources than we do |
| All of these factors as well as the potential for increased competition from new competitors requires us to continue to invest in, and focus on, research and development and new product innovation |
| No assurance can be given that we will be able to compete effectively in the future, and the failure to do so would have a material adverse effect on our business, financial condition and results of operations |
| Dependence on sole source and limited source suppliers of components for our products exposes us to risks that could result in delays in satisfying customer demand, increased costs and loss of revenue |
| We currently rely on a number of sole source and limited source suppliers to provide certain key components for our products |
| We have increased our internal sources of supply for certain critical components, in particular cooled and uncooled infrared detectors, optics and optical coatings, and laser components |
| We rely on numerous sole or limited source third party suppliers for various key components including laser designators and rangefinders, certain machined parts, optics, motors and electronic components |
| Our business, financial condition and results of operations could be materially and adversely affected in the event that we are unable to source certain of these components on a timely basis or if such components are defective or they do not otherwise meet our performance standards |
| Based on past experience, we expect to occasionally receive late deliveries or to experience inadequate supplies of certain components |
| If critical components provided by any significant supplier become unavailable, our manufacturing operations would be disrupted |
| Unless we have sufficient lead-time and are otherwise able to identify and qualify acceptable replacement components or redesign our products with different components, we might not be able to obtain necessary components on a timely basis or at acceptable prices |
| Any extended interruption in the supply of sole or limited source components would have a material adverse effect on our business, financial condition and results of operations |
| We may not be successful in obtaining the necessary export licenses to conduct operations abroad, and the United States Congress may prevent proposed sales to foreign governments |
| Export licenses are required from United States Government agencies under the Export Administration Act, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976 for export of many of our products |
| Recently, heightened government scrutiny of export licenses for products in our market has resulted in lengthened review periods for our license applications |
| Failure to obtain or delays in obtaining these licenses would prevent or delay us from selling our products outside the United States and would have a material adverse effect on our business, financial condition and results of operations |
| We may not be able to reduce our costs quickly enough if our sales decline |
| Our expense levels are based, in part, on our expectations regarding future sales, and these expenses are largely fixed, particularly in the short term |
| In addition, to enable us to promptly fill orders, we maintain inventories of finished goods, components and raw materials |
| Accordingly, we may not be able to reduce our costs in a timely manner to compensate for any unexpected shortfall between forecasted and actual sales |
| Any significant shortfall of sales may result in us carrying higher levels of inventories of finished goods, components and raw materials thereby increasing our risk of inventory obsolescence and corresponding inventory write-downs and write-offs |
| Our future success depends in part on attracting and retaining key senior management and qualified technical and sales personnel |
| Our future success depends in part on the efforts and continued services of our key executives and our ability to attract and retain qualified technical and sales personnel |
| Significant competition exists for such personnel and we cannot assure the retention of our key senior managerial, technical and sales personnel or our 20 ______________________________________________________________________ [45]Table of Contents ability to attract, integrate and retain other such personnel that may be required in the future |
| We also cannot assure that employees will not leave and subsequently compete against us |
| If we are unable to attract and retain key personnel, our business, financial condition and results of operations could be adversely affected |
| We have indebtedness as a result of the sale of our convertible notes |
| In June 2003, we issued dlra210 million of 3dtta0prca senior convertible notes due 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933 |
| As a result of this indebtedness, our principal and interest payment obligations have increased since then |
| Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control |
| We face risks from international sales and currency fluctuations |
| We market and sell our products worldwide and international sales have accounted for, and are expected to continue to account for, a significant portion of our revenue |
| For the years ended December 31, 2005 and 2004, international sales accounted for 44prca and 42prca, respectively, of our total revenue |
| Our international sales are subject to a number of risks, including: • the imposition of governmental controls; • restrictions on the export of critical technology; • trade restrictions; • difficulty in collecting receivables; • inadequate protection of intellectual property; • labor union activities; • changes in tariffs and taxes; • difficulties in staffing and managing international operations; • political and economic instability; and • general economic conditions |
| Historically, currency fluctuations have affected our operating results |
| Changes in the value of foreign currencies in which our sales are denominated or costs incurred have in the past caused, and could in the future cause, fluctuations in our operating results |
| We seek to reduce our exposure to currency fluctuations by denominating, where possible, our international sales in United States dollars |
| With respect to international sales denominated in United States dollars, a decrease in the value of foreign currencies relative to the United States dollar could make our products less price competitive |
| No assurance can be given that these factors will not have a material adverse effect on our future international sales and operations and, consequently, on our business, financial condition and results of operations |
| Our products may suffer from defects or errors leading to substantial damage or warranty claims |
| We include complex system designs and components in our products that may contain errors or defects, particularly when we incorporate new technology into our products or release new versions |
| Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products, which would have a material adverse effect on our business, financial condition and results of operations |
| Furthermore, product defects could result in substantial product liability |
| We maintain product liability insurance but cannot be certain that it is adequate or will remain available on acceptable terms |
| 21 ______________________________________________________________________ [46]Table of Contents Our inability to protect our intellectual property and proprietary rights and avoid infringing the rights of others could harm our competitive position and our business |
| Our ability to compete successfully and achieve future revenue growth depends, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others |
| To accomplish this, we rely on a combination of patent, trademark and trade secret laws, confidentiality agreements and contractual provisions to protect our proprietary rights |
| Most of our proprietary rights are held in confidence as trade secrets and are not covered by patents, making them more difficult to protect |
| Although we currently hold United States patents covering certain aspects of our technologies and products, and we are actively pursuing additional patents, we cannot be certain that we will obtain additional patents or trademarks on our technology, products and trade names |
| Furthermore, we cannot be certain that our patents or trademarks will not be challenged or circumvented by competitors |
| Likewise, we cannot be certain that measures taken to protect our proprietary rights will adequately deter their misappropriation or disclosure |
| Any failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations |
| Moreover, because intellectual property does not necessarily represent a barrier to entry into the thermal imaging industry, there can be no assurance that we will be able to maintain our competitive advantage or that competitors will not develop capabilities equal or superior to ours |
| Litigation over patents and other intellectual property is common in our industry |
| We cannot be sure that we will not be the subject of patent or other litigation in the future |
| Defending intellectual property lawsuits and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort of our personnel |
| An adverse determination in a patent suit or in any other proceeding to which we may be a party could subject us to significant liabilities |
| An adverse determination could require us to seek licenses from third parties |
| If licenses were not available on commercially reasonable terms or at all, our business could be harmed |
| We would be harmed if we were unable to use one of our facilities |
| We manufacture our products at facilities located in the Portland, Boston, Stockholm and Santa Barbara areas |
| Our inability to continue to manufacture our products at one or more of our facilities as a result of, for example, an earthquake, a prolonged power outage, fire or other natural disaster, would prevent us from supplying products to our customers, and could have a material adverse effect on our business, financial condition and results of operations |
| Oregon law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if the transaction would benefit our shareholders |
| Other companies may seek to acquire or merge with us |
| An acquisition or merger of our company could result in benefits to our shareholders, including an increase in the value of our common stock |
| Some provisions of our Articles of Incorporation and Bylaws, including our shareholder rights plan and our ability to issue preferred stock without further action by our shareholders, as well as provisions of Oregon law, may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable |