FLIR Systems, Inc.

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FLIR Systems, Inc.

16505 Southwest 72nd Avenue
Portland, Oregon 97224
U.S.A.
Telephone: (503) 684-3731
Toll Free: (800) 322-3731
Fax: (503) 684-3207
Web site: http://www.flir.com

Public Company
Incorporated: 1978
Employees: 885
Sales: $311.97 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: FLIR
NAIC: 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing; 541511 Custom Computer Programming Services

FLIR Systems, Inc. (Flir) designs and manufactures thermal imaging systems and infrared camera systems. Flir's products are used in a variety of applications in commercial, industrial, and government markets. The company is the market leader in providing airborne imaging systems used by television and radio broadcast stations and in providing airborne systems used by law enforcement agencies. In industrial settings, the company's products are used to detect heat loss, which often foretells equipment failure. Flir generates more than 40 percent of its revenues from international customers. The company operates manufacturing facilities in Boston, Massachusetts; Portland, Oregon; Santa Clara, California; London, England; and Stockholm, Sweden.

Origins

Flir's founding in 1978 marked the birth of one of the world's pioneers in infrared technology. Although the company's contributions to advancing thermal imaging technology began almost immediately after its inception, Flir's commercial success took years to arrive, as the company struggled to find its place in the industry. Initially, Flir provided infrared imaging systems that were installed on vehicles. The vehicles, able to detect the infrared radiation, or heat, emitted by all people, objects, and materials, were used to conduct energy audits of residential areas. By using Flir's thermal imaging systems, the vehicles were able to identify abnormal leakage of heat emanating from the doors, windows, walls, and roofs of individual houses.

Flir's initial business lacked the muscle to support the company's growth. The demand for equipment to conduct residential energy audits was never very strong, and, not long after the company entered the market, what little demand existed soon dissipated. Flir discovered a far more robust market for its technology by serving law enforcement agencies. The company developed stabilized thermal imaging systems for use in aircraft used by law enforcement agencies, who used infrared radiation to track suspects.

Airborne applications for thermal imaging systems represented a viable market for Flir, one that the company would come to dominate and one that remained part of its business into the 21st century. Relying on the needs of law enforcement agencies, however, resulted in problems similar to those presented by the company's reliance on the demand for conducting residential energy audits. The market for airborne thermal imaging systems was not big enough to drive the growth of Flir, not to the scale of the company's stature in the 21st century. The central challenge facing the company involved the dynamics of its industry, a challenge Flir began to address in the late 1980s.

Historically, Flir's industry had struggled to attract widespread demand for its technology. The early applications for thermal imaging technology were developed for use in combat situations such as weapons targeting, a use that demanded exceptional performance no matter the cost. Basic forms of the technology were applied to other uses, such as in limited industrial applications to detect heat loss from buildings, which, in contrast to the systems used by the military, emphasized cost over performance. The result was an industry that only met the needs of users with virtually unlimited financial resources who required high-performance systems and users with little capital at their disposal who needed only basic thermal imaging systems. The industry was split between providing high-cost, high-performance systems and low-cost, low-performance systems, leaving the gulf between the two extremes—a large group of potential users in the public safety sector and in commercial markets—for the most part ignored. For long-term growth, Flir needed to tap the unexploited middle area of the market, and the company did so, becoming one of the first companies to bridge the gap separating the two poles of the thermal imaging market. Flir, particularly after its 1990 acquisition of Hughes Aircraft Co.'s industrial infrared imaging group, began developing products with a combination of price and performance that met the needs of a much broader customer base, enabling it to record substantial gains in revenues for the first time in its history.

During the mid-1980s, Flir was a roughly $4 million-insales company. A decade later, the company was generating more than $30 million in annual sales. The increase was significant, confirming the thermal imaging market's capability to support meaningful financial growth, but the revenues generated during the mid-1990s represented only one-tenth of the total Flir collected ten years later. Much transpired during this signal decade of exponential growth, as Flir experienced both the joys of establishing itself as one of the premier thermal imaging concerns in the world and the despair of watching its success evaporate within several months. The source of both the joy and the despair were two acquisitions completed in the late 1990s, acquisitions that greatly enhanced the company's capabilities and nearly caused its ruin.

Faltering in the Late 1990s

Flir gained the right to claim a pioneering status in the thermal imaging industry in large part through the acquisition of a Swedish company. In December 1997, the company purchased Stockholm-based Agema Infrared Systems AB, a company that was recognized as the world leader in the design, manufacture, and marketing of handheld infrared cameras for detecting and measuring temperature differences for a wide variety of commercial and research applications. Agema, in 1965, had developed the first commercial infrared scanner, a device designed for inspecting power lines. In March 1999, a little more than a year after purchasing Agema, Flir acquired the legacy of another industry pioneer, merging in a stock-for-stock transaction with Boston-based Inframetrics, Inc., a company that developed the first television-compatible infrared system in 1975. Inframetrics was known for producing thermal imaging equipment used to find potential failures in industrial manufacturing and utilities systems.

When Flir announced its intention to acquire Inframetrics in December 1998, the company appeared headed for a much brighter future. The acquisition of Agema and the imminent arrival of Inframetrics greatly increased its expertise and capabilities in serving nonmilitary customers. At the end of 1998, when the company's chief operating officer, Kenneth Stringer, was promoted to chief executive officer, Flir passed an important turning point, obtaining, for the first time in its history, more revenues from commercial contracts than government contracts. The addition of Inframetrics promised to increase the company's advances in the commercial sector, but within a year of completing the deal, Flir found itself embroiled in a devastating scandal.

The acquisitions of 1997 and 1999 more than doubled Flir's size. Their addition to the company's fold made sound strategic sense—an assessment that did not change even as the company appeared destined for bankruptcy in large part because the acquisitions were completed. The problems did not stem from the price paid for the acquisitions, but in how management dealt with its finances in general. In March 2000, the company announced that its fourth quarter results would be materially below expectations, with the cause stated as errors made when the company consolidated entries for subsidiaries in the United States and Europe. Around this time, the company's chief financial officer, J. Mark Stamper, left the company. In May 2000, Flir announced that Stringer was no longer chief executive officer of the company. As it was alleged after numerous investigations, Stringer, Stamper, and a senior vice-president, William Martin, had inflated Flir's revenues and hidden millions of dollars in expenses to present a false image of the company's health to shareholders.

Flir's stock value plummeted during 2000, falling to $1.50 per share by the end of the year. Shareholders reacted with fury, resulting in more than ten class-action lawsuits filed against Flir. Flir's difficulties quickly mounted, creating a litany of woes that afflicted the company. Flir's accountants quit, the company's bank pulled its line of credit, the Securities and Exchange Commission launched an investigation, and so did the Federal Bureau of Investigation, which, three years later, issued a 47-count indictment against Stringer, Stamper, and Martin. The situation was disastrous, but the exposure of the company's faults only exposed more faults. Flir was awash in high-yield debt, which stood in default, and hobbled by excess inventory, leaving the company precariously close to filing for bankruptcy. "Flir is a classic story of what happens when many things go wrong," an analyst commented in an August 2001 interview with Oregon Business. "Management was hanging onto a story of growth and momentum and created pressure to keep it going. They didn't recognize the problems until they became a scandal."

Company Perspectives:

What makes FLIR cameras the hottest selling infrared cameras in the world? FLIR offers the widest selection of award-winning infrared cameras and accessories for beginners to seasoned pros available. Plus painless software that makes generating great-looking reports a snap. And we provide our customers with the best post-sale technical support, customer service, and training in the industry. It's a winning formula that helps explain why we're the global leader in infrared cameras and technology.

Arrival of New Leadership in 2000

Flir was a severely troubled company at the start of the 21st century. The individual who inherited the company's numerous problems was Earl Lewis, who was appointed president and chief executive officer in November 2000. Lewis joined Flir from Thermo Instrument Systems, Inc., an instruments manufacturer he took public in 1986. When Lewis completed the company's initial public offering it had a market capitalization of $70 million. During the next 14 years, Lewis substantially increased the company's market capitalization by purchasing troubled companies and improving their performance, an acquisition strategy he applied 110 times over the course of 14 years, eventually raising Thermo Instrument's market capitalization to $3 billion. One of the acquisitions completed during Lewis's tenure was that of a Swedish laser instrumentation manufacturer named Spectra-Physics AB, which owned 28 percent of Flir. The acquisition was made in 1999. In the months that followed, Lewis gained a seat on Flir's board of directors. Not long afterward, Thermo Instrument's former parent company, Thermo Electron Corp., bought back its former subsidiary and began appointing its own management team. Lewis was being eased out just as Flir needed a new leader.

"This company was very close to bankruptcy," Lewis said in a March 8, 2004 interview with the Daily Deal, remembering the state of Flir in the fall of 2000. Lewis moved quickly to rid the company of its ills, spending $20 million to realign its operations. He focused on products with higher profit margins, eliminated lower profit margin products, improved manufacturing efficiencies, and reduced production and distribution costs. "We made cash king," Lewis explained in an August 2001 interview with Oregon Business. "We started reporting cash flow daily to make sure we wouldn't run out of funds. We curtailed procurements of inventory, stopped acquisitions of capital equipment."

The measures put in place by Lewis quickly reversed Flir's fortunes. By mid-2001, the company was generating positive cash flow consistently and its stock had rebounded, trading for nearly $20 per share. Both industry observers and Lewis credited the success of the turnaround program to the quality of Flir's products and the dominant market share enjoyed by the company. Flir controlled 70 percent of the market for airborne imaging systems used by television and radio broadcast stations and 85 percent of the market for airborne law enforcement systems. Aside from those mainstay product lines, management also envisioned a number of other markets for the company, an outlook embraced by Lewis, who foresaw a future in which infrared technology would play an important role in the commercial sector.

During the early years of the 21st century, Flir's thermal imaging cameras were used for a number of purposes. Professionals used the company's cameras to scan refineries for heat leaks, a preventive maintenance niche Flir dominated. Flir also developed a thermographic flashlight for use by law enforcement agencies, a device that enabled an officer to locate a suspect hiding in a dark alley and determine whether the suspect possessed a weapon, for instance. In Asia, when the sudden acute respiratory syndrome (SARS) crisis erupted, government officials purchased more than 100 Flir devices, paying $15,000 apiece, to detect travelers with high fevers, one of the earliest symptoms of SARS. Lewis predicted many more uses for the company's technology, foreseeing a time when homeowners could go to their local construction supply store and rent a thermographic camera to check their home for heat leaks. Lewis claimed that in the future all electricians would carry an infrared camera. He also saw the automobile manufacturing industry as a big potential customer, touting the incorporation of the company's night-vision technology into automobiles as inevitable.

The central problem in widening the use of Flir's technology in the commercial sector was the price of its products. The roughly 50 camera systems made by Flir ranged in price from $10,000 to $1 million, far too expensive for most of the potential customers envisioned by Lewis. One of his primary objectives after restoring Flir's financial health was to try to lower the price of the company's products, a goal that he made a stride toward achieving with an acquisition. In 2003, Lewis approached a Santa Clara, California-based manufacturer of infrared technology components named Indigo Systems Corp. Lewis offered to buy the company, but Indigo officials rejected his offer. "They didn't quite understand how they might value the business so they decided to go to an auction," Lewis explained in a March 8, 2004 interview with the Daily Deal. "Quite frankly, I was disappointed," Lewis added, "I was hoping we could just do a negotiation." An auction was held in October 2003, with Flir emerging as the winner. Flir paid $165.5 million in cash and roughly $25 million in stock for Indigo, completing the deal in January 2004.

Indigo's integration into Flir's operations provided Lewis with the opportunity to lower the cost of his products. By having control over the manufacture of components the company previously acquired from third parties, Flir was expected to save money, savings that would be used to reduce prices primarily on the company's thermography products. "There are a number of markets for infrared detection that will only be satisfied when the price of those cameras is significantly lower than it is today," Lewis explained in his March 8, 2004 interview with the Daily Deal. As Lewis set himself to the task of making Flir's products more widely used in the commercial sector, there were more than 30,000 of the company's cameras in use throughout the world. In the years ahead, with the help of Indigo and other attempts to drive down the cost of thermography products, Lewis hoped to increase that figure exponentially.

Principal Subsidiaries

FLIR Systems International Ltd. (U.K.); FLIR Systems AB (Sweden); FLIR Systems Ltd. (Canada).

Key Dates:

1978:: FLIR Systems, Inc. is founded.
1990:: FLIR acquires Hughes Aircraft Co.'s industrial infrared imaging group.
1997:: Agema Infrared Systems AB is acquired.
1999:: FLIR acquires Inframetrics, Inc.
2000:: After being rocked by managerial malfeasance, FLIR appoints Earl Lewis as president and chief executive officer.
2004:: FLIR acquires Indigo Systems Corp.