UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q

(Mark one)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 20162017
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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
27700 SW Parkway Avenue,
Wilsonville, Oregon
 97070
(Address of principal executive offices) (Zip Code)
(503) 498-3547
(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  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
  x
 Accelerated filer
  ¨
Non-accelerated filer
  ¨
 Smaller reporting company
  ¨
Emerging growth company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
AtIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ¨    No  ¨
As of July 29, 2016,19, 2017, there were 137,281,232137,195,504 shares of the Registrant’sregistrant’s common stock, $0.01 par value, outstanding.




INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
 
 
Consolidated Statements of Income —- Three and Six Months Ended June 30, 20162017 and 20152016 (unaudited)
1
 
Consolidated Statements of Comprehensive Income (Loss) —- Three and Six Months Ended June 30, 20162017 and 20152016 (unaudited)
2
 
Consolidated Balance Sheets —- June 30, 20162017 and December 31, 20152016 (unaudited)
3
 
Consolidated Statements of Cash Flows —- Six Months Ended June 30, 20162017 and 20152016 (unaudited)
4
 
Notes to the Consolidated Financial Statements (unaudited)
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1820
Item 3.
Quantitative and Qualitative Disclosures Aboutabout Market Risk
2428
Item 4.
Controls and Procedures
2429
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
2530
Item 1A.
Risk Factors
2530
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2538
Item 3.
Defaults Upon Senior Securities
2538
Item 4.
Mine Safety Disclosures
2538
Item 5.
Other Information
2538
Item 6.
Exhibits
2638
Signature
2739


PART I. FINANCIAL INFORMATION

PART 1. FINANCIAL INFORMATION
Item 1.Financial Statements

ITEM 1.    FINANCIAL STATEMENTS
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Revenue$402,729
 $392,975
 $782,201
 $737,492
$434,124
 $402,729
 $840,938
 $782,201
Cost of goods sold219,407
 203,360
 421,189
 371,980
227,392
 219,407
 442,885
 421,189
Gross profit183,322
 189,615
 361,012
 365,512
206,732
 183,322
 398,053
 361,012
Operating expenses:              
Research and development36,945
 35,126
 73,356
 69,900
43,046
 38,208
 85,029
 75,488
Selling, general and administrative81,165
 83,958
 165,067
 159,327
97,056
 79,902
 187,308
 162,935
Total operating expenses118,110
 119,084
 238,423
 229,227
140,102
 118,110
 272,337
 238,423
       
Earnings from operations65,212
 70,531
 122,589
 136,285
66,630
 65,212
 125,716
 122,589
       
Interest expense4,360
 3,358
 7,807
 7,019
4,472
 4,360
 8,925
 7,807
Interest income(328) (295) (588) (542)(355) (328) (626) (588)
Other expense (income), net1,327
 1,020
 (103) 320
Other (income) expense, net(1,027) 1,327
 (1,687) (103)
Earnings before income taxes59,853
 66,448
 115,473
 129,488
63,540
 59,853
 119,104
 115,473
Income tax provision14,485
 15,948
 68,980
 31,078
12,127
 14,485
 25,120
 68,980
Net earnings$45,368
 $50,500
 $46,493
 $98,410
$51,413
 $45,368
 $93,984
 $46,493
              
Earnings per share:       
Net earnings per share:       
Basic$0.33
 $0.36
 $0.34
 $0.70
$0.38
 $0.33
 $0.69
 $0.34
Diluted$0.33
 $0.36
 $0.33
 $0.70
$0.37
 $0.33
 $0.68
 $0.33
              
Weighted average shares outstanding:              
Basic137,861
 140,063
 137,686
 139,916
136,865
 137,861
 136,613
 137,686
Diluted138,993
 141,491
 138,832
 141,484
138,449
 138,993
 138,266
 138,832





FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)













The accompanying notes are an integral part of these consolidated financial statements.

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Net earnings$45,368
 $50,500
 $46,493
 $98,410
$51,413
 $45,368
 $93,984
 $46,493
Other comprehensive income (loss), net of tax:              
Cash flow hedges(196) 194
 (865) (410)
Fair value adjustment on interest rate swap contracts—
 (196) 187
 (865)
Unrealized gain on available-for-sale investments—
 —
 (1) —
Foreign currency translation adjustments(24,888) 30,499
 (1,526) (35,465)22,593
 (24,888) 35,795
 (1,526)
Total other comprehensive income (loss)(25,084) 30,693
 (2,391) (35,875)
Total other comprehensive income22,593
 (25,084) 35,981
 (2,391)
Comprehensive income$20,284
 $81,193
 $44,102
 $62,535
$74,006
 $20,284
 $129,965
 $44,102

























FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 June 30,
2016		 December 31, 2015
ASSETS   
Current assets:   
Cash and cash equivalents$903,179
 $472,785
Accounts receivable, net279,323
 326,098
Inventories387,393
 393,092
Prepaid expenses and other current assets87,927
 95,539
Total current assets1,657,822
 1,287,514
Property and equipment, net271,726
 272,629
Deferred income taxes, net55,578
 55,429
Goodwill592,946
 596,316
Intangible assets, net133,364
 141,302
Other assets83,515
 53,210
    Total assets$2,794,951
 $2,406,400
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$101,170
 $139,540
Deferred revenue30,738
 31,933
Accrued payroll and related liabilities46,629
 54,806
Accrued product warranties14,661
 13,406
Advance payments from customers21,189
 33,848
Accrued expenses35,597
 40,930
Accrued income taxes3,007
 201
Other current liabilities4,441
 5,987
Current portion, long term debt264,924
 264,694
Total current liabilities522,356
 585,345
Long-term debt505,040
 93,750
Deferred income taxes3,893
 3,623
Accrued income taxes51,807
 10,457
Other long-term liabilities64,311
 63,710
Commitments and contingencies
 
Shareholders’ equity:   
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2016, and December 31, 2015—
 —
Common stock, $0.01 par value, 500,000 shares authorized, 137,265 and 137,350 shares issued at June30, 2016, and December 31, 2015, respectively, and additional paid-in capital1,373
 1,374
Retained earnings1,773,688
 1,773,267
Accumulated other comprehensive loss(127,517) (125,126)
Total shareholders’ equity1,647,544
 1,649,515
    Total liabilities and shareholders’ equity$2,794,951
 $2,406,400



FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended June 30,
 2016 2015
CASH PROVIDED BY OPERATING ACTIVITIES:   
Net earnings$46,493
 $98,410
Income items not affecting cash:   
Depreciation and amortization27,778
 24,611
Deferred income taxes(372) 142
Stock-based compensation arrangements14,381
 12,938
Other non-cash items15,451
 (823)
Changes in operating assets and liabilities, net of business acquisitions:   
Decrease in accounts receivable50,711
 22,594
Decrease (increase) in inventories14,995
 (44,072)
(Increase) decrease in prepaid expenses and other current assets(1,634) 489
(Increase) decrease in other assets(8,613) 1,610
(Decrease) increase in accounts payable(44,165) 24,539
(Decrease) increase in deferred revenue(1,052) 2,303
(Decrease) in accrued payroll and other liabilities(34,534) (28,170)
Increase in accrued income taxes46,617
 5,230
Increase of pension & other long term liabilities565
 4,058
Cash provided by operating activities126,621
 123,859
CASH USED BY INVESTING ACTIVITIES:   
Additions to property and equipment, net(20,876) (30,783)
Proceeds on sale of property and equipment4,875
 30
Business acquisitions, net of cash acquired(42,445) —
Cash used by investing activities(58,446) (30,753)
CASH USED BY FINANCING ACTIVITIES:   
Net proceeds from credit agreement and long-term debt525,766
 —
Repayments of credit agreements and long-term debt(112,500) (7,500)
Common stock repurchased(29,747) (31,426)
Dividends paid(33,090) (30,774)
Proceeds from employee stock based compensation plans6,541
 19,636
Excess tax benefits from share-based payment arrangements1,579
 4,041
Other financing activities10
 (8)
Cash provided (used) by financing activities358,559
 (46,031)
Effect of exchange rate changes on cash3,660
 (18,259)
Net increase in cash and cash equivalents430,394
 28,816
Cash and cash equivalents, beginning of period472,785
 531,374
Cash and cash equivalents, end of period$903,179
 $560,190













The accompanying notes are an integral part of these consolidated financial statements.

FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
(Unaudited)
 June 30, December 31,
 2017 2016
ASSETS   
Current assets:   
Cash and cash equivalents$403,591
 $361,349
Accounts receivable, net332,009
 352,020
Inventories405,328
 371,371
Prepaid expenses and other current assets83,175
 79,917
Total current assets1,224,103
 1,164,657
Property and equipment, net272,391
 271,785
Deferred income taxes, net48,821
 45,243
Goodwill920,364
 801,406
Intangible assets, net190,058
 168,460
Other assets47,767
 168,155
          Total assets$2,703,504
 $2,619,706
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$113,957
 $114,225
Deferred revenue31,385
 34,420
Accrued payroll and related liabilities54,820
 52,874
Accrued product warranties16,262
 17,476
Advance payments from customers30,818
 26,019
Accrued expenses39,359
 34,022
Accrued income taxes36,573
 51,017
Other current liabilities11,450
 16,659
Current portion, long-term debt15,000
 15,000
Total current liabilities349,624
 361,712
Long-term debt491,303
 501,921
Deferred income taxes14,020
 2,331
Accrued income taxes9,773
 9,643
Pension and other long-term liabilities58,153
 65,773
Commitments and contingencies
 
Shareholders’ equity:   
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at June 30, 2017, and December 31, 2016—
 —
Common stock, $0.01 par value, 500,000 shares authorized, 137,142 and 136,334 shares issued at June 30, 2017, and December 31, 2016, respectively, and additional paid-in capital25,492
 12,139
Retained earnings1,885,109
 1,832,138
Accumulated other comprehensive loss(129,970) (165,951)
Total shareholders’ equity1,780,631
 1,678,326
          Total liabilities and shareholders' equity$2,703,504
 $2,619,706




The accompanying notes are an integral part of these consolidated financial statements.

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 Six Months Ended June 30,
 2017 2016
CASH PROVIDED BY OPERATING ACTIVITIES:   
Net earnings$93,984
 $46,493
Adjustments to reconcile net earnings to net cash provided by operating activities:   
Depreciation and amortization35,008
 27,778
Deferred income taxes(150) (372)
Stock-based compensation arrangements14,854
 14,381
     Other, net(19,211) 15,451
Increase (decrease) in cash, net of acquisitions, resulting from changes in:   
Accounts receivable24,525
 50,711
Inventories(26,935) 14,995
Prepaid expenses(3,108) (1,634)
Other assets15,322
 (8,613)
Accounts payable(1,937) (44,165)
Deferred revenue(3,304) (1,052)
Accrued payroll and other liabilities2,938
 (28,918)
Accrued income taxes(18,642) 48,196
Pension and other long-term liabilities(8,090) 565
Net cash provided by operating activities105,254
 133,816
CASH FLOWS FROM INVESTING ACTIVITIES:   
Additions to property and equipment(23,653) (20,876)
Proceeds from sale of assets2,885
 4,875
Business acquisitions, net of cash acquired—
 (42,445)
Net cash used by investing activities(20,768) (58,446)
CASH FLOWS FROM FINANCING ACTIVITIES:   
Net proceeds of long-term debt, including current portion—
 525,766
Repayment of long-term debt(11,250) (112,500)
Repurchase of common stock—
 (29,747)
Dividends paid(41,013) (33,090)
Proceeds from shares issued pursuant to stock-based compensation plans7,035
 6,541
Tax paid for net share exercises and issuance of vested restricted stock units(9,022) (5,616)
Other financing activities(4) 10
Net cash (used) provided by financing activities(54,254) 351,364
Effect of exchange rate changes on cash12,010
 3,660
Net increase in cash and cash equivalents42,242
 430,394
Cash and cash equivalents, beginning of year361,349
 472,785
Cash and cash equivalents, end of year$403,591
 $903,179



The accompanying notes are an integral part of these consolidated financial statements.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 1.Basis of Presentation
The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared 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, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s 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 accounting principles generally accepted in the United States 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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016.
The accompanying consolidated financial statements include the accounts of FLIR Systems, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2016.2017.

Recently Adopted Accounting Pronouncements
Effective January 1, 2017, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The standard update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows. As a result of the adoption, on a prospective basis, the Company recognized $2.9 million and $3.7 million of excess tax benefits from stock-based compensation as a discrete item in income tax provision for the three and six months ended June 30, 2017, respectively. Historically, these amounts were recorded as additional paid-in capital. Upon adoption, the Company elected to apply the change retrospectively to the Consolidated Statement of Cash Flows which resulted in a reclassification of excess tax benefits from stock-based compensation of $1.6 million from cash flows from financing activities to cash flows from operating activities for the six months ended June 30, 2016. Additionally, $5.6 million paid in cash to satisfy withholding requirements for net settlement of restricted stock unit shares vested and stock options exercised has been reclassified from cash flows from operating activities to cash flows from financing activities to conform to the presentation required by the new standard in the Consolidated Statement of Cash Flows for the six months ended June 30, 2016. ASU 2016-09 also requires excess tax benefits and deficiencies to be excluded from the assumed future proceeds in the calculation of diluted shares. This change resulted in an increase in diluted weighted average shares outstanding of 179,000 shares and 195,000 shares for the three and six months ended June 30, 2017, respectively. The Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the Company's results of operations.
Reclassifications
The Company made certain reclassifications to the prior year'syears' financial statements and notes to the consolidated financial statements to conform them to the presentation as of June 30, 2016. Restructuring expenses of $0.5 million and $0.7 million have been reclassified to selling, general and administrative expenses, respectively, for the three and six months ended June 30, 2015.2017. These reclassifications had no effect on consolidated financial position, net earnings, shareholders' equity, or net cash flows for any of the periods presented.

Note 2.Stock-based Compensation

Stock Incentive Plans

The Company has a stock-based compensation program that provides equity incentives for employees, consultants and directors. This program includes incentive and non-statutory stock options and nonvestednon-vested stock awards (referred to as restricted stock unit awards) administered bygranted under two plans: the Compensation CommitteeFLIR Systems, Inc. 2002 Stock Incentive Plan (the “2002 Plan”) and the FLIR Systems, Inc. 2011 Stock Incentive Plan (the “2011 Plan”). The Company has discontinued issuing awards out of the Company's Board of Directors.2002 Plan but previously-granted awards under the 2002 Plan remain outstanding.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 2.Stock-based Compensation - (Continued)
Under the stock-based compensation program, theStock Incentive Plans - (Continued)
The Company has granted time-based options, time-based restricted stock unit awards, performance-basedmarket-based restricted stock unit awards and market-basedperformance-based restricted stock unit awards. Options generally expire ten years from theirthe grant dates.date. Time-based options and restricted stock unit awards generally vest over a three yearthree-year period. Shares issuable under the performance-basedMarket-based restricted stock unit awards are earned based upon the Company's return on invested capital over a three year period. Shares issuable under market-based restricted stock unit awards aremay be earned based upon the Company's total shareholder return compared to the total shareholder return over a three year period of the component company at the 60th percentile level in the Standard & Poor'sS&P 500 Index.Index over a three-year period. Performance-based restricted stock unit awards may be earned based upon certain profitability metrics as approved by the compensation committee of the Company's board of directors, including return on invested capital or income from operations over the relevant three-year periods. Shares vested under the performance-based restricted stock unit awards and the market-based restricted stock unit awards must generally be held by the participant for a period of one year from the vest date.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (the “ESPP”) which allows employees to purchase shares of the Company’s common stock at 85 percent of the lower of the fair market value at the lower of either the date of enrollment or the fair market value at the purchase date. The ESPP provides for six-month offerings commencing on May 1 and November 1 of each year with purchases on April 30 and October 31 of each year. Shares purchased under the ESPP must be held by the purchasing plan participantemployees for a period of at least 18 months after the date of purchase.


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 2.Stock-based Compensation - (Continued)

Stock-based Compensation Expense
Stock-basedThe following table sets forth the stock-based compensation expense recognized in the Consolidated Statements of Income are(in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
Cost of goods sold$631
 $855
 $1,032
 $1,470
Research and development1,299
 1,233
 2,476
 2,414
Selling, general and administrative6,678
 6,205
 11,346
 10,497
Stock-based compensation expense before income taxes$8,608
 $8,293
 $14,854
 $14,381
Stock-based compensation expense capitalized in the Consolidated Balance Sheets is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2016 2015 2016 2015
Cost of goods sold$855
 $766
 $1,470
 $1,484
Research and development1,233
 1,185
 2,414
 2,325
Selling, general and administrative6,205
 6,229
 10,497
 9,129
Stock-based compensation expense$8,293
 $8,180
 $14,381
 $12,938
 June 30,
 2017 2016
Capitalized in inventory$1,053
 $685
Stock-based compensation costs capitalized in inventory are as follows (in thousands):
 June 30,
 2016 2015
Capitalized in inventory685
 703
As of June 30, 2016,2017, the Company had $53.6approximately $62.0 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.22.29 years.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 3.Net Earnings Per Share
The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Numerator for earnings per share:              
Net earnings for basic and diluted earnings per share$45,368
 $50,500
 $46,493
 $98,410
$51,413
 $45,368
 $93,984
 $46,493
       
Denominator for earnings per share:              
Weighted average number of common shares outstanding137,861
 140,063
 137,686
 139,916
136,865
 137,861
 136,613
 137,686
Assumed exercises of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method1,132
 1,428
 1,146
 1,568
Weighted average diluted shares outstanding138,993
 141,491
 138,832
 141,484
Assumed exercise of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method1,584
 1,132
 1,653
 1,146
Diluted shares outstanding138,449
 138,993
 138,266
 138,832

The effect of outstanding stock-based compensation awards for the three and six months ended June 30, 2017, which in aggregate consisted of 162,000 and 265,000 shares, respectively; and for the three and six months ended June 30, 2016, which in the aggregate consisted of 295,000 and 440,000 shares, respectively; and for the three and six months ended June 30, 2015, which in the aggregate consisted of 285,000 and 389,000 shares, respectively, have been excluded for purposes of calculating diluted earnings per share since the effect of their inclusion would have had an anti-dilutive effect.been anti-dilutive.



FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 4.Fair Value of Financial Instruments
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories in accordance with FASB ASC Topic 820, “Fair Value Measurement”Measurements”:
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, and credit risk;observable market prices for identical instruments that are traded in less active markets; and
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors andor methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Company had $329.570.9 million and $29.08.3 million of cash equivalents at June 30, 20162017 and December 31, 2015,2016, respectively, which were primarily investments in money market funds.funds and overnight deposits. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets. All cash equivalents are comprised of instruments that are convertible to cash daily. The fair valuesvalue of the Company’s foreign currency forward contracts and interest rate swap contracts as of June 30, 20162017 and December 31, 20152016, are disclosed in Note 5, "Derivative Financial Instruments," of the Notes to the Consolidated Financial Statements below and are based on Level 2 inputs. The fair value of the Company’s senior unsecured notes as described in Note 13, "Long-Term Debt," of the Notes to the Consolidated Financial Statements is approximately $689.0429.4 million and $254.1 million based upon Level 2 inputs at June 30, 20162017 and December 31, 2015, respectively.is categorized as Level 2 based on observable prices for the identical instrument in a less active market. The fair value of the Company's term loan,credit facility and related borrowings, also described in Note 13, approximates the carrying value due to the variable market rate used to calculate interest payments. The Company does not have any other significant financial assets or liabilities that are measured at fair value.


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 5.Derivative Financial Instruments
Note 5.        Derivative Financial Instruments
Foreign Currency Exchange Rate ContractsRisk

The Company enters into foreign currency forward contracts not formally designated as hedges to manage the consolidated exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities.  Changes in fair value of foreign currency forward contracts are recognized in income at the end of each reporting period based on the difference between the contract rate and the spot rate. In general, thethese gains and losses related toare offset in the Company's foreign currency exchange rate contracts recorded in other expense (income), net are offsetConsolidated Statements of Income by the reciprocal gains and losses from cash settlement of the underlying assets or liabilities which originally gave rise to the exposure. The net amount of the gains and losses related to derivative instruments recorded in other (income) expense, net for the three and six months ended June 30, 2017 were net losses of $3.4 million and $7.7 million, respectively. The net losses for the three and six months ended June 30, 2016 were $9.1 million and $2.1 million, respectively. The net gains for the three and six months ended June 30, 2015 were $5.8 million and $1.8 million, respectively.

The following table provides volume information about the Company's foreign currency exchange rate contracts. The table below presents the net notional amounts of the Company'sCompany’s outstanding foreign currency forward contracts in United States dollar equivalent amountsby currency (in thousands):
June 30,
2016		 December 31,
2015		June 30, December 31,
Swedish kronor$93,760
 $59,198
Euro21,280
 281
2017 2016
European euro$190,451
 $156,352
Swedish kroner74,191
 48,555
Canadian dollar14,954
 10,799
56,475
 15,645
Brazilian real8,145
 6,440
9,562
 2,747
Japanese yen2,985
 3,251
Australian dollar2,129
 1,653
British pound sterling3,064
 10,203
668
 33,862
Australian dollar2,856
 2,342
Norwegian krone836
 453
Other1,035
 2,197
485
 —
$145,930
 $91,913
$336,946
 $262,065
At June 30, 2016,2017, the Company’s foreign currency forward contracts, in general, had maturities of one monththree months or less.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 5.Derivative Financial Instruments - (Continued)
Foreign Currency Exchange Rate Contracts - (Continued)
The carrying amount of the foreign currency forwardexchange contracts included in the Consolidated Balance Sheets are as follows (in thousands):
 June 30, 2016 December 31, 2015
 Other current assets Other current liabilities Other current assets Other current liabilities
Foreign currency forward contracts$447
 $2,034
 $767
 $1,314

 June 30, 2017 December 31, 2016
 Prepaid Expenses and Other Current Assets Other Current Liabilities Prepaid Expenses and Other Current Assets Other Current Liabilities
Foreign exchange contracts$3,853
 $1,768
 $2,369
 $75
Interest Rate Swap Contracts
At June 30, 2016,2017, the effective interest rate on the borrowings made from the Company's revolving credit facility was 2.37 percent.percent. As of June 30, 2016,2017, the following interest rate swaps were outstanding:
Contract Date 
Notional Amount
(in millions)
 Fixed Rate Effective Date Maturity Date 
Notional Amount
(in millions)
 Fixed Rate Effective Date Maturity Date
March 15, 2013 $50.6
 1.02% April 5, 2013 March 31, 2019 $43.1
 1.02% April 5, 2013 March 31, 2019
March 29, 2013 $50.6
 0.97% April 5, 2013 March 31, 2019 $43.1
 0.97% April 5, 2013 March 31, 2019
The net fair value carrying amount of the Company's interest rate swaps was a liability of $0.9$0.6 million, of which $0.5$0.3 million has been recorded into prepaid expenses and other current liabilitiesassets and $0.4$0.3 million has been recorded to other long-term liabilitiesassets in the Consolidated Balance Sheet as of June 30, 20162017.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 6.Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $7.8$6.2 million and $6.5 million at June 30, 20162017 and $6.9 million at December 31, 2015.

2016, respectively.


Note 7.Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
June 30,
2016		 December 31,
2015		2017 2016
Raw material and subassemblies$202,343
 $216,107
$217,113
 $200,640
Work-in-progress51,599
 38,639
58,533
 43,430
Finished goods133,451
 138,346
129,682
 127,301
$387,393
 $393,092
$405,328
 $371,371


Note 8.Property and Equipment
Note 8.        Property and Equipment
Property and equipment are net of accumulated depreciation of $269.8$300.3 million and $253.4$275.1 million at June 30, 20162017 and December 31, 2015,2016, respectively.



FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 9.Goodwill
The carrying value of goodwill and the activity for the six months ended June 30, 20162017 are as follows (in thousands):

Balance, December 31, 2015 $596,316
Currency translation adjustments and other (3,370)
Balance, June 30, 2016 $592,946
Balance, December 31, 2016$801,406
Goodwill from acquisitions100,022
Currency translation adjustments18,936
Balance, June 30, 2017$920,364

See Note 17, "Operating Segments and Related Information - Operating Segments," of the Notes to the Consolidated Financial Statements for additional information on the carrying value of goodwill by operating segment at June 30, 2016.2017.

See Note 18, "Business Acquisitions," of the Notes to the Consolidated Financial Statements for additional information on the addition of goodwill from acquisitions.

Note 10.Intangible Assets
Note 10.        Intangible Assets
Intangible assets are net of accumulated amortization of $69.6$93.2 million and $61.3$77.8 million at June 30, 20162017 and December 31, 2015,2016, respectively.


Note 11.Credit Agreement
At June 30, 2016, the Company had $101.3 million borrowings outstanding under its revolving credit facility pursuant to the Credit Agreement, datedOn February 8, 2011, by and among the Company entered into a credit agreement with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders, as amended on April 5, 2013, October 27, 2015 and May 31, 2016 (the "Credit Agreement"), which provides for a $500 million revolving line of credit. At June 30, 2017, the Company had $86.3 million outstanding under its revolving credit facility pursuant to the Credit Agreement and had $20.7$18.2 million of letters of credit outstanding, which reducedreduces the total available revolving credit under the revolving credit facilityCredit Agreement to $378.1$395.5 million.


FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 12.Accrued Product Warranties
The following table summarizes the Company’s accrued product warrantieswarranty liability and activity (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Accrued product warranties, beginning of period$17,227
 $15,840
 $16,514
 $16,175
$19,971
 $17,227
 $20,845
 $16,514
Amounts paid for warranty services(5,458) (3,547) (9,598) (6,971)(4,362) (5,458) (8,991) (9,598)
Warranty provisions for products sold5,826
 3,595
 10,560
 6,985
3,782
 5,826
 7,491
 10,560
Currency translation adjustments and other(103) 134
 16
 (167)139
 (103) 185
 16
Accrued product warranties, end of period$17,492
 $16,022
 $17,492
 $16,022
$19,530
 $17,492
 $19,530
 $17,492
       
Current accrued product warranties, end of period    $14,661

$13,232
    $16,262
 $14,661
Long-term accrued product warranties, end of period    $2,831

$2,790
    $3,268
 $2,831



FLIR SYSTEMS, INC.Note 13.        Long-Term Debt
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 13.Long-Term Debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
June 30,
2016		 December 31,
2015		2017 2016
Unsecured notes$675,000
 $250,000
$425,000
 $425,000
Term loan—
 108,750
Credit Agreement101,250
 —
86,250
 97,500
Unamortized discounts and issuance costs(6,286) (306)
Unamortized discounts and issuance costs of unsecured notes(4,947) (5,579)
$769,964
 $358,444
$506,303
 $516,921
Current portion, long-term debt$264,924
 $264,694
$15,000
 $15,000
Long-term debt$505,040
 $93,750
$491,303
 $501,921

In August 2011, the Company issued $250 million aggregate principal amount of its 3.75 percent senior unsecured notes due September 1, 2016 (the “2011 Notes”). The net proceeds from the issuance of the 2011 Notes were approximately $247.7 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2011 Notes is payable semiannually in arrears on March 1 and September 1. The proceeds from the 2011 Notes were used for general corporate purposes, which include working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock. The 2011 Notes were repaid on July 5, 2016.
In June 2016, the Company issued $425 million aggregate principal amount of its 3.125 percent senior unsecured notes due June 15, 2021 (the “2016 Notes”). The net proceeds from the issuance of the 2016 Notes were approximately $421.0 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2016 Notes is payable semiannually in arrears on December 15 and June 15. The proceeds from the 2016 Notes were used to repay the principal amount of the notes issued in August 2011 Notesand outstanding in July 2016 and are being used for general corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common stock and other general corporate purposes.stock.
The Credit Agreement discussed in Note 11, "Credit Agreement," of the Notes to the Consolidated Financial Statements above, consisted of a $150 million term loan facility and a revolving credit facility. On May 31, 2016, the Company repaid its term loan and drew down $105.0 million under the revolving credit facility. Interest on amounts outstanding under the revolving credit facility accrues at the one-month LIBOR rate plus the applicable scheduled spreadmargin for the amount outstanding and is paid monthly in arrears. See Note 5, "Derivative Financial Instruments - Interest Rate Swap Contracts," of the Notes to the Consolidated Financial Statements for additional information on the effective interest rate on the revolving credit facility at June 30, 2016.2017.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 14.Shareholders’ Equity
The following table summarizes the common stock and additional paid-in capital activity during the six months ended June 30, 2016 (in thousands):
Common stock and additional paid-in capital, December 31, 2015$1,374
Income tax benefit of common stock options exercised1,451
Common stock issued pursuant to stock-based compensation plans, net938
Stock-based compensation expense14,375
Repurchase of common stock(16,765)
Common stock and additional paid-in capital, June 30, 2016$1,373
On February 5, 2015, the Company's Board of Directors authorized the repurchase in the open market or through privately negotiated transactions of up to 15.0 million shares of the Company's outstanding common stock. The authorization will expire on February 5, 2017. During the six months ended June 30, 2016, the Company repurchased 1.0 million shares for an aggregate purchase price of $29.7 million, of which $16.8 million reduced common stock and additional paid in capital and $12.9 million reduced retained earnings.2017 (in thousands):

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Common stock and additional paid-in capital, December 31, 2016$12,139
Common stock issued pursuant to stock-based compensation plans, net(1,987)
Stock-based compensation15,340
Common stock and additional paid-in capital, June 30, 2017$25,492
Note 14.Shareholders’ Equity - (Continued)
On June 3, 2016,9, 2017, the Company paid a dividend of $0.12$0.15 per share on its outstanding common stock to the shareholders of record as of the close of business on May 20, 2016.26, 2017. The total cash payments for dividends during the six months ended June 30, 20162017 were $33.1$41.0 million.

Note 15.Contingencies

Raytheon Litigation
FLIR Systems, Inc. and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.) (formerly known as Indigo Systems Corporation) (together, the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007, in the United States District Court for the Eastern District of Texas. Raytheon's complaint, as amended, asserted claims for tortious interference, patent infringement, trade secret misappropriation, unfair competition, breach of contract, and fraudulent concealment. The FLIR Parties filed an answer to the complaint on September 2, 2008, in which they denied all material allegations. On October 27, 2010, the FLIR Parties and Raytheon entered into a settlement agreement that resolved the patent infringement claims (the "Patent Claims") pursuant to which the FLIR Parties paid $3 million to Raytheon and entitles the FLIR Parties to certain license rights in the patents that were the subject of the Patent Claims. On October 28, 2014, a four-week trial began with respect to Raytheon's remaining claims of misappropriations of trade secrets and claims related to 31 alleged trade secrets. On November 24, 2014, a jury in the United States District Court for the Eastern District of Texas rejected Raytheon’s claims and determined that 27 of the alleged trade secrets were not in fact trade secrets and that neither Indigo, prior to its acquisition byof the FLIR Systems, Inc., nor FLIR Systems, Inc.Parties infringed any of the trade secrets claimed and awarded Raytheon no damages. On March 31, 2016, the United States District Court for the Eastern District of Texas issued a Final Judgment denying Raytheon’s claims and awarding FLIR court costs and denying each of Raytheon’s and FLIR’s Renewed Motions for Judgment as a Matter of Law and denying FLIR’s Amended Rule 54(d) Motion for Attorneys’ Fees and Costs Under the Texas Theft Liability Act.

On April 29, 2016, Raytheon filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit of the denial by the United States District Court for the Eastern District of Texas of Raytheon’s Renewed Motion for Judgment as a Matter of Law, or in the Alternative, Motion for New Trial. On May 11, 2016, the FLIR Parties filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit of the Order of the United States District Court for the Eastern District of Texas Denying the FLIR Parties’ Amended Rule 54(d) Motion for Attorneys’ Fees and Costs under the Texas Theft Liability Act, the Order Denying the FLIR Parties’ Renewed Motion For Judgment as a Matter Of Law, and the Final Judgment to the extent it denied the FLIR Parties Attorneys’ Fees and Costs under the Texas Theft Liability Act. The matter remains ongoing and is subject to appeal and the Company is unable to estimate the amount or range of potential loss or recovery, if any, which might result if the final determination of this matter is favorable or unfavorable, but an adverse ruling on the merits of the original claims against the FLIR Parties, while remote, could be material.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 15.Contingencies - (Continued)

Matters Involving the United States Department of State and Department of Commerce
On October 22, 2014, the Company initially contacted the United States Department of State Office of Defense Trade Controls Compliance (“DDTC”DTCC”), pursuant to International Traffic in Arms Regulation (“ITAR”) § 127.12(c), regarding the unauthorized export of technical data and defense services to dual and third country nationals in at least four facilities of the Company.  On April 27, 2015, the Company submitted its initial report to DDTCDTCC regarding the details of the issues raised in the October 22, 2014, submission.  DDTCDTCC subsequently notified the Company that it was considering administrative proceedings under Part 128 of ITAR and requested a tolling agreement, which the Company executed on June 16, 2015.2015 and reference certain Company disclosures in addition to the submissions made in conjunction with the October 24, 2014 initial notification. On June 6, 2016, the Company executed a subsequent tolling agreement extending the tolling period for matters to be potentially included in an administrative proceeding for an additional 18 months until the end of December 2017. DDTCDTCC continues its review of the Company’s activities and the Company continues to engage actively with the United States government on these matters.

In May 2017, the Company submitted an initial notification to DTCC regarding potential violations related to certain export classifications obtained through the commodity jurisdiction process. DTCC acknowledged the notification and at the request of DTCC, the Company executed a tolling agreement for this matter, suspending the statute of limitations for a twelve (12) month period.

In June 2017, the United States Department of Commerce Bureau of Industry and Security informed the Company of additional export licensing requirements that restrict the Company’s ability to sell 9hz thermal products without a license to customers in China not identified on a list maintained by the United States Department of Commerce. This action was precipitated by concerns of potential diversion of some of the Company's products to prohibited end users and to countries subject to economic and other sanctions implemented by the United States. If the Company is found to have violated applicable rules and regulations with respect to customers and limitations on the end use of the Company’s products, the Company could be subject to substantial fines and penalties, suspension of existing licenses or other authorizations and/or loss or suspension of export privileges.

The Company is unable to reasonably estimate the time it may take to resolve the matterthese matters or the amount or range of potential loss, penalty or other government action, if any, that may be incurred in connection with this matter.these matters. However, an unfavorable outcome could result in substantial fines and penalties or loss or modificationsuspension of exportingexport privileges or of particular authorizations that could potentially be material to the Company’s financial condition andposition, results of operations of the Companyor cash flows in and following the period in which such an outcome becomes estimable or known.

SkyWatch Product Quality Matters
In March 2016, the Company learned of potential quality concerns with respect to as many as 312 Level III and Level IV SkyWatch Surveillance Towers sold by FLIR and companies acquired by FLIR from 2002 through 2014. The Company notified customers who purchased the affected SkyWatch Towers of the potential concerns and, as a precautionary measure, also temporarily suspended production of all Level III and Level IV SkyWatch Towers pending the completion of its review and the implementation of any necessary remedial measures. During the quarter ended September 30, 2016, the Company identified the cause of these quality issues and began testing certain remedial solutions to repair the affected SkyWatch Towers. Testing of the remedial solution for certain of the product variations affected was completed during the quarter ended June 30, 2017. During the quarter ended June 30, 2017, customers who purchased the product configurations for which a remedial solution has been identified and tested were notified of their options to request modifications to their fielded units. While there still remains uncertainty related to estimating the costs associated with a potential remedy and number of units which may require such remedy, the Company currently estimates the range of potential loss to be between $4.5 million and $15 million. As no single amount within the range is a better estimate than any other amount within the range, the Company has recorded a liability of $4.5 million as of June 30, 2017. Factors underlying this estimated range of loss may change from time to time, and actual results may vary significantly from this estimate.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 15.Contingencies - (Continued)

In March 2016, the Company learned of potential quality concerns with respect to as many as 310 Level III and Level IV SkyWatch Surveillance Towers sold by FLIR and companies acquired by FLIR from 2002 through 2014. The Company is currently investigating the cause of these quality issues and remedial steps which may be required to repair or replace affected SkyWatch Towers. The Company has notified customers who purchased the Towers of the potential concerns and, as a precautionary measure, has also temporarily suspended production of all Level III and Level IV SkyWatch Towers pending completion of its review and implementation of any necessary remedial measures. Due to the uncertainty of costs associated with a potential remedy and number of units which may require such remedy, the Company is currently unable to reasonably estimate the amount or range of potential loss or recovery that may result from this matter, however, such loss could be material to the financial condition and results of operations of the Company in the period in which such amount or range becomes estimable or known.

Other Matters
The Company is also subject to other legal and administrative proceedings, investigations, claims and litigation arising in the ordinary course of business not specifically identified above. In these identified matters and others not specifically identified, the Company makes a provision forrecords a liability with respect to a matter when management believes it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of loss can be reasonably estimated for such matter.the loss. The Company believes it has recorded adequate provisions for any probable and estimable losses for matters in existence on the date hereof. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. While the outcome of each of these matters is currently not determinable, the Company does not expect that the ultimate resolution of any such matter will individually have a material adverse effect on the Company’s financial position, results of operations or cash flows. The costs to resolve all such matters may in the aggregate have a material adverse effect on the Company’s financial position, results of operations or cash flows.



Note 16.Income Taxes
The provision for income taxes was as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Income tax provision$14,485
 $15,948
 $68,980
 $31,078
$12,127
 $14,485
 $25,120
 $68,980
Effective tax rate24% 24% 60% 24%19.1% 24.2% 21.1% 59.7%
The effective tax rate for the three and six months ended June 30, 20162017, is lower than the USUnited States Federal tax rate of 35 percent because ofmainly due to the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits, excess tax benefits from stock compensation, and other discrete adjustments. During the first quarter of 2016, the Company recorded discrete tax expenses of $40.0 million primarily related to the European Commission’s decision regarding certain tax legislation in Belgium impacting one of the Company’s international subsidiaries. The Belgian Government announced that they have appealed this decision and filed an action for annulment with the General Court of the European Union. Companies directly affected by the decision may also appeal. The outcome of an appeal, new information received from the Belgian Government, or other future events may cause the income tax provision associated with the decision to be entirely or partially reversed. We expect the annual effective tax rate for the full year of 2016 to be approximately 25 percent, excluding discrete items.
As of June 30, 2016,2017, the Company had approximately $52.9$58.5 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates an immaterial portionapproximately $43.4 million of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of the applicable statute of limitations.
The Company classifies interest and penalties related to uncertainunrecognized tax positions asbenefits in the income tax expense.provision. As of June 30, 2016,2017, the Company had approximately $2.0$2.8 million of net accrued interest and penalties related to uncertainunrecognized tax positions.benefits that are recorded as current and non-current accrued income taxes on the Consolidated Balance Sheet.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 16.Income Taxes - (Continued)
The Company currently has the following tax years open to examination by major taxing jurisdictions:
 Tax Years:
USUnited States Federal2012 – 20142013 - 2015
State of California2013 - 2015
State of Massachusetts2013 - 2015
State of Oregon2012 – 2014
State of Massachusetts2011 – 2014
State of California2012 – 20142013 - 2015
Sweden2011 – 20142012 - 2015
United Kingdom2011 – 20142012 - 2015
Belgium2011 - 20142015

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.Operating Segments and Related Information
Note 17.        Operating Segments and Related Information
Operating Segments
The Company has six reportable operating segments of the Company are as follows:
Surveillance
The Surveillance segment develops and manufactures enhanced imaging and recognition solutions for a wide variety of military, law enforcement, public safety, and other government customers around the world for the protection of borders, troops, and public welfare. Offerings include airborne, land, maritime, and man-portable multi-spectrum imaging systems, radars, lasers, imaging components, integrated multi-sensor system platforms, hand-held and weapon-mounted thermal and image intensified imaging systems for use by consumers and services related to these systems.
Instruments
The Instruments segment develops and manufactures devices that image, measure, and assess thermal energy, gases, and other environmental elements for industrial, commercial, and scientific applications. Products include thermal imaging cameras, gas detection cameras, firefighting cameras, process automation cameras, and environmental test and measurement devices.
Security
The Security segment develops and manufactures cameras, video recording systems, and video recordingmanagement systems for use in commercial, critical infrastructure, and home security applications. Products include thermal and visible-spectrum cameras, digital and networked video recorders, and related software and accessories that enable the efficient and effective safeguarding of assets at all hours of the day and through adverse weather conditions.
OEM & Emerging Markets
The OEM & Emerging Markets segment develops and manufactures thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic monitoring and signal control systems, imaging payloads for Unmanned Aerial Systems ("UAS"), and thermal imaging solutions for use by consumers in the smartphone and mobile devices market, and provides thermal cameras and cores for use or integration into unmanned aerial systems.markets.
Maritime
The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market. The segment provides a full suite of networked electronic systems including multi-function helm displays, navigational instruments, autopilots, radars, sonar systems, thermal and visible imaging systems, and communications equipment for boats of all sizes.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.        Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Detection
The Detection segment develops and manufactures sensor instruments and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives ("CBRNE") threats for military force protection, homeland security, and commercial applications.
The Company’s chief operating decision maker ("CODM"), its Chief Executive Officer, evaluates each of its segment’s performance and allocates resources based on revenue and segment operating income. Intersegment revenues are recorded at cost and are eliminated in consolidation. The Company and each of its segments employ consistent accounting policies.
The following tables present revenue, operating income, and assets for the six segments. Operating income as reviewed by the CODM is revenue less cost of goods sold and operating expense, excluding general corporate expenses, acquisition costs, amortization of purchased intangible assets, amortization of acquisition-related inventory step-up, costs associated with the SkyWatch product remediation, restructuring charges, and executive transition costs. Accounts receivable and inventories for operating segments are regularly reviewed by management and are reported below as segment assets. All remaining assets, liabilities, capital expenditures, and depreciation are managed on a Company-wide basis.

Operating segment information is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2016 2015 2016 2015
Revenue – External Customers:       
Surveillance$113,440
 $107,814
 $237,591
 $220,715
Instruments78,068
 90,260
 157,487
 174,080
Security63,380
 60,048
 110,441
 98,854
OEM & Emerging Markets56,980
 46,285
 104,825
 86,120
Maritime55,163
 52,030
 106,883
 103,002
Detection35,698
 36,538
 64,974
 54,721
 $402,729
 $392,975
 $782,201
 $737,492
Revenue – Intersegments:       
Surveillance$4,755
 $2,065
 $8,979
 $5,747
Instruments1,213
 1,068
 2,788
 1,910
Security3,836
 4,032
 6,308
 8,007
OEM & Emerging Markets8,833
 9,072
 17,010
 17,758
Maritime1,458
 925
 2,072
 1,582
Detection31
 —
 31
 —
Elimination(20,126) (17,162) (37,188) (35,004)
 $—
 $—
 $—
 $—
Earnings (loss) from operations:       
Surveillance$26,135
 $26,378
 $61,374
 $56,546
Instruments19,133
 28,341
 38,629
 56,404
Security3,214
 7,874
 (430) 11,689
OEM & Emerging Markets16,094
 10,495
 26,127
 19,274
Maritime6,721
 6,421
 11,719
 11,210
Detection9,963
 9,380
 17,843
 12,059
Other(16,048) (18,358) (32,673) (30,897)
 $65,212
 $70,531
 $122,589
 $136,285

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.        Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)

 June 30,
2016		 December 31,
2015
Segment assets (accounts receivable, net and inventories):   
Surveillance$255,484
 $285,602
Instruments105,306
 130,363
Security92,960
 105,737
OEM & Emerging Markets111,703
 93,925
Maritime73,414
 73,506
Detection27,849
 30,057
 $666,716
 $719,190

 June 30,
2016		 December 31,
2015
Segment goodwill:   
Surveillance$120,113
 $120,145
Instruments150,457
 149,582
Security102,004
 101,955
OEM & Emerging Markets70,332
 69,973
Maritime102,025
 106,549
Detection48,015
 48,112
 $592,946
 $596,316
Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer,Operating segment information is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2016 2015 2016 2015
United States224,305
 204,946
 418,589
 371,401
Canada/Latin America18,085
 19,972
 47,327
 36,399
Europe84,297
 95,869
 168,707
 189,124
Middle East/Africa28,629
 26,009
 56,341
 52,576
Asia47,413
 46,179
 91,237
 87,992
 $402,729
 $392,975
 $782,201
 $737,492
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
Revenue—External Customers:       
Surveillance$129,209
 $113,440
 $247,938
 $237,591
Instruments85,969
 78,068
 163,824
 157,487
Security49,709
 63,380
 94,786
 110,441
OEM & Emerging Markets87,447
 56,980
 172,212
 104,825
Maritime55,102
 55,163
 103,653
 106,883
Detection26,688 35,698 58,525 64,974
 $434,124
 $402,729
 $840,938
 $782,201
Revenue—Intersegments:       
Surveillance$3,331
 $4,755
 $8,087
 $8,979
Instruments7,325
 1,213
 13,114
 2,788
Security3,640
 3,836
 6,765
 6,308
OEM & Emerging Markets9,361
 8,833
 18,530
 17,010
Maritime621
 1,458
 1,298
 2,072
Detection1
 31
 1
 31
Eliminations(24,279) (20,126) (47,795) (37,188)
 $—
 $—
 $—
 $—
Segment operating income:       
Surveillance$33,007
 $26,595
 $59,372
 $62,460
Instruments23,627
 19,695
 44,773
 39,676
Security1,288
 4,410
 1,603
 2,241
OEM & Emerging Markets26,340
 16,757
 50,697
 27,443
Maritime9,390
 7,521
 14,594
 13,328
Detection7,024
 10,320
 15,761
 18,557
 $100,676
 $85,298
 $186,800
 $163,705

Long-lived assets by significant geographic locations areA reconciliation of the Company's consolidated segment operating income to consolidated earnings before income taxes is as follows (in thousands):
 June 30,
2016		 December 31,
2015
United States$693,580
 $666,759
Europe373,385
 383,501
Other international14,586
 13,197
 $1,081,551
 $1,063,457
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
Consolidated segment operating income$100,676
 $85,298
 $186,800
 $163,705
Unallocated corporate expenses(25,017) (16,049) (43,240) (32,674)
Amortization of purchased intangible assets(7,016) (3,927) (13,751) (8,134)
Amortization of acquisition-related inventory step-up—
 —
 (1,992) —
SkyWatch product quality accrual(2,000) —
 (2,000) —
Restructuring charges(13) (110) (101) (308)
Consolidated earnings from operations66,630
 65,212
 125,716
 122,589
Interest and non-operating expense, net(3,090) (5,359) (6,612) (7,116)
Consolidated earnings before income taxes$63,540
 $59,853
 $119,104
 $115,473
Unallocated corporate expenses include general corporate expenses, acquisition related costs and executive transition costs.

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.        Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
 June 30, December 31,
 2017 2016
Segment assets (accounts receivable, net and inventories):   
Surveillance$278,535
 $283,324
Instruments125,942
 114,681
Security83,493
 93,174
OEM & Emerging Markets141,568
 144,862
Maritime73,963
 61,494
Detection33,836
 25,856

$737,337
 $723,391
 June 30, December 31,
 2017 2016
Segment goodwill:   
Surveillance$258,480
 $152,383
Instruments151,799
 147,595
Security106,785
 102,983
OEM & Emerging Markets254,592
 252,647
Maritime100,724
 97,860
Detection47,984
 47,938
 $920,364
 $801,406
Revenue and Long-Lived Assets by Geographic Area
Information related to revenue by significant geographical location, determined by the end customer, is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
United States$224,025
 $224,305
 $445,856
 $418,589
Europe91,041
 84,297
 174,313
 168,707
Asia59,721
 47,413
 113,645
 91,237
Middle East/Africa35,248
 28,629
 60,390
 56,341
Canada/Latin America24,089
 18,085
 46,734
 47,327
 $434,124
 $402,729
 $840,938
 $782,201
Long-lived assets by significant geographic locations are as follows (in thousands):
   December 31, 2016
 
  June 30,
2017
  (as reclassified)
United States$689,044
 $676,007
Europe508,272
 490,089
Canada/Latin America225,100
 235,921
Other foreign8,164
 7,789
 $1,430,580
 $1,409,806

FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 17.        Operating Segments and Related Information - (Continued)
Operating Segments - (Continued)
Major Customers
Revenue derived from major customers is as follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2016 2015 2016 2015
US Government$100,106
 $76,125
 $185,742
 $129,445
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
United States government$111,824
 $100,106
 $228,059
 $185,742

Note 18.Business Acquisitions

Point Grey Research, Inc.
On November 30, 2015,4, 2016, the Company acquired 100%completed the acquisition of the outstanding stockassets of DVTELPoint Grey Research Inc. ("DVTEL"(“Point Grey”), a providerglobal leader in the development of softwareadvanced visible imaging cameras and hardware technologies forsolutions that are used in industrial automation systems, medical diagnostic equipment, people counting systems, intelligent traffic systems, military and defense products, and advanced video surveillance,mapping systems, for approximately $97.5$259.2 million in cash, subject to customary post-closing adjustments. The excess of theCompany has performed a preliminary purchase price over the preliminary net tangible andallocation which resulted in an allocation of $39.8 million to identifiable intangible assets and $183.7 million to goodwill which has been recorded as goodwill withinin the Company's Security segment and is subject to the final determination on the valuation of assets acquired and liabilities assumed.Company’s OEM & Emerging Markets segment.
The preliminary allocation of the purchase price for DVTELPoint Grey is as follows (in thousands):
Cash acquired$5,232
$2,994
Other tangible assets and liabilities, net5,160
35,064
Net deferred taxes1,727
(2,438)
Identifiable intangible assets27,380
39,800
Goodwill57,993
183,741
Total purchase price$97,492
$259,161
The allocation of the purchase price related to this acquisition is preliminary and is based on management’s judgments after evaluating several factors, including preliminary valuation assessments of tangible and intangible assets, and preliminary estimates of the fair value of liabilities assumed. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of the identifiable intangible assets, property and equipment, income taxes (including uncertain tax positions) and certain other tangible assets and liabilities. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized during the year ended December 31, 2016. The preliminary goodwill of $58.0$183.7 million represents future economic benefits expected to arise from synergies from combining operations and the ability of DVTELPoint Grey to provide the Company domain knowledge and distribution channels in adjacent security markets.
On June 28, 2016, the Company acquired 100% of the outstanding stock of Armasight, Inc. ("Armasight"), a developer of sporting and military optics products, for approximately $43.5 million in cash, subject to customary post-closing adjustments. As of June 30, 2016, the Company has not yet assessed a valuation on identifiable intangible net assets and the $36.0 million excess of the purchase price overIn connection with the preliminary net tangible assets acquired has been recorded in Other assets. The final allocation of the purchase price to the assets acquired and liabilities assumed, will be completed when the final valuation assessments of tangible andCompany identified certain intangible assets. The following table presents the acquired intangible assets, are completedtheir preliminary estimated fair values, and estimates of the fair value of liabilities assumed are finalized during the year ended December 31, 2016.preliminary estimated useful lives (in thousands, except years):
In addition, on June 6, 2016, the Company acquired the assets of Innovative Security Designs, LLC ("ISD"), a developer of embedded firmware and advanced camera surveillance platforms, for approximately $1.8 million in cash. As of June 30, 2016, the Company has not yet assessed a valuation on identifiable intangible net assets and the $1.6 million excess of the purchase price over the preliminary net tangible assets acquired has been recorded in Other assets. The final allocation of the purchase price to the assets acquired and liabilities assumed will be completed when the final valuation assessments of tangible and intangible assets are completed and estimates of the fair value of liabilities assumed are finalized during the year ended December 31, 2016.

 Estimated
Useful Life		 Amount
Developed technology10 years $23,100
Customer relationships7 years 13,200
Backlog1 year 2,300
Non-Competition Agreements5 years 1,000
Othern/a 200
   $39,800



FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 18.        Business Acquisitions - (Continued)
Acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology, customer relationships, backlog, and non-competition agreements. Developed technology represents the economic advantage of having certain technologies in place that lower manufacturing and operating costs and drive higher margins. Customer relationships represents the relationships Point Grey has established in the OEM and people counting markets as of the date of the acquisition. Backlog represents “pre-sold” business at the date of acquisition, which provides positive earning streams post acquisition that exceed what is required to provide a return on the other assets employed. Non-competition agreements represent the economic benefit of having agreements with certain current and former employees and shareholders of Point Grey that restrict their ability to compete directly with the Company.
The developed technology was valued using the income approach and relief from royalty method. Customer relationships and backlog were valued using the income approach and multi-period excess earnings method. Non-competition agreements were valued using the income approach and the with-and-without method.

Prox Dynamics, AS
On November 30, 2016, the Company acquired 100% of the outstanding stock of Prox Dynamics AS (“Prox Dynamics”), a leading developer and manufacturer of nano-class UASs for military and para-military intelligence, surveillance, and reconnaissance applications, for approximately $134.1 million in cash, subject to customary post-close adjustments. At December 31, 2016, the Company reported the net tangible assets of $11.3 million in the respective balance sheet accounts and the excess purchase price of $122.8 million in other long-term assets.
During the three months ended March 31, 2017, the Company performed a preliminary purchase price allocation which resulted in an allocation of $31.4 million of identifiable intangible assets and $91.9 million of goodwill in conjunction with the Prox Dynamics acquisition, which has been recorded in the Company’s Surveillance business segment.
During the three months ended June 30, 2017, the Company finalized the purchase price allocation, resulting in a $7.4 million decrease to net deferred taxes, and a corresponding $7.4 million increase in goodwill. The goodwill of $99.3 million represents future economic benefits expected to arise from synergies from combining operations the ability of Prox Dynamics to provide the Company domain knowledge and distribution channels in adjacent markets.
The allocation of the purchase price for Prox Dynamics is as follows (in thousands):
Cash acquired$11,706
Other tangible assets and liabilities, net(900)
Net deferred taxes(7,387)
Identifiable intangible assets31,400
Goodwill99,269
Total purchase price$134,088
In connection with the allocation of purchase price to the assets acquired and liabilities assumed, the Company identified certain intangible assets. The following table presents the acquired intangible assets, their estimated fair values, and estimated useful lives (in thousands, except years):
 Estimated
Useful Life		 Amount
Developed technology8 years $23,400
Customer relationships7 years 3,500
Patents8 years 3,100
Trade name8 years 1,400
   $31,400
Acquisition-date identifiable intangible assets primarily consist of intangibles derived from developed technology, customer relationships, patents, and trade name. Developed technology and patents represent the economic advantage of having certain technologies in place that lower manufacturing and operating costs and drive higher margins. Customer relationships represents the relationships Prox Dynamics has established in the military and defense ministries of countries throughout the world. Trade name represents the "Black Hornet" name, which is well recognized within the industry and is known as a leading product within the nano-class UAS segment.
FLIR SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 18.        Business Acquisitions - (Continued)
The developed technology and customer relationships were valued using the income approach and multi-period excess earnings method. Patents and trade name were valued using the income approach and relief from royalty method.
The acquisitions of Point Grey and Prox Dynamics are not significant as defined in Regulation S-X under the Securities Exchange Act of 1934, nor are they significant compared to the Company's overall results of operations. Consequently, no pro forma financial information is provided.

Note 19.Subsequent Events
On July 5, 2016, the Company paid the outstanding $250 million aggregate principal amount of its 3.75 percent senior unsecured notes that were due September 1, 2016. The Company will record a loss on extinguishment of the debt of approximately $1.3 million in the third quarter of 2016.
On July 21, 2016,20, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.12$0.15 per share on its common stock, payable on September 2, 2016,8, 2017, to shareholders of record as of the close of business on August 19, 2016.25, 2017. The total cash payment of this dividend will be approximately $16.5 million.$20.6 million.



ItemITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 of FLIR Systems, Inc. and its consolidated subsidiaries (“FLIR” or the “Company”) 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. 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 the “Risk Factors” section in Part II, Item 1A of the Company’s Annualthis Report, on Form 10-K filed for the fiscal year ended December 31, 2015, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry, economic, and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we dothe Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we updatethe Company updates or correctcorrects one or more forward-looking statements, investors and others should not conclude that wethe Company will make additional updates or corrections with respect to other forward-looking statements.

Consolidated Operating Results of Operations
The following discussion of operating results provides an overview of our operations 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. Our six operating segments are: Surveillance, Instruments, Security, OEM & Emerging Markets, Maritime, and Detection. Given the nature of our business, we believe revenue and earnings from operations (including operating margin percentage) are most relevant to an understanding of our performance at a segment level as revenue levels are the most significant indicators of business conditions for each of the respective segments and earnings from operations reflect our ability to manage each of our segments as revenue levels change.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 delivery is expected within twelve months. See Note 17, "Operating Segments and Related Information," of the Notes to the Consolidated Financial Statements for additional information on the six operating segments.
Revenue. Consolidated revenue for the three months ended June 30, 20162017, increased by 2.57.8 percent year over year, from $393.0$402.7 million in the second quarter of 20152016 to $402.7$434.1 million in the second quarter of 2016.2017. Consolidated revenue for the six months ended June 30, 20162017, increased by 6.17.5 percent year over year, from $737.5 million in the first six months of 2015 to $782.2 million in the first six months of 2016. to $840.9 million in the first six months of 2017. Increases in revenues for the three month period in our Surveillance, Security, OEM & Emerging Markets, Surveillance, and MaritimeInstruments segments were partially offset by declines in revenues in our InstrumentsSecurity and Detection segments. Increases in revenues for the six month period in our Surveillance, Security,Instruments, and OEM & Emerging Markets Maritime and Detection segments were partially offset by declines in revenues in our Instruments segment.Security, Maritime, and Detection segments. The acquisitions of Armasight, Prox Dynamics, and Point Grey were the primary drivers in revenue growth for the three and six month periods ended June 30, 2017, compared to the same periods ended June 30, 2016.
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. While we currently expect total annual revenue for 20162017 to be higher than 20152016 revenue, 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 44.348.4 percent and 47.844.3 percent of total revenue for the three month periodsquarters ended June 30, 20162017 and 2015,2016, 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. Cost of goods sold for the three and six months periods ended June 30, 2016 was $219.42017 were $227.4 million and $421.2$442.9 million, respectively compared to cost of goods sold for the three and six months ended June 30, 20152016 of $203.4$219.4 million and $372.0$421.2 million, respectively. The year over year increase in cost of goods sold is primarily related to higher revenues changes in segment and product mix, and lower manufacturing cost absorption in 2016.2017.


Gross profit. Gross profit for the quarter ended June 30, 20162017, was $183.3$206.7 million compared to $189.6$183.3 million for the same quarter last year. Gross profit for the six months ended June 30, 20162017 was $361.0$398.1 million compared to $365.5$361.0 million for the samesix month period last year.ended June 30, 2016. Gross margin, defined as gross profit divided by revenue, decreasedincreased from 48.3 percent in the second quarter of 2015 to 45.5 percent in the second quarter of 2016 and decreased from 49.6 percent in the first six monthssecond quarter of 20152016 to 46.247.6 percent in the firstsecond quarter of 2017 and increased from 46.2 percent for the six months of 2016.ended June 30, 2016, to 47.3 percent during the six months ended June 30, 2017. The decreaseincrease in gross margin for the three and six month periods werewas primarily due to the acquisitions and favorable product mix, partially offset by changes in segment and product mix, lower manufacturing cost absorption, inventory adjustments and increased promotional sales activitycurrency exchange rates, particularly in our Security segment.Instruments and Maritime segments, which are more heavily exposed to foreign currency fluctuations than our other segments.
Research and development expenses. Research and development expenses for the second quarter of 20162017 totaled $36.9$43.0 million,, compared to $35.1$38.2 million in the second quarter of 2015.2016. Research and development expenses in the first six months of 2017 were $85.0 million compared to $75.5 million for the first six months of 2016 totaled $73.4 million, compared2016. The increase in research and development expenses year over year for the three and six month periods was primarily related to $69.9 millionthe inclusion of companies acquired in the first six months of 2015.last 12 months. Research and development expenses as a percentage of revenue were 9.2 percent and 9.49.9 percent for the three and six months ended June 30, 2016, respectively.2017 and 9.5 percent for the three months ended June 30, 2016. Research and development expenses as a percentage of revenue were 8.9 percent and 9.5 percent for the three andfirst six months ended June 30, 2015, respectively.of 2017 were 10.1 percent compared to 9.7 percent during the first six months of 2016. 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 moremost indicative of our commitment to research and development. Over the past five annual periods through December 31, 2015,2016, our annual research and development expenses have varied between 8.5 percent and 9.9 percent of revenue, and we currently expect these expenses to remain within that range, on an annual basis, for the foreseeable future.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $81.2$97.1 million and $84.0$79.9 million for the quarters ended June 30, 20162017 and 2015,2016, respectively. Selling, general and administrative expenses were $165.1$187.3 million and $159.3$162.9 million for the six months ended June 30, 2017 and 2016, and 2015, respectively. The decrease in selling, general and administrative expenses year over year for the three month period was primarily related to cost control measures and partially offset by incremental expenses associated with DVTEL, acquired in November 2015. The increase in selling, general, and administrative expenses year over year for the three and six month periodperiods was primarily related to the inclusion of selling, general, and administrative expenses of DVTEL and higher corporate legal expenses, partially offset by lower corporate administration expenses and other cost control efforts realizedcompanies acquired in the second quarter of 2016.last 12 months. Selling, general, and administrative expenses as a percentage of revenue were 20.122.4 percent and 21.419.8 percent for the quarters ended June 30, 2017 and 2016, respectively. Selling, general and 2015, respectively, and 21.1administrative expenses as a percentage of revenue were 22.3 percent and 21.620.8 percent for the six month periods ended June 30, 20162017 and 2015,2016, respectively. Over the past five annual periods through December 31, 2015,2016, our annual selling, general and administrative expenses have varied between 20.119.4 percent and 23.621.7 percent of revenue, and we currently expect these expenses to remain within that range, on an annual basis, for the foreseeable future.
Interest expense.Interest expense for the first sixthree months of 2016ended June 30, 2017, was $7.8$4.5 million, compared to $7.0$4.4 million for the same period of 2015.2016. Interest expense for the six months ended June 30, 2017, was $8.9 million, compared to $7.8 million for the six months ended June 30, 2016. Interest expense in 2017 was primarily associated with the $425 million aggregate principal amount of our 3.125 percent senior unsecured notes and amounts drawn under our credit facility. Interest expense in 2016 was primarily associated with the $250 million aggregate principal amount of our 3.75 percent senior unsecured notes and our term loan that was drawn upon under our credit agreement.
Income taxes. TheOur income tax provision of $14.5$12.1 million and $25.1 million for the three and six month periods ended June 30, 2017, represents an effective tax rate of 19.1 percent and 21.1 percent, respectively. This compares favorably to our income tax provision of $14.5 million and $69.0 million for the three and six monthsmonth periods ended June 30, 2016,, respectively, represents which represented an effective tax rate of 25 percent.24.2 percent and 59.7 percent, respectively. The effective tax rate for the three and six months ended June 30, 2017 is lower than the United States Federal tax rate of 35 percent mainly due to the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits, excess tax benefits for stock compensation, and other discrete adjustments. The first quarter of 2016 included discrete tax charges totaling $40.0$39.6 million primarily related to the January 11, 2016, announcement from the European Commission'sCommission of a decision regardingconcluding that certain rules under Belgian tax legislation in Belgium impactingare deemed to be incompatible

with European Union regulations on state aid. As a result of this decision, the European Commission has directed the Belgian Government to recover past taxes from certain entities, reflective of disallowed state aid, which impacts one of ourthe Company’s international subsidiaries. The Belgian Government announced that they have appealed this decision and filed an action for an annulment in the General Court of the European Union, and in July 2016 the Company filed a separate appeal with the General Court of the European Union. Companies directly affected byIn accordance with FASB ASC Topic 740, “Income Taxes,” the decision may also appeal.Company recorded discrete tax expense of $39.6 million during 2016, related to this matter and on January 10, 2017, received tax assessments from the Belgium government for a similar amount, which the Company has classified as current taxes payable on the Consolidated Balance Sheet as of June 30, 2017. The outcomeCompany has filed a complaint against the Belgian tax assessments, and the result of anthis complaint, the appeal with the General Court of the European Union, new information received from the Belgian Government, or other future events may cause the income tax provision associated with the decision to be entirely or partially reversed. Excluding discrete items, we expect the annual effective tax rate for the full year of 2016 to be approximately 25 percent. The expected effective tax rate is lower than the US Federal tax rate of 35 percent because of the mix of lower foreign jurisdiction tax rates, and the effect of federal, foreign and state tax credits.



Segment Operating Results
Surveillance
Surveillance operating results are as follows (in millions, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Revenue$113.4
 $107.8
 $237.6
 $220.7
$129.2
 $113.4
 $247.9
 $237.6
Earnings from operations26.1
 26.4
 61.4
 56.5
33.0
 26.6
 59.4
 62.5
Operating margin23.0% 24.5% 25.8% 25.6%25.5% 23.4% 23.9% 26.3%
Backlog, end of period    341
 286
Backlog

 

 327
 341
RevenueSurveillance revenue for the three and six monthsquarter ended June 30, 20162017, increased by 5.213.9 percent and 7.6 percent, respectively, compared to the same periodsperiod of 20152016. Surveillance revenue for the six months ended June 30, 2017, increased by 4.4 percent compared to the same period of 2016. The increase in revenue for the quarter ended June 30, 2017, compared to the same period of 2016 was driven by increase in sales in Airborne and Weapon Sights markets and the addition of the Armasight business, which was acquired in June 2016, partially offset by lower Integrated Systems sales. The increase in revenue for the six months ended June 30, 2017, compared to the same period of 2016 was predominately due to the addition of Armasight as well as the Prox Dynamics business, which was acquired in November 2016. The increase in earnings from operations for the three and six month periodsperiod ended June 30, 2017, compared to the same period in 2016 was primarily due to increaseshigher revenues and favorable product mix. The decrease in our weapon sights and other portable/hand-held product lines and service, partially offset by a decline in revenue in our airborne product line. Revenuesearnings from US government customers inoperations for the three and six month periods increased by approximately 55 percentperiod ended June 30, 2017, compared to the same period of 2016, was due to the inclusion of Armasight and 37 percent, respectively, over the prior year.Prox Dynamics, as well as higher operating expenses.
Instruments
Instruments operating results are as follows (in millions, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Revenue$78.1
 $90.3
 $157.5
 $174.1
$86.0
 $78.1
 $163.8
 $157.5
Earnings from operations19.1
 28.3
 38.6
 56.4
23.6
 19.7
 44.8
 39.7
Operating margin24.5% 31.4% 24.5% 32.4%27.5% 25.2% 27.3% 25.2%
Backlog, end of period    30
 25
Backlog

 

 35
 30
RevenueInstruments segment revenue for the three and six monthsquarter ended June 30, 2016 decreased2017, increased by 13.510.1 percent and 9.5 percent, respectively, compared to the same periodsperiod of 2015.2016. Instruments revenue for the six months ended June 30, 2017, increased by 4.0 percent compared to the same period of 2016. The year over year decreaseincrease in revenue for the three and six month periods werewas predominately attributable strength in the Premium and Volume

Handheld product lines driven by product refreshes, supplemented by growth in Optical Gas products. The increase in earnings from operations for the three and six months ended June 30, 2017, compared to the same periods of 2016, was primarily due to the higher revenue base while operating expenses remained consistent.
Security
Security operating results are as follows (in millions, except percentages):
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
Revenue$49.7
 $63.4
 $94.8
 $110.4
Earnings from operations1.3
 4.4
 1.6
 2.2
Operating margin2.6% 7.0% 1.7% 2.0%
Backlog

 

 23
 21
Security segment revenue for the quarter ended June 30, 2017, decreased by 21.6 percent compared to the same period of 2016. Security revenue for the six months ended June 30, 2017, decreased by 14.2 percent compared to the same period of 2016. The decrease in revenue was primarily due to a declinereduction in sales for consumer-grade security products in Europe; on a product line basis, the segment revenue decline was primarily inretail channels partially offset by increased consumer-grade sales through our building and predictive maintenance product line.e-commerce channel. The decrease in earnings from operations for the three and six months ended June 30, 2016,2017, compared to the same periods of 2015,2016, was primarily due to decreased revenues as well as increased operating expense and higher production costs.
Security
Security operating results are as follows (in millions, except percentages):
 Three Months Ended June 30, Six Months Ended June 30,
 2016 2015 2016 2015
        
Revenue$63.4
 $60.0
 $110.4
 $98.9
Earnings (loss) from operations3.2
 7.9
 (0.4) 11.7
Operating margin5.1% 13.1% (0.4)% 11.8%
Backlog, end of period    21
 13
Revenue for the three and six months ended June 30, 2016 increased by 5.5 percent and 11.7 percent, respectively, compared to the same periods of the prior year. The increase in revenue for the three and six month periods was primarily due to the inclusion of revenue from DVTEL products. DVTEL was acquired in November 2015. The decrease in earnings from operations year over year for the three and six month periods was primarily due to gross margin declines associated with sales incentives and promotional activity, a product mix shift to lower margin consumer products and higher operating expenses, primarily from DVTEL.


revenues.
OEM & Emerging Markets
OEM & Emerging Markets operating results are as follows (in millions, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Revenue$57.0
 $46.3
 $104.8
 $86.1
$87.4
 $57.0
 $172.2
 $104.8
Earnings from operations16.1
 10.5
 26.1
 19.3
26.3
 16.8
 50.7
 27.4
Operating margin28.2% 22.7% 24.9% 22.4%30.1% 29.4% 29.4% 26.2%
Backlog, end of period    139
 109
Backlog

 

 159
 139
RevenueOEM & Emerging Markets segment revenue for the quarter ended June 30, 2017, increased by 23.153.5 percent compared to the same period of 2016. OEM & Emerging Markets revenue for the six months ended June 30, 2017, increased by 64.3 percent compared to the same period of 2016. The increase in revenue was primarily due to the acquisition of Point Grey in November 2016, as well as higher deliveries of cores and 21.7 percentcomponents and intelligent traffic system products. The increase in earnings from operations for the three and six months ended June 30, 2016, respectively,2017, compared to the same periods of the prior year. The increase in revenue year over year for the three and six month periods2016, was primarily due to higher deliveries in most of our segment product lines, particularly in our cores and components and mobile accessories product lines. Geographically, all regions reported year over year increases. Segment earnings from operations increased for the three and six month periods primarily due to higher revenue, partially offset by lower gross margins.revenues.
Maritime
Maritime operating results are as follows (in millions, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Revenue$55.2
 $52.0
 $106.9
 $103.0
$55.1
 $55.2
 $103.7
 $106.9
Earnings from operations6.7
 6.4
 11.7
 11.2
9.4
 7.5
 14.6
 13.3
Operating margin12.2% 12.3% 11.0% 10.9%17.0% 13.6% 14.1% 12.5%
Backlog, end of period    24
 21
Backlog

 

 15
 24


RevenueMaritime segment revenue for the three and six monthsquarter ended June 30, 2016 increased2017, decreased by 6.00.1 percent and 3.8 percent, respectively, compared to the same periodsperiod of 20152016. Maritime revenue for the six months ended June 30, 2017, decreased by 3.0 percent. The increasedecrease in revenue year over year for the three and six month periods of 2017 compared to the same period of the prior year was primarily duedriven by a decline in Thermal camera sales, partially offset by increased Raymarine sales driven by the new Axiom line of multi-function displays which began shipping during the second quarter of 2017. Foreign currency headwinds compared to anthe same periods in the prior year partially offset the increase in Raymarine sales. The increase in operating income for the Americas region. On a product basis, increasedthree and six month periods ended June 30, 2017 compared to the same periods of 2016 was driven by stronger margins on shipments of multifunction displays and infrared displays more than offset declinesnew products introduced in autopilot and instrument shipments.2017.

Detection
Detection operating results are as follows (in millions, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Revenue$35.7
 $36.5
 $65.0
 $54.7
$26.7
 $35.7
 $58.5
 $65.0
Earnings from operations10.0
 9.4
 17.8
 12.1
7.0
 10.3
 15.8
 18.6
Operating margin27.9% 25.7% 27.5% 22.0%26.3% 28.9% 26.9% 28.6%
Backlog, end of period

 

 74
 83
Backlog

 

 86
 74
RevenueDetection segment revenue for the quarter ended June 30, 2017, decreased by 25.2 percent compared to same period of 2016. Detection revenue for the six months ended June 30, 2017, decreased by 9.9 percent. The decrease in revenue for the three and six months ended month periods ending June 30, 2016 decreased by 2.3 percent and increased by 18.7 percent, respectively,2017, compared to the same periods of 2015. The increase in revenue for the six month period was2016 were primarily relateddue to increasedlower shipments fromof our CBRNE threat response systems to United States government customers. These shipments account for a significant portion of Detection revenues, and timing of delivery schedules impacts periodic results. The increasedecrease in earnings from operations and operating margins for the three and six month periodperiods ended June 30, 20162017, compared to the same periods during the prior year were primarilyperiod of 2016 was due to the increases in revenue and reduced intangible asset amortization expense.lower revenues on the CBRNE threat response systems.


Liquidity and Capital Resources
At June 30, 2016,2017, we had a total of $903.2403.6 million in cash and cash equivalents, $111.4 millionof which $457.1 million wasresided in the United States and $446.1292.2 million was at our foreign subsidiaries, compared to cash and cash equivalents at December 31, 20152016, of $472.8361.3 million, of which $129.698.3 million wasresided in the United States and $343.2263.0 million was at our foreign subsidiaries. The increase in cash and cash equivalents during the six months ended June 30, 20162017, was primarily due to the proceedscash provided from long-term debt and cash from operating activities,operations of $105.3 million, partially offset by $42.4 million spent on the acquisitions of Armasight and ISD, payments on our term loan under the credit agreement, capital expenditures of $20.9 million, repurchase of common stock of $29.7$23.7 million and dividend payments of $33.1$41.0 million.
Cash provided by operating activities during the six months ended June 30, 2017, totaled $126.6105.3 million for the six months ended June 30, 2016, which primarily consisted of net earnings, adjusted for non-cash charges for depreciation and amortization, stock-based compensation, and other non-cash items.items and changes in working capital.
Cash used byfor investing activities totaled $58.4 million for the sixthree months ended June 30, 2016, consisting2017, totaled $20.8 million, which primarily consisted of $42.4 million, net of cash acquired, for the acquisitions of Armasight and ISD and capital expenditures in the ordinary course of business.
Cash providedused by financing activities totaled $358.6 millionfor the sixthree months ended June 30, 20162017, totaled $54.3 million, which primarily consisted of the net proceeds from long-term debt and the new credit agreement, partially offset by repurchases of common stock, payment of dividends and the term loan principal payments.repayment of borrowings under our revolving credit facility.
On February 8, 2011, we signedentered into a Credit Agreement (“Credit Agreement”) with Bank of America, N.A., U.S. Bank National Association, JPMorgan Chase Bank N.A. and other lenders.Lenders. The Credit Agreement provides for a $200 million, five-year revolving line of credit. On April 5, 2013, the Credit Agreement was amended to extend the maturity of the revolving credit facility from FebruaryApril 8, 2016 to April 5, 2018, in addition to incorporating a $150 million term loan facility maturing April 5, 2019. On May 31, 2016, the Credit Agreement was further amended to increase the borrowing capacity to $500 million and to extend the maturity of the revolving credit facility from April 5, 2018 to May 31, 2021. The amendment also incorporated a revised schedule of fees and interest rate spreads. We have the right, subject to certain conditions, including approval of additional commitments by qualified lenders, to increase the revolving line of credit under the Credit Agreement by an additional $200 million until May 31, 2021. The Credit Agreement allows us and certain designated subsidiaries to borrow in USUnited States dollars, European euros, Swedish kronor, British pound sterling, Japanese yen, Canadian dollars, Australian dollars, and other agreed upon currencies. Interest rates under the Credit Agreement are determined based on the type of borrowing. Interest associated with borrowings can be based on either the prime lending rate of Bank of America, N.A. or the published Eurocurrency rate (i.e. LIBOR). The borrowings have an applicable margin that ranges from 0.125 percent to 2.125 percent depending on the applicable base rate and our consolidated total leverage ratio. Including the respective spreads and ignoring the effects of hedging, the one-month Eurocurrency-based borrowing rate was 2.601 percent per annum and the prime lending-based borrowing rate was 4.625 percent per annum at June 30, 2017. The Credit Agreement requires us to pay a commitment fee on the amount of unused creditrevolving commitments at a rate, based on the Company’sour total leverage ratio, which ranges from 0.250.150 percent to 0.40 percent.0.300 percent of unused revolving commitments. The Credit Agreement contains two financial covenants that require the maintenance of certaina total leverage ratiosratio and an interest coverage ratio, with which we werethe Company was in compliance at June 30, 2016.2017. The five-year revolving line of credit facilities available under the Credit Agreement and the term loan facility are not secured by any of our assets.unsecured.
As noted above, the Credit Agreement amendment of April 5, 2013 incorporated a $150 million term loan facility that was scheduled to mature on April 5, 2019. On May 31, 2016, we drew down $105 million under the revolving credit facility and repaid the term loan facility in full. Interest is accrued at the one-month LIBOR rate plus the scheduled spread and paid monthly. By entering into interest rate swap agreements, we have effectively fixed the basis for calculating the interest rate on the term loan.revolving credit facility. The effective interest rate paid for the revolving credit facility is equal to the median fixed rate in the swap agreements plus the credit spread then in effect. At June 30, 2016,2017, the effective interest rate on the term loanrevolving credit facility was 2.37 percent. Principal payments of $3.75 million, at our option, will continue to be made in quarterly installments through December 31, 2018, with the final maturity payment including any accrued interest due on April 5, 2019.
At June 30, 2016, we had $101.3 million outstanding under our revolving credit facility pursuant to the Credit Agreement and the commitment fee on the amount of unused credit was 0.175 percent. We had $20.7 million of letters of credit outstanding at June 30, 2016, which reduced the total available credit under the revolving credit facility.
On August 19, 2011, we issued $250 million aggregate principal amount of our 3.75 percent senior unsecured notes due September 1, 2016 (the "2011 Notes"). The interest on the Notes is payable semiannually in arrears on March 1 and September 1. The proceeds from the Notes were used for general corporate purposes, which include working capital and capital expenditure needs, business acquisitions and repurchases of our common stock. The 2011 Notes were repaid on July 5, 2016.
In June 2016, we issued $425 million aggregate principal amount of our 3.125 percent senior unsecured notes due June 15, 20122021 (the “2016 Notes”“Notes”). The net proceeds from the issuance of the 2016 Notes were approximately $421.0 million, after deducting underwriting discounts and offering expenses, which are being amortized over a period of five years. Interest on the 2016 Notes is payable semiannually in arrears on December 15 and June 15. The proceeds from the 2016 Notes were used to repay the 2011 Notes in Julyour 3.75 percent senior unsecured notes that were due September 1, 2016, and are being used for general corporate purposes, which include working capital and capital expenditure needs, business acquisitions, and repurchases of the our common stock.
At June 30, 2017, we had $86.3 million outstanding under the Credit Agreement and the commitment fee on the amount of unused revolving credit was 0.175 percent per annum. We had $18.2 million of letters of credit outstanding under the Credit Agreement at June 30, 2017, which reduced the total available revolving credit under the Credit Agreement.

On February 5, 2015,, our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. AsAn aggregate of June 30, 2016, 1.06.3 million shares had been repurchased under this authorization, which expiresexpired on February 5, 2017. On February 8, 2017,.


our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. This authorization will expire on February 8, 2019. As of June 30, 2017, no shares have been repurchased under the February 8, 2017 authorization.
United States income taxes have not been provided for on accumulated earnings of certain subsidiaries outside of the United States as we currently intend to reinvest the earnings in operations and other activities outside the United States indefinitely. Should we subsequently elect to repatriate such foreign earnings, we would need to accrue and pay United States income taxes, thereby reducing the amount of our cash.
We believe that our existing cash combined with the cash we expect to generateanticipate generating from operating activities, and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future.next twelve months. We do not have any significant capital commitments for the next twelve months nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.liquidity or capital resources.


Off-Balance Sheet Arrangements

Through As of June 30, 2016,2017, we leased our non-owned facilities under operating lease agreements. We also leased certain operating machinery and equipment and office equipment under operating lease agreements. Except for these operating lease agreements, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.


Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which establishes new guidance under which companies will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides for additional disclosure requirements. The FASB has recently issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The amendments include ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations, which was issued in March 2016, and clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09, and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing, which was issued in April 2016, and amends the guidance in ASU No. 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property.
The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. While ASU 2014-09 was to be effective for annual periods and interim periods beginning after December 15, 2016, on July 9, 2015, the FASB approved the deferral of the effective date to periods beginning on or after December 15, 2017. Accordingly, the Company currently intends to adopt ASU 2014-09 on January 1, 2018, and is2018. The Company currently evaluatingplans to adopt using the modified retrospective approach. However, a final decision regarding the adoption method has not been finalized at this time. The final determination will depend on a number of factors, such as the significance of the impact thatof the new standard on its financial results, system readiness, and the ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.
The Company has made progress toward completing the evaluation of the potential changes from adopting the new standard on its financial reporting and disclosures. The Company has evaluated the impact of the standard on all of its revenue streams and most of its significant contracts. The Company has completed the assessment of the impact on its business processes, controls and systems. The Company expects to complete the design of any changes to our business processes, controls and systems in the third quarter of 2017 and implement the changes in the fourth quarter of 2017. The Company has also began quantifying the impact of the adoption of ASU 2014-09 will havethe standard on its consolidated financial statements.
In August 2014,retained earnings as of January 1, 2017. However, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Abilityimpact to Continueretained earnings is not known at this time, as a Going Concern" ("ASU 2014-15"). Under the new guidance, managementit will be required to assess an entity’s ability to continuedependent on the number, size, and complexity of contracts that have not been substantially completed as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning afterof December 15, 2016. Accordingly, the Company currently intends to adopt ASU 2014-15 on January 1, 2017, and does not expect the adoption of ASU 2014-15 to have any impact on its consolidated financial statements.
In July 2015, the FASB issued FASB Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" ("ASU 2015-11"). The amendments in this update require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted. The Company currently intends to adopt ASU 2015-11 on January 1, 2017, and does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The pronouncement revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU 2016-01 requires the change in fair value of many equity investments to be recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company currently intends to adopt ASU 2016-01 on January 1, 2018, and does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.31, 2017.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendment requiresamendments in this update require the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve monthtwelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. ASU 2016-092016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Thepermitted, and the Company currently intends to adopt ASU 2016-02 on January 1, 2019,2019. The Company is assessing the impact ASU 2016-02 will have on its consolidated financial statements and is currently evaluatingexpects that the potential effectsprimary impact upon adoption will be the recognition, on a discounted basis, of adoptingits minimum commitments under noncancelable operating leases on its consolidated balance sheets resulting in the provisionsrecording of ASU 2016-02.right of use assets and lease obligations.
In MarchOctober 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation - Stock Compensation (Topic 718)” (“2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-09”2016-16"). The amendment identifies areasamendments in this update eliminate the exception of recognizing, at the time of transfer, current and deferred income taxes for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an


option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.intra-entity asset transfers other than inventory. ASU 2016-092016-16 is effective for interim and annual reporting periods beginning after December 15, 2016,2017, and should be applied on a modified retrospective transition basis. The Company is currently planning to adopt ASU 2016-16 on January 1, 2018. The Company has estimated that there will be a remaining deferred tax benefit of $6.5 million recorded in prepaid expenses and other current assets and other assets as of December 31, 2017, which represents the tax benefit that was deferred in accordance with earlycurrent GAAP. At adoption, permitted.the Company will recognize this amount through a cumulative-effect adjustment to retained earnings.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or

disposals) of assets or businesses. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company currently intends to adopt ASU 2016-092017-01 on January 1, 2017,2018, and is currently evaluatingdoes not expect the potential effects of adopting the provisionsadoption of ASU 2016-09.2017-01 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Updated No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this update simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in ASU 2017-04 are to be applied on a prospective basis and are not expected to have a material impact on the Company’s consolidated financial statements.


Critical Accounting Policies and Estimates
The Company reaffirms the critical accounting policies and its use of estimates as reported in its Form 10-K for the fiscal year ended December 31, 2015,2016, as described in Note 1, "Nature of Business and Significant Accounting Policies," of the Notes to the Consolidated Financial Statements included in the Form 10-K for the fiscal year ended December 31, 2015.2016.


Contractual Obligations
There were no material changes to the Company's contractual obligations outside the ordinary course of its business during the quarter ended June 30, 2016 other than the issuance of $425 million aggregate principal amount of its 3.125 percent senior unsecured notes due June 15, 2012 and the related interest, as discussed above.2017.


Contingencies
See Note 15, "Contingencies," of the Notes to the Consolidated Financial Statements for a description of an ongoing lawsuit filed by Raytheon Company against FLIR Systems, Inc. and its subsidiary, FLIR Commercial Systems, Inc., the disclosure of certain matters by the Company to the United States Department of State Office of Defense Trade Controls Compliance, and the Company's current estimates of the range of potential loss associated with quality concerns ofidentified by the Company regarding certain SkyWatch Surveillance Towers.


ItemITEM 3.Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2016,2017, the Company has not experienced any changes in market risk exposure that would materially affect the quantitative and qualitative disclosures about market risk presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016.


ItemITEM 4.Controls and ProceduresCONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
As of June 30, 2016,2017, the Company carried outcompleted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e).procedures. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2016 suchto ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 20162017, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.




PART II. OTHER INFORMATION

ItemITEM 1.Legal ProceedingsLEGAL PROCEEDINGS

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of its business. See Note 15, “Contingencies,” and Note 16, "Income Taxes," of the Notes to the Consolidated Financial Statements for additional information on the Company’s legal proceedings.


Item 1A.Risk Factors

ITEM 1A.    RISK FACTORS
There has been noThe 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. If we are unable to adequately respond to these risks and uncertainties, our business, financial condition and results of operations could be materially adversely affected. Additionally, we cannot be certain or give any assurance that any actions taken to reduce known risks and uncertainties will be effective.
Risks, Uncertainties and Other Factors Related to Our Business
We depend on the United States government for a material portion of our business and changes in government spending could adversely affect our business
We derive significant revenue from contracts or subcontracts funded by United States government agencies. A significant reduction in the purchase of our products by these agencies or contractors for these agencies would have a material adverse effect on our business. For the fiscal years ended December 31, 2016, 2015 and 2014, approximately 25 percent, 21 percent and 20 percent, respectively, of our revenues were derived directly or indirectly from sales to the United States government and its agencies. The funding of contracts awarded to us depends on the overall United States government budget and appropriations process, which is beyond our control. In addition, at its discretion, the United States government may change its spending priorities and/or terminate, reduce or modify contracts.
Substantial uncertainty exists in the spending levels and priorities of the United States government, particularly with respect to military expenditures. Continued and further reductions in military spending could have a material adverse effect on our results from operations.
As a United States government supplier, we are subject to a number of procurement rules and regulations
Government contractors must comply with specific procurement regulations and other requirements and are subject to routine audits and investigations by United States government agencies. In addition, violations of these regulations or other unrelated laws and statutes can lead to debarment and other penalties. If we fail to comply with procurement rules and regulations and other laws and statutes, the results could include: reductions in the value of contracts; contract modifications or termination; the assessment of penalties and fines; and/or suspension or debarment from United States government contracting or subcontracting for a period of time or permanently. An adverse action by the United States government could also result in lost sales to non-governmental customers who might disqualify us as a result of such adverse action. The impairment or loss of our government contracts could have a material adverse effect on our business.
Operating margins may be negatively impacted by reduction in sales or by a change in the risk factors previously disclosedmix of products sold
Our expense levels are based, in part, on our expectations regarding future sales and these expenses are largely fixed in the short term. Some expenses, such as those related to research and development activities, would likely be maintained in the event of a sales downturn in order to maintain and enhance the long-term competitiveness of the Company. We maintain inventories of finished goods, components and raw materials at levels we believe are necessary to meet anticipated sales. 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 fixed costs, including facilities and information technology costs, compliance and public company costs, and depreciation and amortization related to previous acquisitions and capital expenditures, are significant and are difficult to reduce in the short term.

Our operating margins vary by product and substantial changes in the mix of products sold could also have a negative impact on our operating margins.
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. Our intangible assets, including goodwill, represent a significant portion of our total assets. Most of these intangibles are the result of acquisitions in which the purchase price exceeded the value of the tangible assets acquired. We amortize certain of these intangibles over their anticipated useful life and review goodwill and indefinite-lived intangible assets for impairment annually or more frequently if warranted by events. 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 assurance that there will not be a future impairment that may have a material impact on our business, financial condition and results of operations.
Unfavorable results of legal proceedings could materially adversely affect us
We are subject to various legal proceedings and claims that have arisen out of the ordinary conduct of our business and are not yet resolved, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and could cause significant expense and diversion of management attention. From time to time, we are involved in lawsuits concerning intellectual property, torts, contracts, shareholder litigation, administrative and regulatory proceedings and other matters, as well as governmental inquiries and investigations, the outcomes of which may be significant to our results of operations and may limit our ability to engage in our business activities. In recognition of these considerations, we have and may in the future enter into material settlements to avoid ongoing costs and efforts in defending or pursuing a matter. Should we fail to prevail in certain matters, or should several of these matters be resolved against us in the same reporting period, we may be faced with significant monetary damages or injunctive relief against us that could adversely affect our business, financial condition, operating results and cash flows. While we have insurance related to our business operations, it may not apply to or fully cover liabilities we incur as a result of these lawsuits. We record accruals for liabilities where we believe a loss to be probable and reasonably estimable. However, our actual costs may differ materially from these estimates.
We face risks from international sales and business activities
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, 2016, 2015 and 2014, international sales accounted for 46 percent, 47 percent and 49 percent, respectively, of our total revenue. We also manufacture certain products and subassemblies in Europe and we have several contract manufacturing agreements with third parties in Europe and in Asia. Certain of these products, particularly our thermal and infrared products, are subject to substantial government regulation and licensing and end use restrictions throughout the world. Our international business activities are subject to a number of risks, including:
the imposition of and changes to governmental licensing restrictions and controls impacting our technology and products;
restrictions and prohibitions on the export of technology and products, including recent changes in regulation prohibiting the sale of certain of our products to certain end users without a license;
international trade restrictions;
difficulty in collecting receivables and governmental restrictions with respect to currency;
inadequate protection of intellectual property;
labor union activities;
changes in tariffs and taxes;
restrictions on repatriation of earnings;
restriction on the importation and exportation of goods and services;
risks, costs, impacts and obligations associated with the United States Foreign Corrupt Practices Act ("FCPA"), and other anti-bribery and anti-corruption laws applicable to us, and laws applicable to global trade and United States export and

costs and penalties from violations of such laws and related regulations, including the costs associated with required remedial and other increased compliance activity;
difficulties in staffing and managing international operations; and
political and economic instability.
Some of these factors recently have had an adverse impact on our sales and operations and increased the Company’s Annual Reportcost of doing business and subjected the business to additional rules, policies and procedures that impacted the operation of the Company. No assurance can be given that these factors will not have a material adverse effect on Form 10-Kour future international sales and operations and, consequently, on our business, financial condition and results of operations. Furthermore, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business both in the United States and in international jurisdictions. These regulations include import and export laws, anti-competition laws, anti-corruption laws, such as the FCPA and the U.K. Bribery Act, and other local laws prohibiting corrupt payments to governmental officials, data privacy requirements, tax laws, and accounting, internal control and disclosure requirements. For example, on April 8, 2015, the Company and the Securities and Exchange Commission (“SEC”) entered into an agreement through entry of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities and Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the “SEC Order”). The SEC Order settled charges under the FCPA with respect to incidents of improper travel and gifts involving FLIR’s Middle East operation. Pursuant to the SEC Order, the Company is obligated to “cease and desist” from committing any future violations of the Securities Exchange Act of 1934, as amended. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our reputation, business and results of operations. In certain foreign jurisdictions, there is a higher risk of fraud or corruption and greater difficulty in maintaining effective internal controls and compliance programs. Further, although we have implemented and continue to implement policies and procedures designed to promote compliance with applicable laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies or applicable laws and regulations. In addition, our international contracts may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other financial obligations, known as offset obligations, and may provide for penalties if we fail to meet such requirements. The impact of these factors is difficult to predict, but one or more of them could have a material adverse effect on our financial position, results of operations, or cash flows.
We face risks from currency fluctuations
Historically, currency fluctuations have affected our operating results. Changes in the value of foreign currencies in which our sales or costs incurred are denominated 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, by balancing expenses and revenues in various currencies and by undertaking limited hedging of forecasted currency exposures. 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.
We may not be successful in obtaining the necessary export licenses to conduct operations abroad and the United States government may prevent proposed sales to foreign governments and customers
Export licenses and other authorizations are required from United States government agencies under the ITAR, the Export Administration Regulation (“EAR”), the Foreign Assets Control Regulations (“OFAC”), the Trading with the Enemy Act of 1917, the International Emergency Economic Powers Act (“IEEPA”), the Arms Export Control Act of 1976 (“AECA”), and other similar laws and regulations for the fiscal year ended December 31, 2015.sale, use and export of many of our products and related data and services. Thermal and infrared products and technical data have been subject to the ITAR and EAR, historically under United States Munitions List (“USML”) Category XII and Commerce Control List (“CCL”) Category 6. Recently, the United States Government’s export reform effort resulted in the transition of various Company products from the USML to the CCL, shifting the licensing requirements and restrictions for products regulated by the Department of Commerce under the EAR. This transition has increased the licensing requirements and restrictions on some products and reduced the requirements and restrictions on others. We can give no assurance that we will be successful in obtaining the necessary licenses from the United States Department of State or Department of Commerce required to conduct our business as presently or historically conducted.

The United States export licensing environment has been affected by a number of factors, including but not limited to, the aftermath of 9/11, the rise of terrorism and the changing geopolitical environment, heightened tensions with other countries (which shift and evolve over time), and the United States reliance on the tactical advantage of the night-time war fighter. Some of these factors have affected the thermal imaging and infrared technology industry overall while others have impacted the Company directly. In addition, the Company’s 2014 submission to the United States Department of State Office of Defense Trade Controls Compliance (“DTCC”) pursuant to ITAR § 127.12(c), regarding the unauthorized export of technical data and defense services to dual and third country nationals in at least four facilities of the Company, have led to heightened scrutiny of export licenses for products in our markets and in some cases, has resulted in lengthened drafting and review periods for our license applications, including in countries where we have historically made significant sales. Subsequent engagement with the DTCC as part of the Company’s 2014 and related submissions and other communications concerning the Company’s licensing posture overall, highlight DTCC’s focus on the manner in which the Company handles exports of its products, technical data and services subject to the ITAR. In addition, concerns with respect to potential diversion of certain of the Company's products to prohibited end users and countries subject to economic and other sanctions implemented by the United States government has caused the United States Department of Commerce Bureau of Industry and Security to recently restrict the Company’s ability to sell 9hz thermal products without a license to customers in China not identified on a list maintained by the United States Department of Commerce.
Although we have taken actions and continue to take additional actions necessary to implement policies and procedures to promote an improved compliance culture and programs, there is no guarantee that our actions will be effective or that government agencies will not view our actions and programs with heightened scrutiny, including as a result of events outside the Company’s control. As a result, we may receive more restrictive provisos or limitations on new license requests, wholesale denials of our license requests, suspensions or terminations of our existing licenses, or delays in receiving new licenses resulting from requests for follow-up information, due diligence requests or additional limitations on our sale to third parties. We can give no assurance that we will be successful in obtaining necessary licenses required to facilitate our international business. Failures to obtain or delays in obtaining licenses may prevent or limit our ability to market, sell, export, or transfer our products outside the United States and has had and could continue to have a material adverse effect on our business and its operating results.
General economic conditions may adversely affect our business, operating results and financial condition
Our operations and performance depend significantly on worldwide economic conditions and their impact on levels of capital investment and consumer spending. Economic factors that could adversely influence demand for the Company’s products include uncertainty about global economic conditions leading to reduced levels of investment, changes in government spending levels and/or priorities, the size and availability of government budgets, customers’ and suppliers’ access to credit, consumer confidence and other macroeconomic factors affecting government, industrial or consumer spending behavior.
In recent years, our performance has been negatively impacted by reduced spending by United States government agencies, global economic weakness, and the Eurozone crisis. Continuation of the conditions that led to reduced spending and potential further reductions in spending globally by either consumers or government agencies could have a material adverse effect on our business, financial condition and results of operations.
Our primary markets are volatile and unpredictable
Our business depends on the demand for our products and solutions in a variety of commercial, industrial and government markets. In the past, the demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control, including:
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 fiscal quarter;
the size and timing of new contract awards;
the timing of the release of government funds for procurement of our products; and
the timing of orders and shipments within a given fiscal quarter.

Seasonal fluctuations in our operating results result from:
the seasonal pattern of contracting by the United States government and certain foreign governments;
the desire of customers to take delivery of equipment prior to fiscal year ends due to funding considerations; and
the tendency of commercial enterprises to fully utilize annual capital budgets prior to expiration.
Competition in our markets is intense and our failure to compete effectively could 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 performance, price, customer service and training, product reputation, and effective marketing and sales efforts. Many of our competitors have greater financial, technical, research and development, and marketing resources than we do. All of these factors, as well as the potential for increased competition from new market entrants, require 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 a failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Our products may suffer from defects or errors leading to substantial product liability, 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. If any of our products are defective, we might be required to redesign or recall those products or pay substantial damages or warranty claims. Such an event could result in significant expenses including expenses arising from product liability and warranty claims, disrupt sales and affect our reputation and that of our products, which could have a material adverse effect on our business, financial condition and results of operations. As we expand our presence into new markets, we may face increased exposure to product liability claims. We maintain product liability insurance but cannot be certain that it will be sufficient or will continue to be available on acceptable terms.
Risks, Uncertainties and Other Factors Related to Our Technology and Intellectual Property
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, copyright and trade secret laws, confidentiality agreements and contractual provisions to protect our proprietary rights. Many 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 worldwide 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 our competitors or that measures taken by us 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 prevent our competitors from entering the markets we serve, there can be no assurance that we will be able to maintain our competitive advantage or that our competitors will not develop capabilities equal or superior to ours.
Litigation over patents and other intellectual property is common in our industry. We have been the subject of patent and other intellectual property litigation in the past and cannot be sure that we will not be subject to such litigation in the future. Similarly, there exists the possibility we will assert claims in litigation to protect our intellectual property. Lawsuits defending or prosecuting intellectual property claims 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 in which we are a party could subject us to significant liabilities, result in the loss of intellectual property rights we claim or impact our competitive position. Additionally, an adverse determination could require us to seek licenses from third parties. If such licenses are not available on commercially reasonable terms or at all, our business, financial condition and results of operations could be adversely affected.

Our future success will depend on our ability to respond to the rapid technological change in the markets in which we compete, our ability to introduce new or enhanced products and enter into new markets
The markets in which we compete are characterized by rapid technological developments and frequent new product introductions, enhancements and modifications. Our ability to develop new products and technologies that anticipate changing customer requirements, reduce costs and otherwise retain or enhance our competitive position in existing and new markets 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 products and technologies in a timely manner, our business, financial condition and results of operations would be adversely affected. In addition, we cannot be certain that our new products and technologies will be successful or that customers will accept any of our new products.
Our business could be negatively impacted by cybersecurity threats and other security threats and technology disruptions
We face certain security threats and technology disruptions, including threats to our information technology infrastructure, attempts to gain access to our or our customers’ proprietary or classified information, threats to the physical security of our facilities and employees, threats of terrorism events, and failures of our technology tools and systems. We are subject to laws and rules issued by various agencies concerning safeguarding and maintaining infrastructure and physical security and information confidentiality. Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. We are also involved with information technology systems for certain customers and other third parties, for which we face similar security threats as for our own. In particular, cybersecurity threats-which include, but are not limited to, computer viruses, spyware and malware, attempts to access information, denial of service attacks and other electronic security breaches-are persistent and evolve quickly. Such threats have increased in frequency, scope and potential impact in recent years. Further, a variety of technological tools and systems, including both company-owned information technology and technological services provided by outside parties, support our critical functions. These technologies, as well as our products, are subject to failure and the user’s inability to have such technologies properly supported, updated, expanded or integrated into other technologies and may contain open source and third party software which may unbeknownst to us contain defects or viruses that pose unintended risks to our customers. These risks if not effectively mitigated or controlled could materially harm our business or reputation. While we believe that we have implemented appropriate measures and controls, there can be no assurance that such actions will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information or corruption of data.
We require user names and passwords in order to access our information technology systems. We use encryption and authentication technologies designed to secure the transmission and storage of data and prevent access to our data or accounts. These security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. These security systems cannot provide absolute security. To the extent we were to experience a breach of our systems and were unable to protect sensitive data, such a breach could materially damage business partner and customer relationships, and curtail or otherwise impact the use of our information technology systems. Moreover, if a security breach of our information technology system affects our computer systems or results in the release of personally identifiable or other sensitive information of customers, business partners, employees and other third parties, our reputation and brand could be materially damaged, use of our products and services could decrease, and we could be exposed to a risk of loss, litigation and potential liability.
Although we have in the past and continue to be subject to cybersecurity threats and other security threats and technology disruptions, to date none has had a material impact on our business, financial condition or results of operations. Nonetheless, in the future, these types of events could disrupt our operations and customer and other third party information technology systems. They also could require significant management attention and resources, negatively impact our reputation among our customers and the public and challenge our eligibility for future work on sensitive or classified systems, which could have a material adverse effect on our business, financial condition and results of operations.

Risks, Uncertainties and Other Factors Related to Our Corporate Structure and Organization
Our future success depends in part on attracting and retaining key senior management and qualified technical, sales and other 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, sales and other personnel. Significant competition exists for such personnel and we cannot assure the retention of our key executives, technical and sales personnel or our ability to attract, integrate and retain other such personnel that may be required in the future. We 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 must successfully manage a complex global organization
As we have grown, the size and scope of our worldwide operations have also increased substantially. We currently design, manufacture and market numerous product lines in locations worldwide. Significant management time and effort is required to effectively manage the increased complexity of the business and our failure to successfully do so could have a material adverse effect on our business, financial condition and results of operations. Our inability to continue to manufacture our products at one or more of our facilities as a result of, for example, a prolonged power outage, earthquake, fire or other natural disaster, or labor or political unrest, could prevent us from supplying products to our customers and could have a material adverse effect on our business, financial condition and results of operations.
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 twelve acquisitions of various sizes in the past five years. The integration of businesses, personnel, product lines and technologies can be 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, fail to capture anticipated synergies, fail to establish satisfactory internal controls, or incur unanticipated liabilities. Any of these difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and decrease our revenue.
We frequently evaluate strategic opportunities available to us and it is likely that we will make additional acquisitions in the future. Such acquisitions may vary in size and complexity. 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. 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.
We have indebtedness as a result of the issuance of our 3.125 percent senior unsecured notes (the “Notes”) and borrowings against our unsecured credit facility, and we are subject to certain restrictive covenants under our unsecured credit facility and the indenture governing the Notes which may limit our operational and financial flexibility
Our ability to meet our debt service obligations and comply with the financial covenants under our credit facility 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. Our inability to meet our debt service obligations or comply with the required covenants could result in a default under the credit facility or indenture. In the event of any such default, under the credit facility, the lenders thereunder could elect to declare all outstanding debt, accrued interest and fees under the facility to be due and immediately payable. In the event of any such default under our indenture, either the trustee or the holders of at least 25 percent of the outstanding principal amount of the Notes could declare the principal amount of all of the Notes to be due and payable immediately.

We may not be able to refinance our indebtedness on favorable terms, if at all. Our inability to refinance our indebtedness could materially and adversely affect our liquidity and our ongoing results of operations.
Our ability to refinance indebtedness, including the Notes, will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our indebtedness, including the Notes, could also require us to comply with more onerous covenants and further restrict our business operations. Our inability to refinance our indebtedness or to do so upon attractive terms could materially and adversely affect our business, results of operations, financial condition and cash flows, and make us vulnerable to adverse industry and general economic conditions.
Changes in our effective income tax rate may have an adverse effect on our results of operations
We are subject to taxes in the United States and numerous foreign jurisdictions, including Belgium, where a number of our subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our future effective tax rate could be affected by changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in the enforcement environment, and changes in tax laws or their interpretations, including in the United States and in foreign jurisdictions. For example, in January 2016, the European Commission announced a decision concluding that certain rules under Belgian tax legislation are deemed to be incompatible with European Union regulations on state aid. As a result of this decision, the European Commission has directed the Belgian Government to recover past taxes from certain entities, reflective of disallowed state aid, which impacts one of the Company’s international subsidiaries.  The Belgian Government announced they have appealed this decision and filed action for an annulment in the General Count of the European Union, and in July 2016 the Company filed a separate appeal with the General Court of the European Union.   The Company recorded discrete tax expense of $39.6 million during 2016 related to this matter and on January 10, 2017, received tax assessments from the Belgium government for a similar amount.   The Company has filed a complaint against the Belgian tax assessments, and the result of this complaint, the appeal with the General Court of the European Union, new information received from the Belgian Government, or other future events may cause the income tax provision associated with the decision to be entirely or partially reversed.
Our future effective tax rate may be adversely affected by a number of additional factors including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits with various tax authorities;
changes in the valuation of our deferred tax assets and liabilities;
adjustments to estimated taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in share-based compensation expense;
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles;
changes in foreign tax rates or agreed upon foreign taxable base; and/or
the repatriation of earnings from outside the United States for which we have not previously provided for United States taxes.
Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the United States Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our financial condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor.
State of 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 ability to issue preferred stock without further action by our shareholders, as well as provisions of the State of Oregon law, may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable.

ItemITEM 2.Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2016, the Company repurchased the following shares:
Period
Total Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs(2)
June 1 to June 30, 2016950,000
 $31.31
 950,000
  
Total950,000
 $31.31
 950,000
 9,881,131
(1) The share repurchases were through open market transactions.
(2) All share repurchases are subject to applicable securities laws, and are at times and in amounts as management deems appropriate. On February 6, 2015, we announced that our Board of Directors authorized the repurchase of up to 15.0 million shares of our outstanding common stock. This repurchase was authorized on February 5, 2015 and will expire on February 5, 2017.


None.

Item 3.Defaults Upon Senior Securities
None.ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.Mine Safety Disclosures
ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.


ItemITEM 5.Other InformationOTHER INFORMATION
None.




ItemITEM 6.ExhibitsEXHIBITS

NumberDescription
3.110.1Third Restated Bylaws of FLIR Systems, Inc., as amended through June 2, 2016.
4.1Fourth Supplemental Indenture dated as of June 10, 2016 by and
Executive Employment Agreement between FLIR Systems, Inc. and U.S. Bank National Association.James J. Cannon dated as of June 19, 2017 (incorporated by reference to Exhibit 4.210.1 of the Current Report on Form 8-K filed on May 23, 2017).(1)
10.2
Change of Control Agreement between FLIR Systems, Inc. and James J. Cannon dated as of June 19, 2017 (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on May 23, 2017).(1)
10.3
Separation and Transition Agreement between FLIR Systems, Inc. and Andrew C. Teich dated June 18, 2017 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on June 10, 2016)21, 2017).
10.1Amended and Restated Credit Agreement by and among FLIR Systems, Inc., the subsidiaries of FLIR Systems Inc. party thereto, Bank of America N.A. and the other lenders party thereto, dated as of May 31, 2016.(1)
31.1  Principal Executive Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
31.2  Principal Financial Officer Certification Pursuant to Sarbanes-Oxley Act of 2002, Section 302.
32.1PrincipalCertification by the Chief Executive Officer Certification Pursuantpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Section 906.2002.
32.2PrincipalCertification by the Chief Financial Officer Certification Pursuantpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Section 906.2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

____________

(1) This exhibit constitutes a management contract or compensatory plan or arrangement.


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  FLIR SYSTEMS, INC.
   
Date August 3, 2016July 28, 2017     /s/ AMIT SINGHI
  Amit Singhi
       Sr. Vice President, Finance and Chief Financial Officer
  (Duly Authorized and Principal Financial Officer)


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