UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~September 30, 2016~~March 31, 2017



¨	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 ~~October~~¨ No ¨

As of April 28, ~~2016~~,2017, there were ~~136,129,920~~136,455,705 shares of the ~~Registrant’s~~registrant’s common stock, $0.01 par value, outstanding.

INDEX



			PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements

	Consolidated Statements of Income —- Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (unaudited)	1

	Consolidated Statements of Comprehensive Income ~~(Loss) —~~- Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (unaudited)	2

	Consolidated Balance Sheets ~~— September 30, 2016~~- March 31, 2017 and December 31, ~~2015~~2016 (unaudited)	3

	Consolidated Statements of Cash Flows ~~— Nine~~- Three Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (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 ~~About~~about Market Risk	2429

Item 4.	Controls and Procedures	2530

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	2631

Item 1A.	Risk Factors	2631

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2631

Item 3.	Defaults Upon Senior Securities	2631

Item 4.	Mine Safety Disclosures	2631

Item 5.	Other Information	2631

Item 6.	Exhibits	2731

	Signature		2832

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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	405,228		$	381,928		$	1,187,429		$	1,119,420		$	406,814		$	379,472
Cost of goods sold	213,852			201,189			635,041			573,169			215,493			201,782
Gross profit	191,376			180,739			552,388			546,251			191,321			177,690
Operating expenses:
Research and development	32,664			31,200			106,020			101,100			41,983			37,280
Selling, general and administrative	77,863			73,557			242,930			232,884			90,252			83,033
Total operating expenses	110,527			104,757			348,950			333,984			132,235			120,313

Earnings from operations	80,849			75,982			203,438			212,267			59,086			57,377

Interest expense	5,736			3,670			13,543			10,689			4,453			3,447
Interest income	(336		)	(319		)	(924		)	(861		)	(271		)	(260		)
Other expense, net	241			1,455			138			1,775
Other income, net													(660		)	(1,430		)
Earnings before income taxes	75,208			71,176			190,681			200,664			55,564			55,620
Income tax provision (benefit)	16,575			(1,896		)	85,555			29,182
Income tax provision													12,993			54,495
Net earnings	$	58,633		$	73,072		$	105,126		$	171,482		$	42,571		$	1,125

Earnings per share:
Net earnings per share:
Basic	$	0.43		$	0.52		$	0.76		$	1.23		$	0.31		$	0.01
Diluted	$	0.43		$	0.52		$	0.76		$	1.21		$	0.31		$	0.01

Weighted average shares outstanding:
Basic	136,963			139,596			137,438			139,808			136,359			137,496
Diluted	137,938			140,525			138,594			141,262			138,239			138,779

~~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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Net earnings	$	58,633		$	73,072		$	105,126		$	171,482		$	42,571		$	1,125
Other comprehensive income (loss), net of tax:
Cash flow hedges	292			(599		)	(573		)	(1,009		)
Fair value adjustment on interest rate swap contracts													187			(669		)
Unrealized gain on available-for-sale investments													(1		)	—
Foreign currency translation adjustments	(7,724		)	(16,672		)	(9,250		)	(52,138		)	13,202			23,361
Total other comprehensive loss	(7,432		)	(17,271		)	(9,823		)	(53,147		)
Total other comprehensive income													13,388			22,692
Comprehensive income	$	51,201		$	55,801		$	95,303		$	118,335		$	55,959		$	23,817

~~FLIR SYSTEMS, INC.~~

~~CONSOLIDATED BALANCE SHEETS~~

~~(In thousands, except par value)~~

~~(Unaudited)~~

September 30,
2016 December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents $ 677,688
$ 472,785
Accounts receivable, net 309,602
326,098
Inventories 380,225
393,092
Prepaid expenses and other current assets 88,625
95,539
Total current assets 1,456,140
1,287,514
Property and equipment, net 267,149
272,629
Deferred income taxes, net 55,194
55,429
Goodwill 626,243
596,316
Intangible assets, net 135,878
141,302
Other assets 47,290
53,210
Total assets $ 2,587,894
$ 2,406,400
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 109,663
$ 139,540
Deferred revenue 36,553
31,933
Accrued payroll and related liabilities 54,277
54,806
Accrued product warranties 16,759
13,406
Advance payments from customers 28,680
33,848
Accrued expenses 35,449
40,930
Accrued income taxes 6,133
201
Other current liabilities 8,134
5,987
Current portion, long term debt 15,000
264,694
Total current liabilities 310,648
585,345
Long-term debt 501,606
93,750
Deferred income taxes 3,711
3,623
Accrued income taxes 53,397
10,457
Other long-term liabilities 65,126
63,710
Commitments and contingencies

Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at September 30, 2016, and December 31, 2015 —
—
Common stock, $0.01 par value, 500,000 shares authorized, 136,127 and 137,350 shares issued at September 30, 2016, and December 31, 2015, respectively, and additional paid-in capital 1,361
1,374
Retained earnings 1,786,994
1,773,267
Accumulated other comprehensive loss (134,949 ) (125,126 )
Total shareholders’ equity 1,653,406
1,649,515
Total liabilities and shareholders’ equity $ 2,587,894
$ 2,406,400

~~FLIR SYSTEMS, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(In thousands)~~

~~(Unaudited)~~

Nine Months Ended September 30,
2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 105,126
$ 171,482
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 41,857
36,465
Deferred income taxes (200 ) (17,238 )
Stock-based compensation arrangements 21,253
19,449
Other, net 19,830
4,346
Increase (decrease) in cash, net of acquisitions, resulting from changes in:
Accounts receivable 19,951
43,295
Inventories 20,211
(72,531 )
Prepaid expenses (3,129 ) 1,784
Other assets (18,861 ) (1,775 )
Accounts payable (35,507 ) 29,011
Deferred revenue 4,859
(106 )
Accrued payroll and other liabilities (13,614 ) (21,055 )
Accrued income taxes 51,856
(957 )
Pension & other long term liabilities 1,595
5,309
Net cash provided by operating activities 215,227
197,479
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (27,682 ) (50,146 )
Proceeds on sale of property and equipment 6,986
30
Business acquisitions, net of cash acquired (42,445 ) —
Net cash used by investing activities (63,141 ) (50,116 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from credit agreement and long-term debt 524,826
—
Repayments of credit agreements and long-term debt (367,435 ) (11,250 )
Common stock repurchased (66,057 ) (93,381 )
Dividends paid (49,564 ) (46,193 )
Proceeds from employee stock based compensation plans 7,347
21,188
Excess tax benefits from share-based payment arrangements 1,605
4,216
Other financing activities 10
(10 )
Net cash provided (used) by financing activities 50,732
(125,430 )
Effect of exchange rates on cash and cash equivalents 2,085
(27,931 )
Net increase (decrease) in cash and cash equivalents 204,903
(5,998 )
Cash and cash equivalents, beginning of period 472,785
531,374
Cash and cash equivalents, end of period $ 677,688
$ 525,376

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)

	March 31,			December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	397,436		$	361,349
Accounts receivable, net	308,740			352,020
Inventories	386,058			371,371
Prepaid expenses and other current assets	83,926			79,917
Total current assets	1,176,160			1,164,657
Property and equipment, net	272,857			271,785
Deferred income taxes, net	45,321			45,243
Goodwill	896,436			801,406
Intangible assets, net	193,099			168,460
Other assets	46,522			168,155
Total assets	$	2,630,395		$	2,619,706
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	110,013		$	114,225
Deferred revenue	33,989			34,420
Accrued payroll and related liabilities	51,140			52,874
Accrued product warranties	16,642			17,476
Advance payments from customers	26,830			26,019
Accrued expenses	28,886			34,022
Accrued income taxes	48,497			51,017
Other current liabilities	10,178			16,659
Current portion, long-term debt	15,000			15,000
Total current liabilities	341,175			361,712
Long-term debt	494,737			501,921
Deferred income taxes	2,479			2,331
Accrued income taxes	9,654			9,643
Pension and other long-term liabilities	62,781			65,773
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at March 31, 2017, and December 31, 2016	—			—
Common stock, $0.01 par value, 500,000 shares authorized, 136,438 and 136,334 shares issued at March 31, 2017, and December 31, 2016, respectively, and additional paid-in capital	17,879			12,139
Retained earnings	1,854,253			1,832,138
Accumulated other comprehensive loss	(152,563		)	(165,951		)
Total shareholders’ equity	1,719,569			1,678,326
Total liabilities and shareholders' equity	$	2,630,395		$	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)

	Three Months Ended March 31,
	2017			2016
CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings	$	42,571		$	1,125
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	17,031			13,939
Deferred income taxes	192			(227		)
Stock-based compensation arrangements	6,246			6,088
Other, net	(3,742		)	5,807
Increase (decrease) in cash, net of acquisitions, resulting from changes in:
Accounts receivable	44,845			28,845
Inventories	(12,789		)	(2,090		)
Prepaid expenses	(2,437		)	(3,675		)
Other assets	9,633			(4,542		)
Accounts payable	(4,463		)	(33,669		)
Deferred revenue	(501		)	1,354
Accrued payroll and other liabilities	(14,236		)	(22,877		)
Accrued income taxes	(4,115		)	57,188
Pension & other long term liabilities	(3,108		)	(1,320		)
Net cash provided by operating activities	75,127			45,946
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment	(13,621		)	(9,992		)
Proceeds from sale of assets	27			4,875
Net cash used by investing activities	(13,594		)	(5,117		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt	(7,500		)	(3,750		)
Dividends paid	(20,456		)	(16,507		)
Proceeds from shares issued pursuant to stock-based compensation plans	1,002			3,989
Tax paid for net share exercises and issuance of vested restricted stock units	(1,843		)	(28		)
Other financing activities	(1		)	3
Net cash used by financing activities	(28,798		)	(16,293		)
Effect of exchange rate changes on cash	3,352			13,292
Net increase in cash and cash equivalents	36,087			37,828
Cash and cash equivalents, beginning of year	361,349			472,785
Cash and cash equivalents, end of year	$	397,436		$	510,613

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 $0.8 million of excess tax benefits from stock-based compensation as a discrete item in income tax provision for the three months ended March 31, 2017. 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 $1.0 million from cash flows from financing activities to cash flows from operating activities for the three months ended March 31, 2016. Additionally, less than $0.1 million cash paid 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 three months ended March 31, 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 229,000 shares for the three months ended March 31, 2017. 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's~~years' financial statements and notes to the consolidated financial statements to conform them to the presentation as of ~~September 30, 2016. Restructuring expenses of $0.3 million~~ and ~~$1.1 million have been reclassified to research and development expenses and selling, general and administrative expenses,~~ for the three ~~and nine~~ months ended ~~September 30, 2015, respectively.~~March 31, 2017. These reclassifications had no effect on consolidated financial position, net earnings, shareholders' equity, or net cash flows for any of the periods presented.

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


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 ~~nonvested~~non-vested stock awards (referred to as restricted stock unit awards) ~~administered by~~granted under two plans: the ~~Compensation Committee~~FLIR 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.

~~Under the stock-based compensation program, the~~The Company has granted time-based options, time-based restricted stock unit awards, ~~performance-based~~market-based restricted stock unit awards and ~~market-based~~performance-based restricted stock unit awards. Options generally expire ten years from ~~their~~the grant ~~dates.~~date. Time-based options and restricted stock unit awards generally vest over a ~~three year~~three-year period. ~~Shares issuable under the performance-based~~Market-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 are~~may 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's~~S&P 500 ~~Index.~~Index over a three-year period. Performance-based restricted stock unit awards may be earned based upon the Company's return on invested capital over a three-year period. Shares vested under the performance-based restricted stock unit awards and the market-based restricted stock unit awards must 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 employees 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-based~~The following table sets forth the stock-based compensation expense recognized in the Consolidated Statements of Income ~~are~~(in thousands):



	Three Months Ended March 31,
	2017		2016
Cost of goods sold	$	400	$	615
Research and development	1,177		1,181
Selling, general and administrative	4,669		4,292
Stock-based compensation expense before income taxes	$	6,246	$	6,088

Stock-based compensation expense capitalized in the Consolidated Balance Sheets is as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
Cost of goods sold $ 881
$ 799
$ 2,351
$ 2,283
Research and development 1,225
1,259
3,639
3,584
Selling, general and administrative 4,766
4,454
15,263
13,582
Stock-based compensation expense $ 6,872
$ 6,512
$ 21,253
$ 19,449



	March 31,
	2017		2016
Capitalized in inventory	$	902	$	790

~~Stock-based compensation costs capitalized in inventory are as follows (in thousands):~~

September 30,
2016 2015
Capitalized in inventory $ 585
$ 667

As of ~~September 30, 2016~~,March 31, 2017, the Company had ~~$46.5~~approximately $35.9 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of ~~2.1~~1.80 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 September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2016		2015		2016		2015		2017		2016
Numerator for earnings per share:
Net earnings for basic and diluted earnings per share	$	58,633	$	73,072	$	105,126	$	171,482	$	42,571	$	1,125

Denominator for earnings per share:
Weighted average number of common shares outstanding	136,963		139,596		137,438		139,808		136,359		137,496
Assumed exercises of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method	975		929		1,156		1,454
Weighted average diluted shares outstanding	137,938		140,525		138,594		141,262
Assumed exercise of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method									1,880		1,283
Diluted shares outstanding									138,239		138,779

The effect of ~~outstanding~~ stock-based compensation awards for the three ~~and nine months~~ ~~ended September 30, 2016, which in the aggregate consisted of 322,000 and 317,000 shares, respectively; and for the three and nine~~ months ended ~~September 30, 2015, which in the aggregate consisted of 457,000~~March 31, 2017 and ~~316,000~~2016 that aggregated 18,000 and 271,000 shares, respectively, have been excluded for purposes of ~~calculating~~ diluted earnings per share since the effect of their inclusion would have ~~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 ~~and~~or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The Company had $~~147.3~~70.8 million and $~~29.0~~8.3 million of cash equivalents at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~,2016, respectively, which were primarily investments in money market funds. 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 in instruments that are convertible to cash daily. The fair ~~values~~value of the Company’s ~~foreign~~forward currency ~~forward~~ contracts and interest rate swap contracts as of ~~September 30,~~March 31, 2017 and 2016 ~~and~~ ~~December 31, 2015~~ 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 $~~440.1~~428.0 million ~~and $254.1 million~~ based upon Level 2 inputs at ~~September 30, 2016~~March 31, 2017 ~~and December 31, 2015, respectively.~~. The fair value of the Company's ~~borrowings under the revolving~~ credit ~~facility,~~agreements and 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 ~~Contracts~~Risk

In general, ~~the~~these gains and losses ~~related to~~are offset in the ~~Company's foreign currency exchange rate contracts recorded in other expense, net are offset~~Consolidated Statements of Income by the reciprocal gains and losses ~~generated~~ from ~~foreign currency changes on the~~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, net for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 were ~~$3.1~~a loss of $4.3 million and ~~$5.2~~gain of $7.0 million, respectively. ~~The net losses for the three and nine months ended September 30, 2015 were $8.9 million and $7.0 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's~~Company’s outstanding foreign currency forward contracts ~~in United States dollar equivalent amounts~~by currency (in thousands):


	September 30, 2016		December 31, 2015		March 31,		December 31,
Swedish kronor	$	89,433	$	59,198
Euro	52,277		281
					2017		2016
European euro					$	179,979	$	156,352
Swedish kroner					80,790		48,555
Canadian dollar	12,978		10,799		55,044		15,645
British pound sterling	7,484		10,203		21,255		33,862
Brazilian real	7,478		6,440		8,102		2,747
Japanese yen					2,896		3,251
Australian dollar	4,967		2,342		2,034		1,653
Japanese yen	1,011		2,124
Other	—		526		271		—
	$	175,628	$	91,913	$	350,371	$	262,065

At ~~September 30, 2016~~,March 31, 2017, the Company’s foreign currency forward contracts, in general, had maturities of ~~one~~ ~~month~~three 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 forward~~exchange contracts included in the Consolidated Balance Sheets are as follows (in thousands):

September 30, 2016 December 31, 2015
Other current assets Other current liabilities Other current assets Other current liabilities
Foreign currency forward contracts $ 61
$ 1,811
$ 767
$ 1,314



	March 31, 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	$	636	$	1,585	$	2,369	$	75

Interest Rate Swap Contracts

At ~~September 30, 2016~~,March 31, 2017, the effective interest rate on the borrowings made from the Company's revolving credit facility was 2.37 ~~percent~~.percent. As of ~~September 30, 2016~~,March 31, 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	$	48.8	1.02	%	April 5, 2013	March 31, 2019	$	45.0	1.02	%	April 5, 2013	March 31, 2019
March 29, 2013	$	48.8	0.97	%	April 5, 2013	March 31, 2019	$	45.0	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 $0.4~~$0.7 million, of which ~~$0.3~~$0.2 million has been recorded into prepaid expenses and other current ~~liabilities~~assets and ~~$0.1~~$0.5 million has been recorded to other ~~long-term liabilities~~assets in the Consolidated Balance Sheet as of ~~September 30, 2016~~March 31, 2017.

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 ~~$7.0~~$6.3 million at ~~September 30, 2016~~ and ~~$6.9~~$6.5 million at March 31, 2017 and December 31, ~~2015~~.

2016, respectively.


Note 7.	Inventories

Inventories consist of the following (in thousands):


					March 31,		December 31,
	September 30, 2016		December 31, 2015		2017		2016
Raw material and subassemblies	$	192,057	$	216,107	$	204,730	$	200,640
Work-in-progress	55,007		38,639		54,934		43,430
Finished goods	133,161		138,346		126,394		127,301
	$	380,225	$	393,092	$	386,058	$	371,371


~~Note 8.~~	~~Property and Equipment~~

Note 8. Property and Equipment

Property and equipment are net of accumulated depreciation of ~~$273.2~~$284.9 million and ~~$253.4~~$275.1 million at ~~September 30, 2016~~March 31, 2017 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 ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 are as follows (in thousands):


Balance, December 31, 2015	$	596,316
Balance, December 31, 2016				Balance, December 31, 2016	$	801,406
Goodwill from acquisitions	35,203			Goodwill from acquisitions	91,945
Currency translation adjustments and other	(5,276		)	Currency translation adjustments and other	3,085
Balance, September 30, 2016	$	626,243
Balance, March 31, 2017				Balance, March 31, 2017	$	896,436

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 ~~September 30, 2016.~~March 31, 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 ~~$73.3~~$85.2 million and ~~$61.3~~$77.8 million at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~,2016, respectively.


Note 11.	Credit Agreement

~~At September 30, 2016, the Company had $97.5 million borrowings outstanding under its revolving credit facility pursuant to the Credit Agreement, dated~~On 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 March 31, 2017, the Company had $90 million outstanding under its revolving credit facility pursuant to the Credit Agreement and had ~~$21.6~~$16.5 million of letters of credit outstanding, which ~~reduced~~reduces the total available revolving credit under the ~~revolving credit facility~~Credit Agreement to ~~$380.9~~$393.5 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 warranties~~warranty liability and activity (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2016			2015			2017			2016
Accrued product warranties, beginning of period	$	17,492		$	16,023		$	16,514		$	16,175		$	20,845		$	16,514
Amounts paid for warranty services	(3,624		)	(3,731		)	(13,221		)	(10,701		)	(4,629		)	(4,139		)
Warranty provisions for products sold	5,099			3,567			15,658			10,551			3,709			4,734
Currency translation and acquisition adjustments	1,025			(23		)	1,041			(189		)
Business acquisition													—			40
Currency translation adjustments and other													46			78
Accrued product warranties, end of period	$	19,992		$	15,836		$	19,992		$	15,836		$	19,971		$	17,227

Current accrued product warranties, end of period							$	16,759		$	13,213		$	16,642		$	14,676
Long-term accrued product warranties, end of period							$	3,233		$	2,623		$	3,329		$	2,551

~~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):


							March 31,			December 31,
	September 30, 2016			December 31, 2015			2017			2016
Unsecured notes	$	425,000		$	250,000		$	425,000		$	425,000
Term loan	—			108,750
Credit Agreement	97,500			—			90,000			97,500
Unamortized discounts and issuance costs	(5,894		)	(306		)
Unamortized discounts and issuance costs of unsecured notes							(5,263		)	(5,579		)
	$	516,606		$	358,444		$	509,737		$	516,921
Current portion, long-term debt	$	15,000		$	264,694		$	15,000		$	15,000
Long-term debt	$	501,606		$	93,750		$	494,737		$	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 2011 Notes were repaid on July 5, 2016. The Company recorded a $1.3 million loss on the extinguishment of the 2011 Notes in Interest expense during the three months ended September 30, 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 ~~Notes~~and outstanding in July 2016 and are being used for other general corporate purposes, including working capital and capital expenditure needs, business acquisitions and repurchases of the Company’s common 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 spread~~margin 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 ~~September 30, 2016.~~March 31, 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 ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 (in thousands):

Common stock and additional paid-in capital, December 31, 2015 $ 1,374
Income tax benefit of common stock options exercised 1,477
Common stock issued pursuant to stock-based compensation plans, net 1,585
Stock-based compensation expense 21,147
Repurchase of common stock (24,222 )
Common stock and additional paid-in capital, September 30, 2016 $ 1,361



Common stock and additional paid-in capital, December 31, 2016	$	12,139
Common stock issued pursuant to stock-based compensation plans, net	(841		)
Stock-based compensation	6,581
Common stock and additional paid-in capital, March 31, 2017	$	17,879

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 nine months ended September 30, 2016, the Company repurchased 2.1 million shares for an aggregate purchase price of $66.1 million, of which $24.2 million reduced common stock and additional paid in capital and $41.9 million reduced retained earnings.

~~FLIR SYSTEMS, INC.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~


~~Note 14.~~	~~Shareholders’ Equity - (Continued)~~

~~On September 2, 2016,~~March 10, 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 ~~August 19, 2016.~~February 24, 2017. The total cash payments for dividends during the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 were ~~$49.6~~$20.5 million.


Note 15.	Contingencies

FLIR Systems, Inc. and its subsidiary, 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 of the FLIR 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)

On October 22, 2014, the Company initially contacted the United States Department of State Office of Defense Trade Controls Compliance (“DDTC”), 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 DDTC regarding the details of the issues raised in the October 22, 2014 submission. DDTC 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. 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 December 2017. DDTC continues its review and the Company is unable to reasonably estimate the time it may take to resolve the matter or the amount or range of potential loss, penalty or other government action, if any, that may be incurred in connection with this matter. However, an unfavorable outcome could result in fines and penalties, or loss, or modification of exporting privileges that could potentially be material to the financial condition, ~~and~~ results of operations, and cash flows of the Company in and following the period in which such an outcome becomes estimable or known.

~~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 312 Level III and Level IV SkyWatch Surveillance Towers sold by FLIR and companies acquired by FLIR from 2002 through 2014. During the quarter ended September 30, 2016, the Company identified the cause of these quality issues and tested certain remedial solutions which may be required to repair the affected SkyWatch Towers. Testing of the remedial solution is ongoing. The Company has notified customers who purchased the affected SkyWatch 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 the completion of its review and the implementation of any necessary remedial measures. 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 $2$2.5 million and ~~$20~~$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 $2$2.5 million as of ~~September 30,~~December 31, 2016. Factors underlying this estimated range of loss may change from time to time, and actual results may vary significantly from this estimate

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 for a liability with respect to a matter when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated for such matter. The Company believes it has recorded adequate provisions for any probable and estimable losses for matters in existence on the date hereof. 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 ~~(benefit)~~ for income taxes was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2016			2015			2017			2016
Income tax provision (benefit)	$	16,575		$	(1,896	)	$	85,555		$	29,182
Income tax provision													$	12,993		$	54,495
Effective tax rate	22.0		%	(2.7		)%	44.9		%	14.5		%	23.4		%	98.0		%

The effective tax rate for the three months ended ~~September 30, 2016~~March 31, 2017 is lower than the US Federal tax rate of 35 percent ~~because of~~mainly due to the mix of lower foreign jurisdiction tax rates, the effect of federal, foreign and state tax credits and 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. In July 2016, the Company filed a separate appeal with the General Court of the European Union. 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.

As of ~~September 30, 2016,~~March 31, 2017, the Company had approximately ~~$53.4~~$53.5 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. The Company anticipates ~~an immaterial portion~~approximately $40.2 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 uncertain tax positions as income tax expense. As of September 30, 2016, the Company had approximately $2.2 million of net accrued interest and penalties related to uncertain tax positions.

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 16.	Income Taxes - (Continued)

The Company classifies interest and penalties related to unrecognized tax benefits in the income tax provision. As of March 31, 2017, the Company had $2.3 million of accrued interest and penalties related to unrecognized tax benefits that are recorded as current and non-current accrued income taxes on the Consolidated Balance Sheet.

The Company currently has the following tax years open to examination by major taxing jurisdictions:



	Tax Years:
USUnited States Federal	2013 –- 2015
State of California	2013 - 2015
State of Massachusetts	2013 - 2015
State of Oregon	~~2012 – 2014~~
~~State of Massachusetts~~	~~2011 – 2014~~
~~State of California~~	~~2012 – 2014~~2013 - 2015
Sweden	~~2011 – 2014~~2012 - 2015
United Kingdom	~~2011 – 2014~~2012 - 2015
Belgium	2011 - ~~2014~~2015


~~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 and video recording 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 as well as 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)~~


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, 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 September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2016			2015			2016			2015			2017			2016
Revenue – External Customers:
Revenue—External Customers:
Surveillance	$	136,402		$	131,598		$	373,993		$	352,312		$	118,729		$	124,151
Instruments	82,673			74,796			240,160			248,877			77,855			79,418
Security	56,431			59,331			166,872			158,185			45,078			47,061
OEM & Emerging Markets	62,719			51,448			167,544			137,568			84,765			47,845
Maritime	40,586			38,920			147,469			141,922			48,550			51,720
Detection	26,417			25,835			91,391			80,556			31,837			29,277
	$	405,228		$	381,928		$	1,187,429		$	1,119,420		$	406,814		$	379,472
Revenue – Intersegments:
Revenue—Intersegments:
Surveillance	$	5,001		$	2,653		$	13,980		$	8,400		$	4,756		$	4,224
Instruments	709			777			3,498			2,687			5,790			1,575
Security	4,267			2,386			10,575			10,393			3,126			2,473
OEM & Emerging Markets	7,518			8,020			24,528			25,778			9,170			8,176
Maritime	656			85			2,728			1,667			677			615
Detection	—			—			31			—			—			—
Elimination	(18,151		)	(13,921		)	(55,340		)	(48,925		)
Eliminations													(23,519		)	(17,063		)
	$	—		$	—		$	—		$	—		$	—		$	—
Earnings (loss) from operations:
Segment operating income:
Surveillance	$	38,427		$	39,918		$	99,801		$	96,464		$	26,365		$	35,865
Instruments	27,010			21,555			65,640			77,959			21,146			19,981
Security	2,958			7,222			2,527			18,911			315			(2,169		)
OEM & Emerging Markets	19,936			14,233			46,063			33,507			24,357			10,686
Maritime	2,391			1,848			14,110			13,058			5,205			5,806
Detection	6,641			5,290			24,484			17,349			8,737			8,237
Other	(16,514		)	(14,084		)	(49,187		)	(44,981		)
	$	80,849		$	75,982		$	203,438		$	212,267		$	86,125		$	78,406

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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


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

Operating Segments - (Continued)

A reconciliation of the Company's consolidated segment operating income to consolidated earnings before income taxes is as follows (in thousands):

September 30,
2016 December 31,
2015
Segment assets (accounts receivable, net and inventories):
Surveillance $ 275,705
$ 285,602
Instruments 110,048
130,363
Security 93,646
105,737
OEM & Emerging Markets 118,408
93,925
Maritime 62,290
73,506
Detection 29,730
30,057
$ 689,827
$ 719,190



	Three Months Ended March 31,
	2017			2016
Consolidated segment operating income	$	86,125		$	78,406
Unallocated corporate expenses	(18,223		)	(16,624		)
Amortization of purchased intangible assets	(6,736		)	(4,207		)
Amortization of acquisition-related inventory step-up	(1,992		)	—
Restructuring charges	(88		)	(198		)
Consolidated earnings from operations	$	59,086		$	57,377
Interest and non-operating expense, net	(3,522		)	(1,757		)
Consolidated earnings before income taxes	$	55,564		$	55,620

Unallocated corporate expenses include general corporate expenses, acquisition related costs and executive transition costs.


	September 30, 2016		December 31, 2015		March 31,		December 31,
Segment goodwill:
					2017		2016
Segment assets (accounts receivable, net and inventories):
Surveillance	$	151,123	$	120,145	$	269,646	$	283,324
Instruments	150,638		149,582		111,800		114,681
Security	105,630		101,955		76,976		93,174
OEM & Emerging Markets	70,380		69,973		139,791		144,862
Maritime	100,489		106,549		73,619		61,494
Detection	47,983		48,112		22,966		25,856
	$	626,243	$	596,316	$	694,798	$	723,391



	March 31,		December 31,
	2017		2016
Segment goodwill:
Surveillance	$	244,433	$	152,383
Instruments	148,538		147,595
Security	103,844		102,983
OEM & Emerging Markets	253,074		252,647
Maritime	98,596		97,860
Detection	47,951		47,938
	$	896,436	$	801,406

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


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

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 September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2016		2015		2016		2015		2017		2016
United States	229,350		216,237		647,938		587,637		$	221,832	$	194,283
Europe									83,271		84,410
Asia									53,924		43,825
Middle East/Africa									25,142		27,712
Canada/Latin America	19,401		23,825		66,727		60,224		22,645		29,242
Europe	71,949		66,207		240,656		255,331
Middle East/Africa	41,889		37,253		98,231		89,830
Asia	42,639		38,406		133,877		126,398
	$	405,228	$	381,928	$	1,187,429	$	1,119,420	$	406,814	$	379,472

Long-lived assets by significant geographic locations are as follows (in thousands):


					March 31,		December 31,
	September 30, 2016		December 31, 2015		2017		2016 (as reclassified)
United States	$	692,391	$	666,759	$	686,546	$	676,007
Europe	369,906		383,501		480,653		490,089
Other international	14,263		13,197
Other foreign					241,715		243,710
	$	1,076,560	$	1,063,457	$	1,408,914	$	1,409,806

Major Customers

Revenue derived from major customers is as follows (in thousands):



	Three Months Ended March 31,
	2017		2016
United States government	$	116,235	$	85,636

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

~~Major Customers~~

~~Revenue derived from major customers is as follows (in thousands):~~

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
US Government $ 112,737
$ 79,297
$ 298,479
$ 208,742


Note 18.	Business Acquisitions

Point Grey Research, Inc.

On November ~~30, 2015,~~4, 2016, the Company ~~acquired 100%~~closed a transaction to acquire the assets of ~~the outstanding stock of DVTEL~~Point Grey Research Inc. ~~("DVTEL"~~(“Point Grey”), a ~~provider~~global leader in the development of ~~software~~advanced visible imaging cameras and ~~hardware technologies for~~solutions 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 the purchase price over the preliminary net tangible and identifiable intangible assets has been recorded as goodwill within the Company's Security segment and is subject to the final determination on the valuation of assets acquired and liabilities assumed.

~~The preliminary allocation of the purchase price for DVTEL is as follows (in thousands):~~

Cash acquired $ 5,015
Other tangible assets and liabilities, net 4,024
Net deferred taxes 582
Identifiable intangible assets 27,380
Goodwill 60,491
Total purchase price $ 97,492

During the three months ended September 30, 2016, the Company made revisions to certain estimates in the preliminary purchase price allocation, including changes to deferred taxes and tangible assets and liabilities. The preliminary allocation of the purchase price related to this acquisition 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 $60.5 million represents future economic benefits expected to arise from synergies from combining operations and the ability of DVTEL 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. At June 30, 2016, the Company initially reported the $36.0 million excess of the purchase price over the preliminary net tangible assets acquired had been recorded in Other assets. The Company has ~~since~~ performed a preliminary purchase price allocation which resulted in an allocation of ~~$7.6~~$39.8 million to identifiable intangible assets and ~~$31.1~~$183.7 million to goodwill which has been recorded in the Company’s ~~Surveillance~~OEM & Emerging Markets segment.

The preliminary allocation of the purchase price for ~~Armasight~~Point Grey is as follows (in thousands):


Cash acquired	$	2,804	$	2,994
Other tangible assets and liabilities, net	1,979		35,127
Net deferred taxes			(2,438		)
Identifiable intangible assets	7,600		39,800
Goodwill	31,085		183,678
Total purchase price	$	43,468	$	259,161

~~FLIR SYSTEMS, INC.~~

~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~(Unaudited)~~


~~Note 18.~~	~~Business Acquisitions - (Continued)~~

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, 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 ~~$31.1~~$183.7 million represents future economic benefits expected to arise from synergies from combining operations and the ability of ~~Armasight~~Point Grey to provide the Company domain knowledge and distribution channels in adjacent markets.

In ~~addition,~~connection with the preliminary 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 preliminary estimated fair values, and preliminary estimated useful lives (in thousands, except years):



	Estimated Useful Life	Amount
Developed technology	10 years	$	23,100
Customer relationships	7 years	13,200
Backlog	1 year	2,300
Non-Competition Agreements	5 years	1,000
Other	n/a	200
		$	39,800

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 ~~June 6,~~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.

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 18.	Business Acquisitions - (Continued)

Prox Dynamics, AS

On November 30, 2016, the Company acquired 100% of the ~~assets~~outstanding stock of ~~Innovative Security Designs, LLC ("ISD"~~Prox Dynamics AS (“Prox Dynamics”), a leading developer and manufacturer of ~~embedded firmware~~nano-class unmanned aircraft systems ("UAS") for military and ~~advanced camera~~para-military intelligence, surveillance, ~~platforms,~~and reconnaissance applications, for approximately ~~$1.8~~$134.1 million in ~~cash.~~cash, subject to customary post-close adjustments. At ~~June 30,~~December 31, 2016, the Company ~~initially~~ reported the ~~$1.6 million excess of the purchase price over the preliminary~~ net tangible assets ~~acquired~~of $11.3 million in ~~Other~~the respective balance sheet accounts and the excess purchase price of $122.8 million in other long-term assets. ~~The~~

During the three months ended March 31, 2017, the Company ~~has since~~ performed a preliminary purchase price allocation which resulted in an allocation of ~~$1.6~~$31.4 million of identifiable intangible assets and $91.9 million of goodwill in conjunction with the ~~ISD~~Prox Dynamics acquisition, which has been recorded in the Company’s ~~Security~~Surveillance business segment.

The preliminary allocation of the purchase price for Prox Dynamics is as follows (in thousands):



Cash acquired	$	11,706
Other tangible assets and liabilities, net	(900		)
Identifiable intangible assets	31,400
Goodwill	91,882
Total purchase price	$	134,088

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 unrecognized tax benefits), and certain other tangible assets and liabilities. The preliminary goodwill of $91.9 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.

In connection with the preliminary 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 preliminary estimated fair values, and preliminary estimated useful lives (in thousands, except years):



	Estimated Useful Life	Amount
Developed technology	8 years	$	23,400
Customer relationships	7 years	3,500
Patents	8 years	3,100
Trade name	8 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.

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.

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


Note 19.	Subsequent Events

On ~~October~~April 20, ~~2016,~~2017, the Company’s Board of Directors declared a quarterly dividend of ~~$0.12~~$0.15 per share on its common stock, payable on ~~December 2, 2016,~~June 9, 2017, to shareholders of record as of the close of business on ~~November 18, 2016.~~May 26, 2017. The total cash payment of this dividend will be approximately ~~$16.3 million.~~

~~On November 4, 2016, the Company's subsidiary, FLIR Integrated Imaging Solutions, Inc., completed its previously announced acquisition of the assets of Point Grey Research Inc., for approximately $259~~$20.5 million ~~in cash, which is subject to a post-closing working capital adjustment.~~.


~~Item~~ITEM 2.	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~MANAGEMENT’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,1, 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 of the ~~Company’s~~Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, ~~2015~~,2016, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I,1, 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 do~~the 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 update~~the Company updates or ~~correct~~corrects 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 ~~September 30, 2016increased~~ by ~~6.1 percent~~ ~~year over year, from~~ ~~$381.9 million~~ ~~in the~~ ~~third~~ ~~quarter of~~ ~~2015~~ to ~~$405.2 million~~ ~~in the~~ ~~third~~ ~~quarter of~~ ~~2016. Consolidated revenue for the nine months ended September 30, 2016~~March 31, 2017 increased by ~~6.1~~7.2 percent year over year, from ~~$1,119.4~~$379.5 million in the first ~~nine months~~quarter of ~~2015~~2016 to ~~$1,187.4~~$406.8 million in the first ~~nine months~~quarter of ~~2016~~.2017. Increases in revenues for the three month period in our ~~Surveillance, Instruments,~~ OEM & Emerging Markets ~~Maritime,~~ and Detection segments were partially offset by ~~a decline~~declines in ~~revenue in our Security segment. Increases in~~ revenues ~~for the nine month period~~ in our Surveillance, Maritime, Security ~~OEM & Emerging Markets, Maritime~~ and ~~Detection segments were partially offset by a decline in revenue in our~~ Instruments ~~segment.~~segments.

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 ~~2016~~2017 to be higher than ~~2015~~2016 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 ~~43.4~~45.5 percent and 48.8 percent of total revenue for ~~both~~ the ~~three month periods~~quarters ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015, and 45.4 percent and 47.5 percent for the nine months ended September 30, 2016 and 2015,~~ 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 nine~~ months ended ~~September 30, 2016~~March 31, 2017 was ~~$213.9~~$215.5 million, ~~and $635.0 million, respectively,~~ compared to cost of goods sold for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 of ~~$201.2 million~~ ~~and $573.2 million, respectively.~~$201.8 million. The year over year increase in cost of goods sold is primarily ~~relates~~related to higher revenues ~~and changes~~ in ~~segment and product mix.~~2017.

Gross profit. Gross profit for the quarter ended ~~September 30, 2016~~March 31, 2017 was ~~$191.4~~$191.3 million compared to ~~$180.7~~$177.7 million for the same quarter ~~last year. Gross profit for the nine months ended September 30, 2016 was $552.4 million compared to $546.3 million for the same period~~ last year. Gross margin, defined as gross profit divided by revenue, ~~decreased~~increased from ~~47.3 percent~~ ~~in the~~ ~~third~~ ~~quarter of~~ ~~2015~~ to ~~47.2 percent~~ ~~in the~~ ~~third~~ ~~quarter of~~ ~~2016~~ ~~and decreased from 48.8~~46.8 percent in the first ~~nine months~~quarter of ~~2015~~2016 to ~~46.5~~47.0 percent in the first ~~nine months~~quarter of ~~2016.~~2017. The ~~decrease~~increase in gross margin for the ~~nine month~~three-month period was primarily due to the acquisitions, improved manufacturing variances and off-standard costs, and product mix, partially offset by changes in ~~product mix~~currency exchange rates, particularly in our Instruments and ~~manufacturing cost variances and under-absorption.~~Maritime segments.

Research and development expenses. Research and development expenses for the ~~third~~first quarter of ~~2016~~2017 totaled ~~$32.7 million, compared to~~ ~~$31.2 million~~ ~~in the~~ ~~third~~ ~~quarter of~~ ~~2015. Research and development expenses for the first nine months of~~ ~~2016~~ ~~totaled $106.0~~$42.0 million, compared to ~~$101.1~~$37.3 million in the first ~~nine months~~quarter of ~~2015~~.2016. Research and development expenses as a percentage of revenue were ~~8.1 percent~~ ~~and 8.9 percent for the~~ ~~three and nine months~~ ~~ended~~ ~~September 30, 2016, respectively. Research and development expenses as a percentage of revenue were 8.2 percent and 9.0~~10.3 percent for the three ~~and nine~~ months ended ~~September 30, 2015, respectively.~~March 31, 2017 and 9.8 percent for the three months ended March 31, 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 more 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 ~~$77.9~~$90.3 million and ~~$73.6~~$83.0 million for the quarters ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015, respectively. Selling, general and administrative expenses were $242.9 million and $232.9 million for the nine months ended September 30, 2016 and 2015,~~ respectively. The increase in selling, general and administrative expenses year over year for the three month period was primarily related to incremental expenses associated with DVTEL, acquired in November 2015, and Armasight, acquired in June 2016, partially offset by cost control measures executed during the current quarter. The increase in selling, general and administrative expenses year over year for the nine month period was primarily related to the inclusion of selling, general and administrative expenses of ~~DVTEL and Armasight and higher corporate legal expenses, partially offset by lower corporate administration expenses and other cost control efforts realized~~companies acquired in ~~2016.~~the last 12 months. Selling, general and administrative expenses as a percentage of revenue were ~~19.2~~22.2 percent and ~~19.3~~21.9 percent for the quarters ended ~~September 30,2016~~March 31, 2017 and ~~2015, respectively, and 20.5 percent and 20.8 percent for the nine month periods ended September 30,~~ 2016, ~~and 2015,~~ respectively. Over the past five annual periods through December 31, ~~2015~~,2016, our annual selling, general and administrative expenses have varied between ~~20.1~~19.4 percent and ~~23.6~~21.7 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 ~~nine~~three months of ~~2016~~2017 was ~~$13.5~~$4.5 million, compared to ~~$10.7~~$3.4 million for the same period of ~~2015.~~2016. Interest expense ~~for~~in 2017 was primarily associated with the ~~year~~$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 ~~were repaid in July 2016, the $425 million aggregate principal amount of 3.125% senior unsecured notes that were issued in June 2016, and amounts~~was drawn upon under our credit ~~facility. Interest expense~~agreement.

Income taxes. Our income tax provision of $13.0 million for the three months ended September 30, 2016 was $5.7 million, compared to $3.7 million for the same period in 2015. The year over year increase in interest expense is primarily due to the increased amount of interest bearing debt as well as a $1.3 million loss on the extinguishment of the $250 million unsecured notes that were repaid in July 2016.

~~Income taxes.~~ ~~The income tax provision of~~ ~~$16.6 million~~ ~~and $85.6 million for the three and nine months ended~~ ~~September 30, 2016, respectively,~~March 31, 2017 represents an effective tax rate of 2423.4 percent. This compares favorably to our income tax provision of $54.5 million for the three months ended March 31, 2016, which represented an effective tax rate of 98.0 percent ~~excluding discrete items. The first quarter of 2016~~and included discrete tax charges totaling $40.0 million, primarily related to the European ~~Commission's~~Commission’s decision regarding certain tax legislation in Belgium impacting one of our international subsidiaries. The effective tax rate for the three months ended March 31, 2017 is lower than the US 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 and discrete adjustments.

On January 11, 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 ~~that~~ they have appealed this decision and filed an action for an annulment ~~with~~in the General Court of the European ~~Union. In~~Union, and in July 2016 the Company filed a separate appeal with the General Court of the European Union. In accordance with FASB ASC Topic 740, “Income Taxes,” 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, which the Company has classified as current taxes payable on the Consolidated Balance Sheet as of March 31, 2017. The ~~outcome~~Company has filed a complaint against the Belgian tax assessments, and the result of this complaint, the appeal with the General Court of the ~~appeal,~~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 24 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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	136.4		$	131.6		$	374.0		$	352.3		$	118.7		$	124.2
Earnings from operations	38.4			39.9			99.8			96.5			26.4			35.9
Operating margin	28.2		%	30.3		%	26.7		%	27.4		%	22.2		%	28.9		%
Backlog, end of period							363			314
Backlog													320			314

~~Revenue~~Surveillance revenue for the three ~~and nine~~ months ended March 31, 2017 decreased by ~~September 30, 2016~~4.4 percent ~~increased by 3.7 percent and 6.2 percent, respectively,~~ compared to the same ~~periods~~period of ~~2015~~2016. The ~~increase~~decrease in revenue ~~for the three and nine month periods~~ was primarily due to the ~~acquisition~~completion of a large international government contract in the prior year and a US government contracting delay in the current quarter. This was partially offset by revenue from the acquisitions of Armasight in June 2016 and ~~increases~~Prox Dynamics in ~~our weapon sights and other portable/hand-held product lines and our integrated systems product line, partially offset by a decline in revenue in our airborne product line. Revenues~~November 2016. Earnings from ~~US government customers in~~operations for the three month period declined year over year primarily due to a decrease in revenues, as noted above, and ~~nine month periods increased by approximately 33 percent~~higher operating expenses, due to the acquisitions of Armasight and ~~45 percent, respectively, over the prior year.~~Prox Dynamics.

Instruments

Instruments operating results are as follows (in millions, except percentages):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	82.7		$	74.8		$	240.2		$	248.9		$	77.9		$	79.4
Earnings from operations	27.0			21.6			65.6			78.0			21.1			20.0
Operating margin	32.7		%	28.8		%	27.3		%	31.3		%	27.2		%	25.2		%
Backlog, end of period							27			29
Backlog													30			27

~~Revenue~~Instruments segment revenue for the three ~~and nine~~ months ended ~~September 30, 2016~~ ~~increased~~ ~~by 10.5 percent and~~March 31, 2017 decreased by ~~3.5~~2.0 percent ~~respectively,~~ compared to the same ~~periods~~period of ~~2015~~.2016. The ~~increase~~decrease in revenue ~~for the three month period~~ was primarily ~~due~~related to ~~increases~~a decline in sales for our building and predictive maintenance and ~~firefighting products lines.~~Extech product lines, partially offset by an increase in sales from fire products. The ~~decrease~~increase in ~~revenue~~earnings from operations for the ~~nine month~~three months ended March 31, 2017, compared to the same period of 2016, was primarily due to ~~a decline~~reduced operating expenses related to cost containment initiatives implemented in sales in Europe; on a product line basis, the segment revenue decline was primarily in our building and predictive maintenance product line. The decrease in earnings from operations and operating margin for the nine months ended September 30, 2016, ~~compared to the same periods of 2015, was primarily due to decreased revenues and lower~~as well as improved gross ~~margins as a result of manufacturing cost variances and under-absorption, and investments in low cost optics capabilities.~~margins.

Security

Security operating results are as follows (in millions, except percentages):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	56.4		$	59.3		$	166.9		$	158.2		$	45.1		$	47.1
Earnings from operations	3.0			7.2			2.5			18.9			0.3			(2.2		)
Operating margin	5.2		%	12.2		%	1.5		%	12.0		%	0.7		%	(4.6		)%
Backlog, end of period							23			16
Backlog													23			15

~~Revenue for the~~ ~~three and nine months~~ ~~ended September 30, 2016 decreased by 4.9 percent and increased by 5.5 percent, respectively, compared to the same periods of~~ ~~2015. The decrease in~~Security segment revenue for the three ~~month period is primarily due to a decrease in consumer-grade security products~~months ended March 31, 2017 decreased by 4.2 percent compared to the same period ~~in the prior year.~~of 2016. The ~~increase~~decrease in revenue ~~for the nine month period~~ was primarily due to ~~the acquisition of DVTEL~~a reduction in ~~November 2015 and the inclusion of the associated revenues~~sales for consumer-grade security products. The increase in ~~the current year. The decrease in~~

earnings from operations ~~year over year~~ for the three ~~and nine month periods~~months ended March 31, 2017, compared to the same period of 2016, was primarily due to ~~acquisition-related amortization and higher~~reduced operating expenses ~~associated with~~related to cost reduction initiatives implemented in the ~~DVTEL acquisition.~~

second half of 2016, as well as improved gross margins.

OEM & Emerging Markets

OEM & Emerging Markets operating results are as follows (in millions, except percentages):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	62.7		$	51.4		$	167.5		$	137.6		$	84.8		$	47.8
Earnings from operations	19.9			14.2			46.1			33.5			24.4			10.7
Operating margin	31.8		%	27.7		%	27.5		%	24.4		%	28.7		%	22.3		%
Backlog, end of period							139			115
Backlog													141			134

~~Revenue increased by 21.9 percent and 21.8 percent~~OEM & Emerging Markets segment revenue for the three ~~and nine~~ months ended ~~September 30, 2016, respectively,~~March 31, 2017 increased by 77.2 percent compared to the same ~~periods~~period of ~~2015~~2016. The increase in revenue ~~year over year~~was primarily due to the acquisition of Point Grey in November 2016 as well as higher deliveries of cores and components, including continued growth in our Lepton microbolometer core sales. The increase in earnings from operations for the three ~~and nine month periods~~months ended March 31, 2017, compared to the same period of 2016, was primarily due to higher deliveries in most of the segment product lines, particularly in cores and components and mobile accessories. Geographically, all regions reported year over year increases. Segment earnings from operations increased for the three and nine 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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	40.6		$	38.9		$	147.5		$	141.9		$	48.6		$	51.7
Earnings from operations	2.4			1.8			14.1			13.1			5.2			5.8
Operating margin	5.9		%	4.7		%	9.6		%	9.2		%	10.7		%	11.2		%
Backlog, end of period							24			22
Backlog													20			26

~~Revenue~~Maritime segment revenue for the three ~~and nine~~ months ended ~~September 30, 2016 increased~~March 31, 2017 decreased by ~~4.3~~6.1 percent ~~and 3.9 percent, respectively,~~ compared to the same ~~periods~~period of ~~2015~~2016. The ~~increase~~decrease in revenue ~~year over year for the three and nine month periods was~~is primarily due to ~~an increase~~a decrease in the Americas and ~~Europe~~Middle East and Africa regions. On a product basis, ~~increased shipments~~there was a decrease in sales of multifunction navigation displays and ~~infrared cameras more than offset declines~~thermal cameras. The decrease in ~~autopilot~~earnings from operations is primarily due to the decrease in revenues. Revenues and ~~instrument shipments.~~earnings from operations were also negatively impacted by foreign exchange rate changes in European currencies.

Detection

Detection operating results are as follows (in millions, except percentages):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			Three Months Ended March 31,
													2017			2016
Revenue	$	26.4		$	25.8		$	91.4		$	80.6		$	31.8		$	29.3
Earnings from operations	6.6			5.3			24.5			17.3			8.7			8.2
Operating margin	25.1		%	20.5		%	26.8		%	21.5		%	27.4		%	28.1		%
Backlog, end of period							68			72
Backlog													74			97

~~Revenue~~Detection segment revenue for the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 increased by ~~2.3~~8.7 percent ~~and 13.5 percent, respectively,~~ compared to ~~the~~ same ~~periods~~period of ~~2015~~.2016. The increase in revenue ~~for the three and nine month period~~ was primarily ~~related~~due to increased shipments from our ~~CBRNE~~chemical, biological, radiological, nuclear, and

explosives ("CBRNE") threat response systems to United States government ~~customers.~~customers and an increase in shipments of our identiFINDER products within the radiation detection product line. This was partially offset by a decrease in sales in our chemical and biological detection product line. The increase in earnings from operations ~~and operating margins for the three and nine month period ended~~ ~~September 30, 2016~~ ~~compared to the same periods during the prior year were~~is primarily due to the ~~increases~~increase in ~~revenue and reduced operating expenses.~~revenues.

Liquidity and Capital Resources

At ~~September 30, 2016~~,March 31, 2017, we had a total of $~~677.7~~397.4 million in cash and cash equivalents, $116.7 millionof which~~$211.0 million~~ was in the United States and $~~466.7~~280.7 million ~~was~~ at our foreign subsidiaries, compared to cash and cash equivalents at December 31, ~~2015~~2016 of $~~472.8~~361.3 million, of which $~~129.6~~98.3 million was in the United States and $~~343.2~~263.0 million ~~was~~ at our foreign subsidiaries. The increase in cash and cash equivalents during the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 was primarily due to ~~the proceeds~~cash provided from ~~long-term debt and cash from operating activities,~~operations of $75.1 million, partially offset by ~~the repayment of long-term debt, $42.4 million spent on the acquisitions of Armasight and ISD,~~ capital expenditures of ~~$27.7 million, repurchase of common stock of $66.1~~$13.6 million and dividend payments of ~~$49.6~~$20.5 million.

Cash provided by operating activities during the three months ended March 31, 2017 totaled $~~215.2~~75.1 million ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2016~~, which primarily consisted of net earnings, ~~and reductions in working capital,~~ adjusted for non-cash charges for depreciation and amortization, stock-based compensation and other non-cash ~~items.~~items and improved use of working capital.

Cash used byfor investing activities ~~totaled $63.1 million~~ for the ~~nine~~three months ended ~~September 30, 2016, consisting~~March 31, 2017 totaled $13.6 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 ~~provided~~used by financing activities ~~totaled~~ ~~$50.7 million~~for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 totaled $28.8 million, which primarily consisted of the ~~net proceeds from long-term debt~~payment of dividends and the ~~new credit agreement, partially offset by $251.2 million to repay long-term debt, repurchases of common stock, and payment of dividends.~~quarterly term loan principal payment.

On February 8, 2011, we ~~signed~~entered 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 ~~February~~April 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 2.357 percent per annum and the prime lending-based borrowing rate was 4.375 percent per annum at March 31, 2017. The Credit Agreement requires us to pay a commitment fee on the amount of unused ~~credit~~revolving commitments at a rate, based on ~~the Company’s~~our total leverage ratio, which ranges from ~~0.15~~0.150 percent to ~~0.30 percent.~~0.300 percent of unused revolving commitments. The Credit Agreement contains two financial covenants that require the maintenance of ~~certain~~a total leverage ~~ratios~~ratio and an interest coverage ratio, with which ~~we were~~the Company was in compliance at ~~September 30, 2016.~~March 31, 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 ~~September 30, 2016,~~March 31, 2017, the effective interest rate on the ~~term loan~~revolving 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 September 30, 2016, we had $97.5 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 $21.6 million of letters of credit outstanding at September 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, 2021 (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 July~~our 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 our common stock.

At March 31, 2017, we had $90.0 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 $16.5 million of letters of credit outstanding under the Credit Agreement at March 31, 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. As of ~~September 30, 2016~~,March 31, 2017, an aggregate of 6.3 million shares had been repurchased under this authorization, which ~~expires~~expired 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.

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.

On October 3, 2016, the Company announced that its subsidiary, FLIR Integrated Imaging Solutions, Inc., reached a definitive asset purchase agreement to acquire the assets of Point Grey Research Inc. (“Point Grey”). The Company completed this acquisition on November 4, 2016 for approximately $259 million in cash, which is subject to a post-closing working capital adjustment. The acquisition is intended to augment FLIR’s existing OEM cores and components business by adding a broad range of visible spectrum machine vision cameras and solutions. Additionally, the Company’s thermal sensor technology is expected to further extend Point Grey’s product range into new application spaces.

We believe that our existing cash combined with the cash we ~~expect to generate~~anticipate 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 September 30, 2016,~~As of March 31, 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 is currently evaluating the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.~~

In August 2014, 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 Ability to Continue as a Going Concern" ("ASU 2014-15"). Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual and interim periods beginning after 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.2018. The Company currently ~~intends~~plans to adopt ~~ASU 2015-11~~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 ~~January 1,~~a number of factors, such as the significance of the impact of 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 expects to complete the contract evaluation and validate the impact of the accounting and disclosure changes on its business processes, controls and systems during the first half of 2017, design any changes to such business processes, controls and systems by the middle of 2017, and ~~does not expect~~implement the ~~adoption~~changes over the remainder 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.2017.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments 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 month~~twelve-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 ~~2016-09~~2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption ~~permitted. The~~permitted, 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 evaluating~~expects that the ~~potential effects~~primary impact upon adoption will be the recognition, on a discounted basis, of ~~adopting~~its minimum commitments under noncancelable operating leases on its consolidated balance sheets resulting in the ~~provisions~~recording of ~~ASU 2016-02.~~right of use assets and lease obligations.

In ~~March~~October 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 amendments in this update ~~identify areas~~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 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company currently intends to adopt ASU 2016-09 on January 1, 2017, and is currently evaluating the potential effects of adopting the provisions of ASU 2016-09.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The amendments in this update provide clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-152016-16 is effective for interim and annual reporting periods beginning after December 15, 2017 ~~including interim periods within those fiscal years, with early~~and should be applied on a modified retrospective transition basis. Early adoption is permitted. The Company ~~adopted~~currently intends to adopt ASU ~~2016-15~~2016-16 on January 1, 2018 and is currently evaluating the potential impact of adopting the provisions of ASU 2016-16.

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 ~~third quarter~~definition of ~~2016,~~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 ~~our early~~annual reporting periods beginning after December 15, 2017. The Company currently intends to adopt ASU 2017-01 on January 1, 2018, and does not expect the adoption of ASU ~~2016-15 did not~~2017-01 to have a material impact on ~~our~~its consolidated financial ~~statements or disclosures.~~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 ~~September 30, 2016.~~March 31, 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 identified by the Company regarding certain SkyWatch Surveillance Towers.


~~Item~~ITEM 3.	~~Quantitative and Qualitative Disclosures About Market Risk~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of ~~September 30, 2016~~,March 31, 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.


~~Item~~ITEM 4.	~~Controls and Procedures~~CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of ~~September 30, 2016~~,March 31, 2017, the Company ~~carried out~~completed 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 September 30, 2016 such~~to 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 ~~September 30, 2016~~March 31, 2017 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II. OTHER INFORMATION


~~Item~~ITEM 1.	~~Legal Proceedings~~LEGAL 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 no material change in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2015~~.

2016.


~~Item~~ITEM 2.	~~Unregistered Sales of Equity Securities and Use of Proceeds~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~During the three months ended September 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⁾

August 1 to August 31, 2016 598,900
$ 30.63
598,900

September 1 to September 30, 2016 582,770
30.83
582,770

Total 1,181,670
$ 30.73
1,181,670
8,699,461

~~(1) The share repurchases were made 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.


~~Item~~ITEM 5.	~~Other Information~~OTHER INFORMATION

None.


~~Item~~ITEM 6.	~~Exhibits~~EXHIBITS



Number		Description
~~3.1~~		~~Fourth Restated Bylaws of FLIR Systems, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on October 24, 2016).~~
~~10.1~~		Asset Purchase Agreement by and among FLIR Integrated Imaging Solutions, Inc., Point Grey Research Inc., FLIR Systems, Inc. and certain shareholders of Point Grey Research Inc., dated as of October 1, 2016 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K on October 6, 2016).
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.
32.1		~~Principal~~Certification by the Chief Executive Officer ~~Certification Pursuant~~pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002, Section 906.~~2002.
32.2		~~Principal~~Certification by the Chief Financial Officer ~~Certification Pursuant~~pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002, Section 906.~~2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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 ~~November 4, 2016~~May 3, 2017		/s/ AMIT SINGHI
		Amit Singhi
		Sr. Vice President, Finance and Chief Financial Officer
		(Duly Authorized and Principal Financial Officer)



	September 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	677,688		$	472,785
Accounts receivable, net	309,602			326,098
Inventories	380,225			393,092
Prepaid expenses and other current assets	88,625			95,539
Total current assets	1,456,140			1,287,514
Property and equipment, net	267,149			272,629
Deferred income taxes, net	55,194			55,429
Goodwill	626,243			596,316
Intangible assets, net	135,878			141,302
Other assets	47,290			53,210
Total assets	$	2,587,894		$	2,406,400
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	109,663		$	139,540
Deferred revenue	36,553			31,933
Accrued payroll and related liabilities	54,277			54,806
Accrued product warranties	16,759			13,406
Advance payments from customers	28,680			33,848
Accrued expenses	35,449			40,930
Accrued income taxes	6,133			201
Other current liabilities	8,134			5,987
Current portion, long term debt	15,000			264,694
Total current liabilities	310,648			585,345
Long-term debt	501,606			93,750
Deferred income taxes	3,711			3,623
Accrued income taxes	53,397			10,457
Other long-term liabilities	65,126			63,710
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued at September 30, 2016, and December 31, 2015	—			—
Common stock, $0.01 par value, 500,000 shares authorized, 136,127 and 137,350 shares issued at September 30, 2016, and December 31, 2015, respectively, and additional paid-in capital	1,361			1,374
Retained earnings	1,786,994			1,773,267
Accumulated other comprehensive loss	(134,949		)	(125,126		)
Total shareholders’ equity	1,653,406			1,649,515
Total liabilities and shareholders’ equity	$	2,587,894		$	2,406,400



	September 30, 2016				December 31, 2015
	Other current assets		Other current liabilities		Other current assets		Other current liabilities
Foreign currency forward contracts	$	61	$	1,811	$	767	$	1,314



Common stock and additional paid-in capital, December 31, 2015	$	1,374
Income tax benefit of common stock options exercised	1,477
Common stock issued pursuant to stock-based compensation plans, net	1,585
Stock-based compensation expense	21,147
Repurchase of common stock	(24,222		)
Common stock and additional paid-in capital, September 30, 2016	$	1,361



Cash acquired	$	5,015
Other tangible assets and liabilities, net	4,024
Net deferred taxes	582
Identifiable intangible assets	27,380
Goodwill	60,491
Total purchase price	$	97,492



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⁾

August 1 to August 31, 2016	598,900	$	30.63	598,900
September 1 to September 30, 2016	582,770	30.83		582,770
Total	1,181,670	$	30.73	1,181,670	8,699,461