SWOT analysis of FLIR Systems, Inc.

COMPANY OVERVIEW

FLIR Systems (FLIR) is engaged in the design, manufacture and marketing of thermal imaging

systems. The company operates in the US and Europe. It is headquartered in Wilsonville, Oregon

and employs 2,079 people.

The company recorded revenues of $1,147.1 million in the financial year ended December 2009

(FY2009), an increase of 6.5% over FY2008.The operating profit of the company was $347.3 million

in FY2009, an increase of 22.1% over FY2008. The net profit was $230.2 million in FY2009, an

increase of 14.6% over FY2008.

KEY FACTS

FLIR Systems, Inc.Head Office

27700 SW Parkway Avenue

Wilsonville

Oregon 97070

USA

1 503 498 3547Phone

Fax

http://www.flir.comWeb Address

1,147.1Revenue / turnover

(USD Mn)

DecemberFinancial Year End

2,079Employees

FLIRNASDAQ National

Market Ticker

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FLIR Systems, Inc.

Company OverviewSWOT ANALYSIS

FLIR Systems (FLIR) is engaged in the design, manufacture and marketing of thermal imaging

systems.The company has been able to expand its business through a number of acquisitions over

the years. However, intense competition across all the operating divisions of the company could

reduce its market share.

WeaknessesStrengths

Customer concentrationInorganic growth

Legal proceedingsBackward vertical integration

Dependence on sole source and limited

source suppliers of components

Robust financial performance

Strong liquidity position

ThreatsOpportunities

Intense competitionRising defense spending in the US

Rapid changes in technologyGrowth in automotive electronics market

Stringent US government contractual and

regulatory requirements

Agreement to acquire ICx Technologies

Strengths

Inorganic growth

FLIR has been able to expand its business through a number of acquisitions over the years. The

company acquired Cedip Infrared Systems, a provider of infrared imaging cameras and systems;

and Ifara Tecnologias, a developer of software, hardware and developer tools for security and

surveillance, force protection, exploration, and maritime purposes, in 2008. The company also

acquired Salvador Imaging, a leading provider of high-performance visible and low light imaging

systems, in June 2009. Further, it also acquired OmniTech Partners, a company engaged in the

development and manufacturing of image intensified and fused image intensified/thermal imagers,

in October 2009, and Directed Perception, a leading provider of pan-tilt motion control systems for

commercial and military markets, in December 2009. Moreover in May 2010, the company acquired

Raymarine Holdings Limited, a wholly owned subsidiary of Raymarine.

The Cedip Infrared Systems acquisition significantly improved FLIR's international distribution network

and added new products and technology, including infrared cameras. It also provided a strong

manufacturing and technology base for the company in Europe. The Ifara Tecnologias acquisition

provided the company with access to software and middleware solutions including video analytics,

networking and multi-sensor integration. OmniTech added image intensified capability to FLIR's

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SWOT Analysisproduct line, and created the opportunity to leverage the capabilities of both companies to expand

in the growing market for fused image intensified / thermal imagers. The acquisition of Directed

Perception enhanced and differentiated FLIR's pan-tilt-zoom camera systems for both commercial

and military markets. Raymarine Holdings’ acquisition further strengthened FLIR's foothold in the

marine market by increasing its maritime distribution network with the addition of Raymarine's 1,000

dealer outlets and more than 400 marine OEMs, nearly all of which are additive to FLIR's existing

distribution. FLIR also planned to expand Raymarine's product line breadth by integrating thermal

imaging cameras with Raymarine's display, radar and autopilot product lines to create the broadest,

most effective, and easiest to use suite of products in the marine electronics industry.

Through these acquisitions, the company enhanced its market share, increased its access to a

broader range of customers and extended its product portfolio.

Backward vertical integration

The company focuses on backward vertical integration primarily to reduce the manufacturing costs.

FLIR manufactures many of the critical components for its products, including infrared detectors,

gimbals, optics and coatings, laser subsystems and micro-coolers. It also develops much of the

necessary software and middleware for the systems. In addition, the company purchases other parts

(pre-assembled), including certain detectors, certain coolers and optics, circuit boards, cables and

wire harnesses.These purchased components are then assembled into finished systems and tested

at one of the company’s primary production facilities located in Wilsonville, Oregon; North Billerica,

Massachusetts; Goleta, California; Danderyd, Sweden; Croissy-Beauborg, France; Tallinn, Estonia;

and Bozeman, Montana; Colorado Springs, Colorado; Freeport, Pennsylvania; and Burlingame,

California. This vertical integration minimizes lead times and facilitates prompt delivery of FLIR’s

products. In addition, it also controls costs and ensures that these components satisfy the company’s

quality standards.

Robust financial performance

FLIR has reported consistent increase in its revenues and profitability since FY2009.The company's

revenues have grown at a compound annual growth rate (CAGR) (2005-09) of 23%. In FY2009, the

company recorded revenues of $1,147.1 million, an increase of 6.5% over FY2008. The increase

was primarily due to an increase in unit sales of the company’s large-gimbaled systems.

The company's profitability has also increased since FY2005. Its operating profit increased at a

CAGR (2005-09) of 29%, from $126 million in FY2005 to $347.3 million in FY2009. The operating

margin of the company increased to 30.8% in FY2009 from 24.8% in FY2005. Similarly, the net profit

of the company also increased at a CAGR (2005-09) of 27%. The net profit margin of the company

increased to 20.1% in FY2009 from 17.3% in FY2005. Robust financial performance provides financial

stability to the company which could be leveraged to seek more growth avenues in the future.

Strong liquidity position

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FLIR Systems, Inc.

SWOT AnalysisFLIR has a strong liquidity position in FY2009 compared to previous years. For instance, the

company’s cash and cash equivalents at the end of FY2009 were $422.0 million compared to $289.4

million in FY2008. The increase in cash and cash equivalents was primarily due to cash provided

from operations and the cash proceeds and tax benefits generated from FLIR’s stock-based

compensation programs, offset by business acquisitions, capital expenditures, and the repurchase

of FLIR’s common stock. Similarly, the cash provided by operating activities in FY2009 totaled $271.8

million compared to $218.3 million in 2008. The increase in cash provided from operating activities

was primarily due to an increase in net earnings and a lower level of net cash used in FY2009

compared to FY2008 for operating assets and liabilities, principally accounts receivable, inventories

and accrued payroll.

A strong liquidity positions enhances the shareholders confidence in the company and helps in

investing in other profitable businesses in the future.

Weaknesses

Customer concentration

A substantial portion of FLIR’s revenue is derived from sales to the US and foreign government

agencies. The company's business will continue to be substantially dependent upon such sales.

Aggregate sales to the US government agencies accounted for 43% of FLIR’s revenues in FY2009,

41% of its revenues in FY2008 and 39% in FY2007.The funding of contracts awarded to the company

depends on the overall US government budget and appropriation process, which is beyond the

company’s control. The US government programs are subject to uncertain future funding levels

which can result in termination of various programs. A very small part of the company's US sales

come from non-government agencies. Also, being the single largest customer of the company, the

US government has immense bargaining power. Therefore, a significant reduction in the purchase

of the company’s products by these agencies could have an adverse effect on FLIR’s business.

Legal proceedings

The company is subject to various legal proceedings, claims and litigation arising in the ordinary

course of business. In FY2007, FLIR and its subsidiary, Indigo Systems have been named in a

lawsuit filed by Raytheon in the US District Court for the Eastern District of Texas. In August 2008,

Raytheon was granted leave to file a second amended complaint. The complaint, as amended,

asserts claims for tortious interference, patent infringement, trade secret misappropriation, unfair

competition, breach of contract and fraudulent concealment.

In August 2009, the court entered an order granting the FLIR Parties’ motion for summary judgment

on Raytheon’s trade secret misappropriation claim based on the FLIR Parties’ statute of limitations

defense. Raytheon has abandoned all of its other claims except its patent claims which were set for

trial to commence in April 2010. FLIR is also subject to other legal proceedings, claims and litigation

arising in the ordinary course of business. Such contingencies may increase the operating costs of

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SWOT Analysisthe company which may inturn impact the profitability. Legal proceedings may have a material

adverse effect on the company’s market image and on its financial position.

Dependence on sole source and limited source suppliers of components

FLIR is currently dependent on a number of sole source and limited source suppliers to provide

certain key components for its products. The company has increased its internal sources of supply

for certain critical components, in particular, cooled and uncooled infrared detectors, optics and

optical coatings, and laser components, but it relies on sole or limited source third-party suppliers

for other key components including laser rangefinders, certain machined parts, optics, motors and

electronic components. Many of these suppliers are small and the company is often one of their

most important customers.

FLIR’s business, financial condition and results of operations could be materially and adversely

impacted in the event that the company is unable to source certain of these components on a timely

basis or if such components are defective or they do not otherwise meet the company’s performance

standards.

Moreover, if critical components provided by any significant supplier become unavailable, the

company’s manufacturing operations could be disrupted. Any extended interruption in the supply of

sole or limited source components could have a material adverse influence on FLIR’s business,

financial condition and results of operations.

Opportunities

Rising defense spending in the US

The global defense spending is rising consistently over the past few years due to increasing threats

to the security. It is expected to rise further in the future. The total global military expenditure in

FY2009 is estimated to have been $1,531 billion. This represented an increase of 6% in real terms

compared to FY2008, and of 49% since FY2000. The Americas represents 43% of global defense

spending. The US government signed a bill that authorizes $712.9 billion in defense spending for

FY2010. For FY2011, the government has submitted a defense budget of $658.7 billion.The increase

in defense spending by the US government could provide additional opportunities for FLIR to enhance

its revenue base through new contracts.

Growth in automotive electronics market

The automotive electronics market has witnessed a strong growth in recent years. The worldwide

automotive electronics market is predicted to grow at 9% from $125 billion in FY2009 to $244 billion

in FY2017. The biggest demand is expected from the emerging markets in Asia and Europe. The

navigation market will be one of the fastest growing sections of the auto electronics market. The

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FLIR Systems, Inc.

SWOT Analysisdriver supporting systems, like night vision, collision avoidance and lane departure warning is also

expected to show strong growth.

In addition to the economic recovery, demand is being fueled by advanced powertrain systems, as

vehicle manufacturers seek to improve the fuel efficiency of their vehicles to meet increasing legislative

and consumer demand. It is estimated that the value of powertrain electronic control units (ECUs)

installed in light vehicles grow at a compound average annual growth rate of 14% over the period

2009 to 2014, outpacing the overall market growth of 11%. Moreover, demand for electronics for

hybrid and electric vehicles would grow to around 20% of the demand for powertrain electronics by

2014.This strong growth in demand is due to the much higher electronics content in these vehicles.

Hence, the growing automotive electronics market would boost demand for the company’s products

and services.

Agreement to acquire ICx Technologies

FLIR is enhancing the operational capabilities of its various by acquiring many technologies through

new acquisitions. In this context, in August 2010, the company entered into a definitive merger

agreement to acquire ICx Technologies (ICx). ICx is a provider of integrated advanced sensing

technologies for homeland security, force protection and critical infrastructure applications. ICx has

established a technology leadership position across a wide spectrum of detection and surveillance

technologies, supported by a robust intellectual property portfolio.

The acquisition expands FLIR's capabilities into advanced sensors for chemical, biological,

radiological, nuclear, and explosives (CBNRE) detection for defense and homeland security markets.

The acquisition also enhances FLIR's existing intelligence surveillance and reconnaissance product

suite through the addition of ICx's advanced radars and integrated platforms. Upon closing of the

transaction, ICx's operations will be integrated into FLIR's Government Systems segment.

Upon completion, this transaction will enhance the FLIR's product portfolio and will leverage its

global infrastructure to reduce costs and drive growth.

Threats

Intense competition

Competition in the markets for FLIR’s products is intense. The principal competitive factors are

product performance, price, customer service and training, product reputation, and effective marketing

and sales efforts. In the thermography market, FLIR competes with Fluke (a division of Danaher)

and NEC San-Ei.The company faces competition with L-3 Communications, ULIS, Axsys

Technologies, ICx Technologies and other smaller companies in the CVS market. In the government

systems market, FLIR’s competitors include Raytheon, BAE Systems, L-3 Communications, DRS

(a Finmecanica Company), Lockheed Martin, El-Op, Sagem, Tamam and Thales. Many of these

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SWOT Analysiscompetitors have substantially greater financial, technical and marketing resources than the company.

All of these factors, as well as the potential for increased competition from new competitors, require

FLIR to continue to invest in, and focus on, research and development and new product innovation.

Intense competition may negatively impact the FLIR's operations and its financial condition.

Rapid changes in technology

The market for thermal imaging equipment is characterized by rapid technological developments

and frequent new product introductions. A company's success is highly dependent on its ability to

develop new technologies that anticipate changing customer requirements.This might require FLIR

to make substantial capital expenditures and incur significant research and development costs to

improve manufacturing capability, reduce costs, and to develop and introduce new products and

enhancements. Moreover, the company has limited financial resources as compared to its peers

like Raytheon, BAE Systems, Lockheed Martin and L-3 Communications Holdings. This might fail

to match up to their product development efforts limiting its ability to launch new products in a timely

manner. This could have an adverse effect on the company's market share.

Stringent US government contractual and regulatory requirements

As a US government contractor, FLIR is subject to a number of procurement rules and regulations.

The company is obliged to comply with, and is affected by the laws and regulations relating to the

formation, administration and performance of the government contracts.These laws and regulations

require certification and disclosure of all cost and pricing data in connection with contract negotiations,

and could impose accounting rules that define allowable and unallowable costs for certain cost-based

government contracts in the US. Any default on these regulations could lead to termination or

modification of contracts and transactions and reductions in the value of contracts.This in turn could

have an adverse effect on the company’s profit margins.