item 14 exhibits financial statements schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts report independent accountants financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits b reports form 8k filed last quarter year ended december 31 1996 c see a3 see a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 31st day march 1997 flir systems inc registrant j mark samper j mark samper vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 31 1997 schedule ii flir systems inc valuation qualifying accounts thousands report independent accountants financial statement schedule board directors flir systems inc audits consolidated financial statements referred report dated february 25 1997 appearing page 18 form 10k also included audit financial statement schedule listed item 14a form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse llp portland oregon february 25 1997item 14 exhibits financial statements schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent accountants financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits portions exhibit omitted pursuant request confidential treatment 17 cfr 24024b 2 b quarter ended december 31 1998 company file form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 14th day april 2000 flir systems inc registrant j kenneth stringer iii j kenneth stringer iii president chief executive officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated april 14 2000 schedule ii flir systems inc valuation qualifying accounts thousands report independent accountants financial statement schedule board directors flir systems inc audits consolidated financial statements referred report dated april 14 2000 appearing 1999 annual report form 10k flir systems inc also included audit financial statement schedule listed item 14a2 form 10k audit financial statement schedule inframetrics inc wholly owned subsidiary years ended december 31 1998 1997 schedule audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included inframetrics inc based solely report auditors opinion based audit report auditors financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon april 14 2000item 14 exhibits financial statement schedules reports form 8k a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent accountants financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement 2 portions exhibit omitted pursuant request confidential treatment 17 cfr 24024b 2 b quarter ended december 31 2000 company filed following reports form 8k 1 company filed current report form 8k dated november 16 2000 reporting item 5 7 financial results quarter ended september 30 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 2nd day april 2001 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated april 2 2001 schedule ii flir systems inc valuation qualifying accounts thousands report independent public accountants financial statement schedule board directors flir systems inc audited accordance generally accepted auditing standards consolidated financial statements year ended december 31 2000 included flir systems inc subsidiaries form 10k issued report thereon dated march 2 2001 audit made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements 2000 valuation qualifying accounts schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statement taken whole arthur andersen llp portland oregon march 2 2001 report independent accountants financial statement schedule board directors flir systems inc audits consolidated financial statements referred report dated april 14 2000 except note 15 march 23 2001 appearing 2000 annual report form 10k flir systems inc also included audit financial statement schedule years ended december 31 1999 1998 listed item 14a2 form 10k audit financial statement schedule inframetrics inc wholly owned subsidiary year ended december 31 1998 schedule audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included inframetrics inc based solely report auditors opinion based audit report auditors financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements audited financial statement schedule flir systems inc period subsequent december 31 1999 pricewaterhousecoopers llp portland oregon april 14 2000item 14 exhibits financial statement schedules reports form 8k a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent accountants financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits number description 21 merger agreement dated march 19 1999 among flir systems inc inframetrics inc irabu acquisition corporation shareholders inframetrics inc incorporated reference current report form 8k filed april 14 1999 31 second restated articles incorporation flir systems inc incorporated reference exhibit 31 registration statement form s1 file 3362582 32 first amendment second restated articles incorporation flir systems inc incorporated reference exhibit 11 registration statement form 8a filed june 11 1999 33 first restated bylaws flir systems inc incorporated reference exhibit 32 registration statement form s1 file 3362582 41 rights agreement dated june 2 1999 incorporated reference exhibit 11 registration statement form 8a filed june 11 1999 101 form indemnity agreement flir systems inc member board directors incorporated reference exhibit 101 registration statement form s1 file 33625821 102 1984 incentive stock option plan amendments incorporated reference exhibit 102 registration statement form s1 file 33625821 103 1992 stock incentive plan incorporated reference exhibit 103 registration statement form s1 file 33625821 104 1993 stock option plan nonemployee directors incorporated reference exhibit 104 registration statement form s1 file 33625824 105 lease dated february 11 1985 amended among flir systems inc pacific realty association lp incorporated reference exhibit 106 registration statement form s1 file 3362582 106 combination agreement dated october 6 1997 among flir systems inc spectraphysics ab spectraphysics holding sa spectraphysics holdings gmbh spectraphysics holdings plc pharos holdings inc incorporated reference exhibit 20 current report form 8k filed october 24 1997 107 form executive employment agreement dated may 5 1997 james fitzhenry incorporated reference exhibit 102 current report form 8k filed october 24 19971 108 form agreement amending executive employment agreement dated december 1 1997 james fitzhenry incorporated reference exhibit 101 current report form 8k filed december 15 19971 109 form agreement amending executive employment agreement dated january 20 1999 amending executive employment agreement james fitzhenry arne almerfors incorporated reference exhibit 102 quarterly report form 10q filed august 16 19991 1010 registration rights agreement dated december 1 1997 among flir systems inc spectraphysics ab spectraphysics holdings plc pharos holdings incorporated reference exhibit 102 current report form 8k filed december 15 1997 1011 contract supply uncooled imaging modules dated january 15 1997 incorporated reference exhibit 101 form 10qa filed may 28 19982 1012 contract supply uncooled imaging modules dated march 4 1998 incorporated reference exhibit 101 form 10qa filed may 28 19982 1013 inframetrics inc shareholders agreement dated march 19 1999 among flir inframetrics shareholders inframetrics incorporated reference exhibit 101 current report form 8k filed april 14 1999 1014 amendment inframetrics inc shareholders agreement dated october 27 1999 among flir inframetrics former shareholders inframetrics incorporated reference exhibits registration statement form s1 file 33390717 1015 flir systems inc 1999 employee stock purchase plan incorporated reference exhibit company’s proxy statement dated april 30 19991 1016 contract supply uncooled imaging modules dated august 8 1999 incorporated reference exhibit 101 form 10qa filed december 2 19992 1017 form credit agreement among flir systems inc bank america na certain financial institutions dated december 16 1999 incorporated reference exhibits registration statement form s1 file 33390717 1018 form pledge agreement dated december 16 1999 flir systems inc favor bank america na agent incorporated reference exhibits registration statement form s1 file 33390717 1019 form security agreement dated december 16 1999 flir systems inc bank america na agent incorporated reference exhibits registration statement form s1 file 33390717 1020 amendment credit agreement among flir systems inc bank america na certain financial institutions dated january 23 2001 incorporated reference exhibits form 10k filed april 30 2001 1021 amendment security agreement dated january 23 2001 flir systems inc bank america na agent incorporated reference exhibits form 10k filed april 30 2001 1022 executive employment agreement dated january 1 2002 flir systems inc earl r lewis1 1023 form change control agreement dated may 8 2001 earl r lewis arne almerfors stephen bailey james fitzhenry daniel l manitakos william sundermeier andrew c teich detlev h suderow1 1024 flir systems inc supplemental executive retirement plan1 210 subsidiaries flir systems inc 230 consent arthur andersen llp 231 consent pricewaterhousecoopers llp 1 exhibit constitutes management contract compensatory plan arrangement 2 portions exhibit omitted pursuant request confidential treatment 17 cfr 24024b 2 b quarter ended december 31 2001 company filed following reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 12th day march 2002 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 12 2002 signature title earl r lewis earl r lewis chairman board directors president chief executive officer john c hart john c hart director angus l macdonald angus l macdonald director w allen reed w allen reed director ronald l turner ronald l turner director steven e wynne steven e wynne director schedule ii flir systems inc valuation qualifying accounts thousands 1 deductions include writeoffs net recoveries 545 500 applied certain nontrade receivables 2 deductions represents writeoffs net recoveries report independent public accountants financial statement schedule board directors flir systems inc audited accordance generally accepted auditing standards consolidated financial statements years ended december 31 2001 2000 included flir systems inc subsidiaries’ form 10k issued report thereon dated february 8 2002 audit made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility company’s management presented purposes complying securities exchange commissions rules part basic financial statements valuation qualifying accounts schedule years ended december 31 2001 2000 subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statement taken whole arthur andersen llp portland oregon february 8 2002 report independent accountants financial statement schedule board directors flir systems inc audit consolidated financial statements referred report dated april 14 2000 appearing 2001 annual report form 10k flir systems inc also included audit financial statement schedule year ended december 31 1999 listed item 14a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements audited financial statement schedule flir systems inc period subsequent december 31 1999 pricewaterhousecoopers llp portland oregon april 14 2000item 14 controls procedures supervision participation management including principal executive officer principal financial officer conducted evaluation effectiveness design operation disclosure controls procedures defined rules 13a14c 15d14c securities exchange act 1934 within 90 days filing date report “evaluation date” based upon evaluation principal executive officer principal financial officer concluded evaluation date disclosure controls procedures effective material information required included securities exchange commission “sec” reports recorded processed summarized reported within time periods specified sec rules forms relating company including consolidated subsidiaries made known others within entities particularly period report prepared addition significant changes internal controls factors could significantly affect controls subsequent evaluation date identified significant deficiencies material weaknesses internal controls therefore corrective actions taken part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “fees paid kpmg llp” company’s definitive proxy statement 2004 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “fees paid kpmg llp” company’s definitive proxy statement 2005 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “fees paid kpmg llp” company’s definitive proxy statement 2006 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “information concerning independent registered public accounting firmfees paid kpmg llp” company’s definitive proxy statement 2007 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “information concerning independent registered public accounting firmfees paid kpmg llp” company’s definitive proxy statement 2008 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “information concerning independent registered public accounting firmfees paid kpmg llp” company’s definitive proxy statement 2009 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “information concerning independent registered public accounting firmfees paid kpmg llp” company’s definitive proxy statement 2010 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment information concerning independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2014 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment information concerning independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2015 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2017 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2018 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2019 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification selection independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2020 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services selection independent registered public accounting firm audit committee board directors selected kpmg llp serve independent registered public accounting firm company fiscal year ending december 31 2021 kpmg llp served company’s independent registered public accounting firm year ended december 31 2020 kpmg llp audited company’s consolidated financial statements year since 2002 fees paid kpmg llp services provided kpmg llp required 2020 2019 approved audit committee advance audit auditrelated services approved annually respect services audit auditrelated services least annually independent registered public accounting firm submits audit committee approval anticipated engagements ensuing year either time audit committee reviews approves annual audit engagement time specifically scheduled reviewing services quarterly conjunction audit committee’s regularly scheduled meetings independent registered public accounting firm presents audit committee preapproval proposed engagements previously reviewed approved event audit nonaudit service requires approval prior next regularly scheduled meeting audit committee kpmg llp must contact chairman audit committee obtain approval must reported audit committee next regularly scheduled meeting aggregate fees professional services rendered kpmg llp fiscal years ended december 31 2020 2019 follows audit fees audit fees include fees services rendered audit annual financial statements included annual reports form 10k including audit procedures related business acquisitions audit internal control financial reporting review quarterly financial statements included quarterly reports form 10q addition amounts include fees statutory filings audits issuance comfort letters consents assistance review documents filed sec audit fees 2019 reflect adjustment 164000 amount fees negotiated additional billing filing companys definitive proxy statement 2020 annual stockholders meeting associated consolidated audit fiscal 2019 auditrelated fees auditrelated fees include fees assurance related services reasonably related performance audit review financial statements tax fees tax fees include fees principally tax consultation tax compliance services fees consist amounts paid kpmg llp applicable period audit committee preapproval policies procedures audit committee established policies procedures audit permitted nonaudit tax services performed company’s independent registered public accounting firm must separately approved advance audit committee audit nonaudit services provided fiscal years 2020 2019 preapproved audit committee accordance policies procedures part iv item 15item 14 exhibits financial statements schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts report independent accountants financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits b quarter ended december 31 1998 company file form 8k c see a3 see a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 19th day april 1999 flir systems inc registrant j mark samper j mark samper vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated april 19 1999 signature title robert p daltry chairman board directors robert p daltry director president chief executive officer principal j kenneth stringer iii executive officer j kenneth stringer iii vice president finance chief financial officer principal j mark samper accounting financial officer j mark samper patrick l edsell director patrick l edsell john c hart director john c hart egon linderoth director egon linderoth w allen reed director w allen reed lars spongberg director lars spongberg ronald l turner director ronald l turner schedule ii flir systems inc valuation qualifying accounts thousands report independent accountants financial statement schedule board directors flir systems inc audits consolidated financial statements referred report dated april 15 1999 form 10k also included audit financial statement schedule listed item 14 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon april 15 1999item 14 principal accountant fees services information respect principal accountant fees services included “information concerning independent registered public accounting firmfees paid kpmg llp” company’s definitive proxy statement 2012 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment information concerning independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2013 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accountant fees services information respect principal accountant fees services included “ratification appointment information concerning independent registered public accounting firm related informationfees paid kpmg llp” company’s definitive proxy statement 2016 annual meeting shareholders incorporated herein reference part iv item 15item 14 exhibits financial statements schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule ii valuation qualifying accounts report independent accountants financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits b quarter ended december 31 1997 company filed two current reports form 8k including following 1 october 24 1997 company filed current report form 8k reporting company entered combination agreement dated october 6 1997 spectraphysics ab spectraphysics holdings sa spectraphysics holdings gmbh spectraphysics holding plc pharos holdings inc combination agreement provided acquisition company outstanding shares capital stock agema infrared systems ab corporation organized laws sweden agema infrared systems limited corporation organized laws united kingdom agema infrared systems ltd corporation organized laws canada agmea infrared systems inc delaware corporation exchange total 4162000 shares companys common stock 2 december 15 1997 company filed current report form 8k reporting completion acquisition agema infrared systems ab agema infrared systems limited agema infrared systems ltd agema infrared systems inc form 8k stated financial statements required filed included companys proxy statement dated november 10 1997 filed securities exchange commission november 12 1997 c see a3 see a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 31st day march 1998 flir systems inc registrant j mark samper j mark samper vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 31 1998 schedule ii flir systems inc valuation qualifying accounts thousands report independent accountants financial statement schedule board directors flir systems inc audits consolidated financial statements referred report dated march 9 1998 appearing page 19 form 10k also included audit financial statement schedule listed item 14 form 10 k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse llp portland oregon march 9 1998item 14 principal accountant fees services information respect principal accountant fees services included “information concerning independent registered public accounting firmfees paid kpmg llp” company’s definitive proxy statement 2011 annual meeting shareholders incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations overview flir systems inc fsi company founded 1978 designs manufactures markets imaging systems worldwide wide variety applications government commercial markets thermal imaging systems detect infrared radiation heat emitted directly objects materials enable operator see objects total darkness adverse weather conditions obscurants smoke haze government applications include public safety law enforcement drug interdiction search rescue border patrol maritime patrol environmental protection defense surveillance reconnaissance navigation assistance commercial applications include commercial broadcast imaging predictive preventive maintenance nondestructive testing evaluation research development manufacturing process control monitoring machine vision image analysis company profitable year ended december 31 1988 reported profitable results succeeding year june 1993 company completed initial public offering stock traded nasdaq national market system january 1996 company continued expand market potential growing commercial product line well government products acquiring optimas corporation optimas seattle washington optimas specializes development image analysis software wide range applications industrial biomedical research machine vision markets april 1996 company entered commercial broadcast market introduction two products ultra 4000 ultramedia ultra 4000 fully stabilized airborne camera system couples highresolution infrared camera industrystandard broadcast camera 24houraday news coverage ultramedia broadcastquality imaging system delivers clear crisp jitterfree daylight images 1996 company continued significant investment infrastructure company included significant investments expanding operations companys subsidiaries broadcast surveillance systems ltd bss optimas continued emphasis corrective action related production issues prism product line restructuring marketing channels direct sales force predominately representativebased network continued investment research development related new products enhancement existing products company beginning benefit investment evidenced introduction two new aerial broadcast products 1996 profitable operations bss continued enhancement existing products early 1997 introduction extremely lightweight ultramediars tracer first industrial imager capable recording analyzing long sequences thermal activity realtime basis results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 1996 1995 1994 overall companys revenues increased 317 501 million 1995 660 million 1996 net earnings increased 317 39 million 070 per share 1995 51 million 091 per share 1996 increase overall revenue net income primarily due inclusion revenue sale companys two aerial broadcast products ultra 4000 ultramedia broadcast market well increased deliveries safire night vision system federal government particularly us marine corps us air force increase revenue net income due fact 1995 government revenues constrained due delays finalization several international domestic contracts inclusion 1995 significant onetime transaction costs associated optimas acquisition increases sufficient offset several items dilutive impact 1996 net earnings including 12 million fourth quarter increase allowance doubtful accounts related one longoutstanding international receivable increase interest expense related increased short longterm borrowings increase effective tax rate 1995 companys overall revenues increased 23 490 million 1994 501 million 1995 net earnings decreased 254 52 million 095 per share 1994 39 million 070 per share 1995 slight increase overall revenues despite decline revenues experienced companys government division primarily due increased sales prism family products principally prism ds increased sales bss decline net earnings primarily due significant onetime costs associated optimas acquisition reduction interest income earned cash balances revenues sale government systems increased 279 336 million 1995 430 million 1996 increase primarily attributable increased sales safire night vision system 239 million 1995 299 million 1996 principally us government particularly us marine corps us air force additionally revenues sale bss products increased 1996 commercial imaging systems revenues increased 393 166 million 1995 231 million 1996 improvement principally attributable inclusion revenues sales companys two aerial broadcast products ultramedia ultra 4000 introduced first quarter 1996 aggregated 104 million 1996 increase partially offset reduced sales prism family products due supplierrelated production constraints experienced 1996 company continues make improvements production capacity prism products working existing suppliers improve performance also identifying alternative sources detector components utilize different electronic design company producing prism cameras utilize new components company process ramping production utilizing existing new supplier components results effort positive prism revenues 1996 reflect full production achieved revenues 1995 sale government systems decreased 62 358 million 1994 336 million 1995 slight decrease primarily due delays finalization several international domestic contracts resulted revenues contracts postponed latter half 1995 1996 1997 revenues sale commercial imaging systems increased 256 132 million 1994 166 million 1995 improvement principally attributable increased sales prism family products particularly prism ds introduced first quarter 1995 sales prism family products aggregated 78 million 1995 compared 52 million 1994 company continued benefit significant investment develop worldwide sales distribution channels majority companys revenue outside united states europe however 1996 international revenues decreased slightly 231 million 1995 212 million 1996 sales outside united states accounted approximately 320 companys revenue 1996 represents decrease 460 experienced 1995 423 experienced 1994 decrease 1996 absolute dollars percentage revenue primarily due increased shipments terms existing domestic contracts primarily us marine corps company anticipates revenues international sales percentage total revenue continue comprise significant percentage revenues may vary modestly year gross profit percentage revenue gross profit decreased slightly 547 1995 539 1996 decrease primarily due decrease higher margin international sales increase sales us government aggregated 265 million 1996 compared 157 million 1995 decrease mitigated increased sales companys commercial broadcast products typically slightly higher margin commercial products higher margin software sales optimas gross profit increased percentage revenue 514 1994 547 1995 primarily due higher percentage higher margin international sales 1995 gross profit percentages affected variety factors including mix domestic international government commercial imaging sales competitive nature commercial imaging market impact competitive bids significant government contracts research development research development expense increased 218 78 million 1995 95 million 1996 increased 26 76 million 1994 78 million 1995 percentage revenue research development expense decreased 155 1995 144 1996 remained consistent 155 1995 1994 increase research development expense absolute dollar terms attributable increased research development activities related introduction ultramedia ultra 4000 ultramediars tracer well ongoing product enhancements research development expense also impacted classification development costs directly associated engineering revenues cost goods sold rather research development expenses costs amounted 200000 425000 306000 1996 1995 1994 respectively without reclassifications research development expense percentage revenue would 147 164 161 1996 1995 1994 respectively reflecting fact large percentage research development expense fixed nature general trend research development expense reflects companys continuing emphasis product development new product introductions company expects research development expenses continue increase absolute dollars companys revenues increase given large percentage research development expense fixed nature expenses continue decline percentage revenue selling operating costs selling operating costs increased 215 146 million 1995 177 million 1996 increased 227 119 million 1994 146 million 1995 primarily due costs associated increased revenues expenses related expanded operations bss optimas increased personnel company continued expand strengthen direct sales marketing staffs fsi optimas selling operating costs decreased percentage revenue 292 1995 269 1996 increased 243 1994 292 1995 company expects selling operating costs continue grow absolute terms 1997 result planned increases sales marketing personnel anticipated increased marketing efforts related expenses allowance doubtful accounts 1996 company increased reserve doubtful accounts 13 million primarily related possible uncollectibility receivable international customer located genoa italy company previously established partial reserve possible uncollectibility receivable determined continued delays restructuring company italian government necessitated onehundredpercent reserve interest income interest expense interest income consists amounts earned cash balances shortterm investments decrease 705000 1994 226000 1995 44000 1996 reflects decline cash balances 1995 1996 due increased working capital needs primarily inventories accounts receivable well expanded operations bss optimas additionally 1994 interest income reflects inclusion interest certain longterm receivables interest expense includes costs related shortterm longterm debt capital lease obligations miscellaneous bank charges expenses increase 795000 1995 195000 exclusive onetime costs associated acquisition optimas 819000 1996 primarily due increased shortterm longterm debt result increased working capital needs discussed increase 172000 1994 795000 1995 due onetime costs associated acquisition optimas aggregated approximately 600000 income taxes companys effective income tax rates 1996 1995 1994 197 119 99 respectively effective tax rates substantially statutory rate company able realize benefits portion net operating loss carryforwards existing tax credits company recognized net deferred tax benefit 400000 950000 850000 1996 1995 1994 respectively recognition criteria statement financial accounting standard 109 sfas 109 accounting income taxes current portion income tax expense consists state federal income taxes utilization net operating loss carryforwards existing tax credits limited result companys initial public offering 1993 company experienced cumulative change ownership 50 within threeyear period resulted imposition limitation utilization net operating losses existing tax credits 26 million per year december 31 1996 company utilized net operating loss carryforwards however connection acquisition optimas company acquired net operating loss carryforwards aggregating 55 million expire years 1997 2010 utilization carryforwards limited future earnings optimas limited approximately 350000 per year optimas experienced cumulative change ownership 50 within threeyear period additionally company various tax credits available aggregating 771000 expire years 1999 2011 liquidity capital resources december 31 1996 company cash equivalents hand 775000 compared 12 million december 31 1995 additionally december 31 1996 company 64 million drawn line credit working capital increased 442 million december 31 1996 379 million december 31 1995 decrease cash balances increased working capital primarily due increases inventories accounts receivable discussed well cash required expanded operations bss optimas december 31 1996 company 283 million accounts receivable outstanding compared 249 million december 31 1995 increase accounts receivable primarily due 317 increase revenue days sales outstanding declined 181 days december 31 1995 157 days december 31 1996 company generally experiences long collection cycles due variety factors including payment terms required foreign governmental customers well payment terms companies integrate companys products aircraft sale ultimate users company believes days sales outstanding continue decline revenue increases commercial imaging systems revenue generally short collection cycle continues become larger percentage overall revenue december 31 1996 company inventories hand aggregating 335 million compared 237 million december 31 1995 increase inventory level principally due build components due production constraints related prism ds increase components related anticipated deliveries safire systems us government international customers increase inventories support deliveries new products including ultramedia ultramediars tracer companys new uncooled product seekir additionally inventory levels bss continue increase anticipation future deliveries existing contracts extremely long lead times many expensive components necessary inventory hand meet required delivery schedules existing contracts company maintains levels inventory sufficient satisfy backlog company considers firm respond shortterm delivery requirements majority products management believes companys ability provide prompt deliveries give competitive advantage certain sales expected current inventory levels maintained decrease slightly production constraints related prism ds resolved company available 100 million line credit bears interest prime rate collateralized receivables inventories requires company maintain working capital excess 400 million net tangible worth 400 million december 31 1996 company balance 64 million drawn line credit compared 21 million balance line december 31 1995 company believes existing cash generated operations available credit facilities together scheduled payments existing receivable balances sufficient meet cash requirements foreseeable future forwardlooking statements managements discussion analysis financial condition results operations sections annual report contain forwardlooking statements within meaning securities litigation reform act 1995 based current expectations estimates projections companys business managements beliefs assumptions made management words expect anticipates intends plans believes seeks estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance involve certain risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially form expressed forecasted forwardlooking statements due numerous factors including limited discussed managements discussion analysis financial condition results operations well discussed elsewhere annual report time companys securities exchange commission filings reports addition statements could affected general industry market conditions growth rates general domestic international economic conditions item 8item 7 managements discussion analysis financial condition results operations forward looking statements managements discussion analysis financial condition results operations contain forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 based current expectations estimates projections companys business managements beliefs assumptions made management words expects anticipates intends plans believes sees estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance involve risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecasted forwardlooking statements due numerous factors including limited discussed managements discussion analysis financial condition results operations elsewhere annual report well discussed time securities exchange commission filings reports addition statements could affected general industry market conditions forwardlooking statements speak date made undertake obligation update forwardlooking statement reflect events circumstances date annual report update correct one forwardlooking statement investors others conclude make additional updates corrections respect forwardlooking statements overview flir systems founded 1978 become world leader design manufacture marketing thermal imaging broadcast camera systems wide variety commercial government applications business organized around two principal markets commercial government historically majority revenue derived government sales however shifted product mix favor commercial applications accounted 647 701 respectively revenue years ended december 31 1999 1998 continue enhance stateoftheart products within existing commercial government markets well develop products new market applications use advanced thermal imaging technology new uncooled detector technology operates room temperature allowing systems cheaper smaller lighter energy efficient additionally developed highermargin image analysis software tools enhance capability customization commercial handheld products hardware prices decline sophistication image analysis software incremental functionality provided analysis tools expected become critical component commercial segment march 30 1999 completed merger inframetrics inc privately held thermal imaging company headquartered billerica massachusetts issuing approximately 23 million shares common stock exchange outstanding stock inframetrics result merger inframetrics accounted pooling interests see note 15 consolidated financial statements consolidated financial statements amounts included managements discussion analysis financial condition results operations periods presented restated reflect combined operations financial position periods effective december 1 1997 acquired agema infrared systems ab headquartered stockholm sweden agema world leader design manufacture marketing handheld infrared cameras detecting measuring temperature differences wide variety commercial research applications acquisition accounted purchase consolidated statement operations year ended december 31 1997 includes agemas results month december 1997 international revenue accounted approximately 527 459 396 revenue 1999 1998 1997 respectively anticipate international sales continue account significant portion revenue acquisition agema contributing significant volume sales denominated foreign currencies increased exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies company typically experiences longer payment cycles international sales adverse impact upon companys liquidity addition substantial portions companys operations conducted outside united states particularly sweden international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal fluctuations customer sales cycles exception 1998 1999 revenue fourth quarter year generally significantly higher quarter year first cases second quarter following year due seasonal pattern contracting us certain foreign governments frequent requirement international customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize yearly capital budgets prior expiration addition significant portion companys quarterly sales historically occurred last month quarter sales frequently concentrated last week days quarter events likely continue result substantial fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance restatement financial statements march 2000 company determined necessary revise 1998 financial statements interim 1999 financial statements restatement required incorrect consolidation companys subsidiary information inaccurate inventory valuation insufficient accruals commission expense inadequate accumulation misclassification certain subsidiary costs result matters certain costs allowances either accrued recorded correctly appropriate periods addition december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 among guidance clarifies certain conditions met order recognize revenue april 2000 connection audit companys financial statements light focus revenue recognition issues resulting issuance sab 101 company reexamined historical application generally accepted accounting principles relating revenue recognition terms underlying certain transactions title risks ownership transferred buyer physical delivery buyer occurred bill hold transactions result review company modified historical revenue recognition policy respect bill hold transactions view cumulative effect unrecorded adjustments costs allowances bill hold revenue matters company restated beginning retained earnings 1997 result revenue recognition matters annual fourth quarter consolidated financial statements 1998 quarterly consolidated financial statements first three quarters 1999 financial statements related notes set forth annual report reflect restatements including changes tax provision periods presented result restatement total revenues year ended december 31 1998 reduced 117 million 2086 million originally reported 1969 million earnings reduced 70 million 168 million originally reported 98 million period result prior period adjustments revenue recognition bill hold transactions beginning retained earnings 1997 reduced 29 million companys quarterly financial results first three quarters 1999 fourth quarter 1998 also restated result restatement total revenues first three quarters 1999 increased amounts previously reported 70 million 1313 million originally reported 1383 million earnings reduced 121 million net loss 77 million originally reported net loss 198 million period fourth quarter 1998 revenues reduced 117 million 631 million originally reported 514 million earnings reduced 69 million 78 million originally reported 09 million period results operations 1 following table sets forth indicated periods certain items percentage revenue 1 financial data presented table fiscal 1998 1997 restated see notes 1 15 17 consolidated financial statements information concerning companys restatement financial statements 2 excluding onetime charges 346 million connection acquisition inframetrics cost goods sold gross profit earnings operations net earnings 1999 would 528 472 64 respectively 3 excluding onetime charge 525 million connection acquisition agema costs goods sold gross profit earnings operations net earnings 1997 would 488 512 106 57 respectively years ended december 31 1999 1998 1997 revenue decreased 53 1969 million 1998 1864 million 1999 commercial revenue decreased 126 1380 1998 1206 million 1999 decrease attributable reduction sales commercial airborne systems certain commercial products sold industrial customers revenue sale government products rose 119 589 million 1998 659 million 1999 increase attributable higher deliveries safire family airborne products particularly star safire system began significant shipments 1999 higher deliveries milcam hand held surveillance product also added increase government sales compared 1998 revenue increased 358 1449 million 1997 1969 million 1998 commercial revenue increased 592 867 million 1997 1380 million 1998 increase primarily attributable inclusion full year agemas operations compared one month operations 1997 revenue sale government products rose 10 589 million 1998 583 million 1997 increase primarily attributable inclusion full year agemas ground based products compared one month operations 1997 international sales contribute significant portion overall revenue europe japan consistent source sales international revenue 1999 983 million representing 527 overall revenue compared 1998 international revenue 904 million 459 total revenue 1997 international revenue 573 million 396 total revenue gross profit percentage revenue gross profit declined 337 1999 compared 531 1998 decline primarily result writeoff 253 million duplicative inventory products determined reached end life created overlapping product lines result merger inframetrics writeoff included cost goods sold exclusive writeoff 1999 gross profit 472 gross profit 1999 negatively affected lower expected production delivery volumes resulting excess manufacturing costs fully absorbed products excess manufacturing costs expensed 1999 percentage revenue gross profit increased 401 1997 531 1998 primarily due 161 million writeoff duplicative inventories related agema acquisition included cost goods sold 1997 exclusive writeoff gross margin increased 512 1997 531 1998 improvement 1998 primarily attributable higher percentage sales using uncooled technology favorable cost structure compared older technology research development research development expense increased 76 270 million 1998 290 million 1999 research development expense increased 1999 facilitate introduction new products including thermacam 595 sc3000 marflir fireflir ultra7000 ultramedia iii star safire star safire ii research development expense increased 531 176 million 1997 270 million 1998 increase primarily attributable inclusion full year agemas research development expense compared one month expense 1997 selling operating costs selling operating costs increased 154 615 million 1998 710 million 1999 increased 493 1998 412 million 1997 percentage revenue selling operating costs 381 313 285 1999 1998 1997 respectively increase selling operating costs 1999 reflect variety factors including expense increases due anticipated higher volumes business fully realized implementation costs enterprise resource planning system higher commission expense increased bad debt expense higher costs uk operations certain yearend audit adjustments increase selling operating costs 1998 absolute dollar terms primarily due inclusion full year agemas operations 1998 compared one month 1997 costs associated increased revenue particularly increase international sales expenses related expanded operations international operations increased personnel interest expense interest expense includes costs related shortterm longterm debt capital lease obligations miscellaneous bank charges expenses foreign currency transaction gains losses interest expense 63 52 41 million years ended 1999 1998 1997 respectively increase expense primarily due increased shortterm debt result loss incurred 1999 increased working capital needs year income taxes companys effective tax rate 1999 1998 1997 44 155 283 respectively companys effective tax rate substantially us statutory rate number reasons including recognition greater lesser valuation allowance deferred tax asset utilization research development tax credits benefits obtained utilization foreign sales corporation state income taxes statement financial accounting standards 109 allows recognition deferred tax assets likely assets utilized historically company recorded valuation allowance gross deferred tax assets 1998 valuation allowance reduced impact companys enhanced profitability international subsidiaries valuation allowance increased 1999 due reduced profitability year company recognized net tax provision 1999 despite consolidated pretax loss generate pretax profits certain jurisdictions december 31 1999 company net operating loss carryforwards aggregating approximately 632 million expire years 2005 2014 utilization companys acquired net operating loss carryforwards fsi automation formerly known optimas corporation limited future earnings fsi automation limited approximately 350000 per year fsi automation experienced cumulative change ownership 50 within threeyear period additionally company various tax credits available aggregating 34 million expire years 2007 2013 finally company 118 million deferred tax asset related acquired inprocess research development realization deferred tax asset dependent upon ability foreign subsidiaries remit earnings us parent limited realization 15year period liquidity capital resources december 31 1999 company shortterm borrowings net cash hand 770 million compared 352 million december 31 1998 increase shortterm borrowings year principally caused requirement finance operations year capital expenditures year due repayment inframetrics existing longterm debt aggregated 183 million december 31 1998 december 31 1999 company inventories hand 633 million compared 714 million december 31 1998 decrease primarily attributable writeoff 253 duplicative inventory products result merger inframetrics excluding writeoff inventories rose 172 million year rise result lower anticipated delivery products year particularly yearend based yearend values company experienced 15 turns inventory year exclusive writeoff duplicative inventory december 31 1999 company accounts receivable amount 578 million compared 844 million december 31 1998 decrease level accounts receivable primarily due lower volume sales experienced last quarter 1999 compared period 1998 reduction also reflects much shorter collection cycle end 1999 days sales outstanding decreased 162 december 31 1998 112 december 31 1999 company improved collection process reduced extension terms beyond 30 days companys investing activities consisted primarily expenditures fixed assets totaled 75 million 132 million years ended december 31 1999 1998 respectively majority expenditures 1998 significant amount expended 1999 relate companys investment new productivity tools two primary investments nature enterprise resource planning erp system sales force automation system investment erp also necessary compliant year 2000 software issues company expects spend approximately 1 million expand erp system 2000 make boston operations compatible rest organization sales force automation system assist management assessing future business prospects planning production company entered credit agreement number banks december 16 1999 credit agreement provides company 100 million revolving line credit interest fluctuating rate generally equal higher federal funds rate plus 050 prime rate primary lender domestic borrowings libor offshore borrowings interest rates borrowings agreement increase companys consolidated debt level increases weighted average interest rate borrowings december 31 1999 786 credit agreement allows company elect time prior december 1 2002 convert entire principal balance credit agreement term loan would payable 24 subsequent equal monthly payments plus interest credit agreement includes several negative covenants among things restrict companys ability incur new indebtedness credit agreement collateralized substantially assets company includes certain financial covenants consolidated tangible net worth interest coverage ratio leverage ratio maximum accounts payable days december 31 1999 year ended company violation certain covenants lenders waived covenant violations december 31 1999 2000 modified covenants 2000 including addition covenants respect minimum levels revenue ebitda lenders also increased interest rates applicable offshore borrowings agreement 035 additionally company one subsidiaries 50000000 swedish kronar approximately 59 million line credit 365 december 31 1999 december 31 1999 company 813 million outstanding lines company believes existing cash available credit facilities financing available sources continuing efforts control costs improved collection accounts receivable management inventory levels sufficient meet cash requirements foreseeable future impact year 2000 company conducted comprehensive review computer systems identify systems could affected year 2000 issue company identified internal manufacturing system acquired company connection acquisition agema year 2000 compliant installed new enterprise resource planning system hardware software correct deficiency companys existing product line tested reviewed ensure year 2000 compliance companys products development designed year 2000 compliant additionally company evaluated year 2000 compliance products suppliers partners contingency plan dealing reasonably likely worst case scenario developed internal external resources employed identify correct reprogram test systems year 2000 compliance total cost project approximately 7 million funded existing cash resources date company encountered material year 2000 problems respect products internal systems third party products systems process research development connection acquisition agema december 1997 company expensed 336 million representing purchased process research development iprd yet reached technological feasibility alternative future use expenditures recognized period expense accordance statement financial accounting standards 2 financial accounting standards board interpretation 4 see note 16 notes financial statements discussion agema acquisition 336 million value assigned iprd assigned three separate technological projects 570 series uncooled products 137 million uncooled technology 121 million qwip technology 78 million nature efforts required develop projects commercially viable products includes completion planning designing prototyping verification testing activities necessary establish product produced meet design specifications including functions features technical performance requirements date acquisition estimated total cost incurred develop iprd commercially variable products approximately 255 million aggregate year 2002 value assigned iprd determined independent appraiser using discounted cash flow method involved estimating costs develop purchased process technology commercially viable products estimating resulting net cash flow projects discounting net cash flows back present values discount rate used 25 included factor intended take account uncertainty surrounding successful development purchased process technology resulting net cash flows based managements estimates revenue fiveyear period cost sales research development expenses selling general administrative expense income taxes projects consistent historical rates assurance company able complete required work order develop projects commercially viable products iprd projects discussed successfully developed revenue profitability company may adversely affected future periods item 7aitem 7 managements discussion analysis financial condition results operations forward looking statements managements discussion analysis financial condition results operations contains forwardlooking statements within meaning securities litigation reform act 1995 based current expectations estimates projections companys business managements beliefs assumptions made management words expects anticipates intends plans believes sees estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance involve risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecasted forwardlooking statements due numerous factors including limited discussed managements discussion analysis financial condition results operations elsewhere annual report well discussed time securities exchange commission filings reports addition statements could affected general industry market conditions forwardlooking statements speak date made undertake obligation update forwardlooking statement reflect events circumstances date annual report update correct one forwardlooking statements investors others conclude make additional updates corrections respect forwardlooking statements overview flir systems founded 1978 become world leader design manufacture marketing thermal imaging stabilized camera systems wide variety commercial industrial government applications business organized around two principal markets imaging thermography acquisition agema infrared systems ab headquartered danderyd sweden 1997 pooling interest merger inframetrics inc headquartered n billerica massachusetts 1999 company experienced significant change structure operations thermography market three previously separate companies competed significant transition company phased products utilizing cooled technology focused uncooled products produced sweden imaging market merger inframetrics brought certain set complimentary products previous portfolio products carried company continue enhance stateoftheart products within markets well develop products new market applications use advanced thermal imaging technologies uncooled detector technology operates room temperature allowing systems less expensive smaller lighter energy efficient additionally developed highermargin image analysis software tools enhance capability thermography products hardware prices decline sophistication image analysis software incremental functionality provided analysis tools expected become critical component thermography systems course 2000 company new management restructuring operations improve profitability result 2000 company recorded charges totaling 205 million primarily associated realigning operations focus higher margin products eliminating aged lower margin products improving manufacturing efficiencies reducing production distribution costs charges include 90 million cost goods sold adjust inventory reserves related certain low margin products older products phased addition 88 million related cost accumulation asset valuations written result operational changes 22 million incurred associated workforce reductions related costs 05 million recorded related settlement class action lawsuit international revenue accounted approximately 484 502 476 revenue 2000 1999 1998 respectively anticipate international sales continue account significant portion revenue production distribution thermography products sweden contributing significant volume sales denominated foreign currencies exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies company typically experiences longer payment cycles international sales adverse impact upon companys liquidity addition substantial portions companys operations conducted outside united states particularly sweden international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal variances customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement international customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance restatements reclassifications march 2001 company determined necessary restate 1999 1998 consolidated financial statements interim 2000 1999 consolidated financial statements restatements effected company determined based review specific terms conditions underlying certain sales transactions recorded 1999 1998 revenue recognized respect transactions periods amounts consistent companys revenue recognition policy accordingly restatements include deferral revenue reporting period revenue originally recorded reporting period revenue would properly recorded companys revenue recognition policy related cost sales certain operating costs also restated appropriate restatements also include revision accounting certain assets recorded connection merger inframetrics inc 1999 result restatements previously reported revenue year ended december 31 1998 reduced 111 million previously reported revenue year ended december 31 1999 increased 07 million revenue year ended december 31 2000 increased 81 million result restatements previously reported net earnings year ended december 31 1998 reduced 62 million previously reported net loss year ended december 31 1999 reduced 03 million net loss year ended december 31 2000 reduced 56 million also reclassifications made 1998 1999 report results consistent basis 2000 reclassifications impact net earnings years presented see notes 15 16 consolidated financial statements information concerning restatements reclassifications information presented management discussion analysis reflect impact restatements reclassifications results operations following table sets forth indicated periods certain items percentage revenue 1 excluding onetime charges connection 2000 charges related streamlining manufacturing corporate operations cost goods sold gross profit operating expenses loss taxes net loss would 491 509 458 10 30 respectively 2 excluding onetime charges 346 million connection acquisition inframetrics cost goods sold gross profit loss operations net loss 1999 would 551 449 66 111 respectively years ended december 31 2000 1999 1998 revenue increased 44 1786 million 1999 1864 million 2000 increase due higher volumes imaging business revenue business segment increased 103 899 million 1999 992 million 2000 increase imaging revenue experienced across product segments revenue thermography 1999 2000 amounted 886 million 871 million respectively revenue thermography remained relatively constant revenue increase units delivered offset approximately 49 million associated decline value foreign currencies us dollar revenue period revenue 1998 1773 million compared revenue 1999 1786 million 1999 revenue imaging business increased 88 million 109 revenue thermography business decreased 75 million 78 increase imaging revenue due increased demand governmental commercial market segments decrease thermography revenue primarily due loss market share result consolidation business base acquisition agema 1997 merger inframetrics 1999 loss market share resulted companys focus consolidation operations distribution channels elimination duplicative overlapping product lines reaction market changes international revenue 2000 902 million representing 484 revenue compared 1999 international revenue 896 million 502 revenue 1998 international revenue 844 million 476 revenue gross profit percentage revenue gross profit 2000 438 compared 307 1999 onetime charges 133 million 253 million recorded 2000 1999 respectively without onetime charges gross profit would 509 2000 449 1999 improvement margin partially attributable decrease manufacturing costs resulted streamlining operations took place 2000 percentage revenue gross profit 1998 507 compared 449 1999 excluding impacts onetime charges recorded year gross profit 1999 negatively impacted excess manufacturing costs partially result merger certain consolidation activities occurred research development percentage revenue research development expense decreased slightly 153 2000 162 1999 research development expense 2000 included 29 million related cost accumulations asset valuations written result operational changes charges totaling 02 million associated workforce reductions related costs without charges research development expense would 136 revenue percentage revenue research development expense increased slightly 162 1999 152 1998 research development expense increased 1999 facilitate introduction new products including thermacam 595 sc3000 marflir fireflir ultra7000 ultramedia iii star safire star safire ii selling operating costs selling operating costs increased 16 629 million 1999 639 million 2000 increase selling operating costs due onetime charges 2000 39 million principally related workforce reductions settlement class action lawsuit write offs demonstration equipment well additional legal audit fees incurred 2000 partially offset cost savings generated 2000 result streamlining activities initiated year percentage revenue selling operating costs 343 352 2000 1999 respectively without onetime charges selling operating costs would 600 million 322 revenue 2000 selling operating costs increased 186 1999 530 million 1998 629 million 1999 99 million increase selling operating costs 1999 absolute dollar terms due variety factors including expense increases due anticipated higher volumes business fully realized implementation costs enterprise resource planning system higher commission expense increased bad debt expense higher costs uk operations interest expense interest expense 120 million 78 million 32 million years ended 2000 1999 1998 respectively increase expense primarily due increased debt levels increased interest rates increased interest rates due application default rates 2000 companys credit agreement resulting average borrowing rate 786 december 31 1999 increasing rate 1225 december 31 2000 increase expense also due fair value adjustment 13 million interest rate swap agreements income taxes companys income tax provision 37 million 23 million 18 million 2000 1999 1998 respectively mix taxable income loss companys us foreign operations years significantly impacted recording tax provision tax provisions 2000 1999 primarily reflect taxes provided income generated companys foreign subsidiaries principally sweden substantial losses generated united states however benefited years due inability carry losses back prior years valuation allowances recorded resulting deferred tax assets december 31 2000 company us united kingdom tax net operating loss carryforwards nols totaling approximately 808 million 06 million respectively expire years 2005 2020 additionally company various us tax credits available aggregating 32 million expire years 2007 2019 company also 101 million deferred tax asset related acquired inprocess research development recorded connection agema acquisition realization deferred tax asset dependent upon ability foreign subsidiaries remit earnings us parent statement financial accounting standards 109 accounting income taxes sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets likely otherwise valuation allowance required recorded based guidance management recorded substantial valuation allowance amounting 241 million deferred tax assets management believes primarily result significant operational restructuring third quarter 2000 net deferred tax asset 237 million reflected december 31 2000 consolidated balance sheet realizable based future forecasts taxable income addition company planning implement various tax planning strategies assist utilization deferred tax assets future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond companys control assurance given sufficient taxable income generated full utilization unreserved deferred tax assets accordingly company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income andor tax planning strategies achieved liquidity capital resources december 31 2000 company shortterm borrowings net cash hand 59 million compared 770 million december 31 1999 decrease shortterm borrowings year principally due reclassification 749 million longterm debt result amendment companys credit agreement january 2001 cash provided operating activities 2000 39 million compared net cash used operating activities 1999 161 million cash provided operating activities principally due reductions accounts receivable inventories offset net loss year net noncash charges reduction accounts payable accrued liabilities december 31 2000 company accounts receivable amount 397 million compared 568 million december 31 1999 company increased collection efforts tightened credit policies days sales outstanding decreased 116 december 31 1999 78 december 31 2000 timing sales particularly recording large system sales significantly impact calculation days sales outstanding point time december 31 2000 company inventories hand 558 million compared 651 million december 31 1999 decrease primarily due inventory reduction initiatives writeoffs certain inventories connection restructuring operations 2000 company accounts payable 162 million december 31 2000 compared balance 221 million december 31 1999 decrease accounts payable primarily attributable lower operating expenses inventory purchases fourth quarter 2000 compared earlier periods increase availability cash settle trade accounts december 31 2000 company accrued payroll current liabilities 192 million compared 272 million december 31 1999 decrease principally due reduction deferred revenue arose 1999 connection timing revenue recognition shipments made year companys investing activities consisted primarily expenditures fixed assets totaled 73 million 75 million years ended december 31 2000 1999 respectively company entered credit agreement number lender banks december 16 1999 credit agreement amended effective january 23 2001 credit agreement amended provides company borrowing facility maximum 934 million december 31 2000 company 899 million borrowings addition 08 million standby letters credit 27 million financing available company december 31 2000 interest rate amended credit agreement 1225 amended credit agreement provides maximum borrowing facility permanently reduced 50 first 50 million principal payment time financing availability fixed amount exceed 52 million principal payments exceeding 50 million permanently reduce maximum borrowing facility dollarfordollar basis interest rate borrowings amended credit agreement december 31 2000 january 23 2001 prime rate primary lender domestic borrowings plus 275 interest rate borrowings decline certain principal payments made reduction 25 basis points provided payment 75 million additional 25 basis point reduction 50 million principal reduction thereafter subject total reduction 100 basis points amended credit agreement requires minimum cumulative principal payments totaling less 25 million march 31 2001 50 million june 30 2001 90 million september 30 2001 150 million december 31 2001 200 million march 31 2002 250 million june 30 2002 amended credit agreement expires july 15 2002 amended credit agreement includes one financial covenant related company achieving certain levels profitability beginning quarter ending march 31 2001 amended credit agreement collateralized substantially assets company additionally company one subsidiaries 40000000 swedish kronar approximately 42 million line credit 43 december 31 2000 december 31 2000 company 27 million outstanding line credit line secured primarily accounts receivable inventories subsidiary subject automatic renewal annual basis believe existing cash generated operating activities available credit facilities financing available sources combined continuing efforts control costs improve collections accounts receivable better manage inventory levels sufficient meet cash requirements foreseeable future present significant capital commitments coming year item 7aitem 7 management’s discussion analysis financial condition results operations forwardlooking statements management’s discussion analysis financial condition results operations contains forwardlooking statements within meaning securities litigation reform act 1995 based current expectations estimates projections company’s business management’s beliefs assumptions made management words “expects” “anticipates” “intends” “plans” “believes” “sees” “estimates” variations words similar expressions intended identify forwardlooking statements guarantees future performance involve risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecasted forwardlooking statements due numerous factors including limited discussed management’s discussion analysis financial condition results operations including section entitled “risk factors” located herein elsewhere annual report well discussed time securities exchange commission filings reports addition statements could affected general industry market conditions forwardlooking statements speak date made undertake obligation update forwardlooking statement reflect events circumstances date annual report update correct one forwardlooking statements investors others conclude make additional updates corrections respect forwardlooking statements overview flir systems founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits neighborhoods helping determine whether abnormal leakage heat coming doors windows walls roofs house demand application declined company began focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since company continued develop thermal imaging products growing number applications become one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets acquisition agema infrared systems ab headquartered danderyd stockholm sweden 1997 pooling interests merger inframetrics inc headquartered n billerica boston massachusetts 1999 company experienced significant changes structure operations business organized around two principal markets imaging thermography market primarily consists use handheld thermal imaging systems detect measure minute temperature differences useful wide variety commercial applications fall four basic categories predictive preventive maintenance also known condition monitoring research development process control monitoring product development market three previously separate companies competed significant transition phased products utilizing older infrared detector technology called “cooled” technology focused products utilize newer less expensive detector technology known “uncooled” technology thermography products produced facility sweden imaging market primarily consists use infrared imaging cameras incorporated highly stabilized turrets call gimbals use helicopters fixedwing aircraft types ships addition also manufacture groundbased handheld systems also make products specifically developed firefighters applications imaging products include search rescue navigation safety drug interdiction law enforcement support maritime border patrol surveillance reconnaissance perimeter security firefighting merger inframetrics brought certain set complimentary products previous portfolio products carried company imaging products primarily produced portland boston facilities continue enhance stateoftheart products within markets well develop products new market applications use advanced thermal imaging technologies example uncooled detector technology used thermography systems enable systems operate room temperature allowing systems less expensive smaller lighter energy efficient additionally developing image analysis software tools enhance capability thermography products hardware prices decline sophistication image analysis software incremental functionality provided analysis tools expected become important component thermography systems imaging products beginning utilize new type cooled infrared detector technology called quantum well infrared photodetector qwip provides superior resolution yet less expensive produce addition continually improving stabilization airborne systems offering additional imaging options ccd tv cameras laser rangefinders laser designators course 2000 company restructured operations improve profitability result 2000 company recorded charges totaling 205 million primarily associated realigning operations focus higher margin products eliminating aged lower margin products improving manufacturing efficiencies reducing production distribution costs charges included 90 million cost goods sold adjust inventory reserves related certain low margin products older products phased addition 88 million related cost accumulation asset valuations written result operational changes 22 million incurred associated workforce reductions related costs 05 million recorded related settlement class action lawsuit actions 2000 resulted improved profitability cash generated operating activities 2001 international revenue accounted approximately 470 484 502 revenue 2001 2000 1999 respectively anticipate international sales continue account significant percentage revenue production distribution thermography products sweden contributing large volume sales denominated foreign currencies exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies company typically experiences longer payment cycles international sales adverse impact upon company’s liquidity addition substantial portions company’s operations conducted outside united states particularly sweden international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal variances customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement international customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related revenue recognition bad debts inventories warranty obligations income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition policy recognize revenue upon delivery products customers fulfillment contractual terms conditions pursuant guidance provided staff accounting bulletin 101 revenue recognition financial statements sab 101 issued securities exchange commission produce commercially developed offtheshelf products many imaging customers particularly use airborne systems request different system configurations based standard options accessories addition delivery contracts provide specific testing product acceptance customer contract recognize revenue determined satisfied specific contractual terms including options services determined essential functionality system amount specified contract items services delivered judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined risk uncollectibility minimal allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2001 accounts receivable balance 580 million reported net allowances doubtful accounts 19 million believe reported allowances december 31 2001 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory reserves designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventory becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy establish inventory reserves conditions exist suggest inventory may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventory based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded reserves intended reduce carrying value inventory net realizable value december 31 2001 inventory 476 million stated net inventory reserves 117 million actual demand products deteriorate market conditions less favorable project additional inventory reserves may required product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability december 31 2001 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly income taxes recorded valuation allowance reduce deferred tax assets amount likely realized company assessed valuation allowance based upon estimate future taxable income covering relatively short time horizon given volatility markets serve historic operating results external market data considered evaluation availability tax planning strategies utilize recorded deferred tax assets also considered december 31 2001 deferred tax assets reduced valuation allowances 182 million company able realize deferred tax assets amount excess reported net amounts adjustment deferred tax assets would increase earnings period determination made similarly determine may unable realize net deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue certain reclassifications made prior years’ data conform current year’s presentation reclassifications impact previously reported results operations shareholders’ equity 1 excluding onetime charges connection 2000 charges related streamlining manufacturing corporate operations cost goods sold gross profit operating expenses loss taxes net loss would 488 512 462 10 30 respectively 2 excluding onetime charges 346 million connection acquisition inframetrics cost goods sold gross profit loss operations net loss 1999 would 548 452 66 111 respectively years ended december 31 2001 2000 1999 revenue increased 150 1864 million 2000 2144 million 2001 increase primarily due increased sales company’s imaging products revenue business segment increased 239 992 million 2000 1229 million 2001 revenue increase experienced across imaging product line thermography revenue increased 50 871 2000 915 2001 increases revenue due increase unit volumes due growth number applications infrared technology ability products meet applications addition price increases implemented late 2000 increase revenue sales thermography products offset approximately 50 million related weakening foreign currencies relative us dollar 2001 revenue increased 44 1786 million 1999 1864 million 2000 increase due higher sales volumes imaging business revenue business segment increased 103 899 million 1999 992 million 2000 increase imaging revenue experienced across product segments revenue thermography 1999 2000 amounted 886 million 871 million respectively revenue thermography remained relatively constant revenue increase units delivered offset approximately 49 million associated decline rate used translate foreign currencies us dollar 2000 international revenue 2001 totaled 1007 million representing 470 revenue compares international revenue 902 million 484 revenue 2000 896 million 502 revenue 1999 sales mix domestic international sales may fluctuate slightly one year anticipate mix approximately 50 domestic 50 international longterm basis gross profit percentage revenue gross profit 2001 545 compared 441 2000 onetime charges taken 2000 related company’s restructuring streamlining operations included 133 million cost goods sold without onetime charges 2000 gross profit would 512 2000 improvement gross profit primarily due price increases implemented late 2000 decrease manufacturing costs resulted restructuring operations occurred 2000 including elimination older lower margin products believe gross margin experienced 2001 representative margins company able realize ongoing basis percentage revenue gross profit 2000 441 compared 310 1999 onetime charges 133 million 253 million recorded 2000 1999 respectively without onetime charges gross profit would 512 2000 452 1999 improvement gross profit 2000 partially attributable company’s efforts decrease manufacturing costs streamline operations 2000 research development percentage revenue research development expenses decreased 156 2000 127 2001 absolute dollars research development expenses decreased 292 million 2000 272 million 2001 research development expenses 2000 included 31 million onetime charges related cost accumulations asset valuations workforce reductions costs associated company’s efforts restructure streamline operation 2000 without charges research development expenses 2000 would 261 million 140 revenue believe 2001 spending level research development percentage sales representative spending ongoing basis sufficient meet demand new products changes technology percentage revenue research development expenses decreased slightly 165 294 million 1999 156 292 million 2000 expenses 2000 include onetime charges 31 million described selling general administrative expenses selling general administrative expenses decreased 639 million 343 revenue 2000 523 million 244 revenue 2001 expenses 2000 include onetime charges 39 million associated company’s streamlining operations year without charges selling general administrative expenses would 600 million 322 revenue 2000 decrease selling general administrative expenses primarily due onetime charges taken 2000 reduction expense levels result restructuring actions 2000 reductions certain administrative expenses legal audit fees abnormally high 2000 believe expense levels 2001 representative spending levels company experience ongoing basis selling general administrative expenses increased 16 629 million 1999 639 million 2000 increase expenses due onetime charges 2000 totaling 39 million principally related workforce reductions settlement class action lawsuit write offs demonstration equipment well additional legal audit fees incurred 2000 partially offset cost savings generated 2000 result streamlining activities initiated year percentage revenue selling general administrative expenses 343 352 2000 1999 respectively interest expense interest expense totaled 94 million 120 million 78 million years ended 2001 2000 1999 respectively decrease interest expense 2000 2001 due primarily company’s ability reduce debt levels cash flows provided operating activities average interest rate 2001 also slightly lower compared 2000 due reductions prime lending rates year reductions rates provided amended credit agreement based level payments made company 2001 increased interest expense 1999 2000 primarily due increased debt levels increased interest rates default rates applied 2000 company’s credit agreement’s borrowing rates 786 december 31 1999 increasing rate 1225 december 31 2000 declining 650 december 31 2001 interest expense also includes expenses associated fair value adjustments company’s interest rate swap agreements amounts 10 million 2001 13 million 2000 income taxes company’s income tax provision 28 million 37 million 23 million 2001 2000 1999 respectively mix taxable income loss company’s us foreign operations years significantly impacted recording tax provision tax provision years primarily reflects taxes provided income generated company’s foreign subsidiaries principally sweden 2000 1999 company recognize benefit losses generated years united states due inability carry losses back prior years accordingly valuation allowances recorded deferred tax assets associated net operating loss carryforwards nols 2001 company recognize portion previously unrecognized loss benefits december 31 2001 company us nols totaling approximately 839 million expire years 2005 2021 additionally company various us tax credits available aggregating 37 million expire years 2007 2020 approximately 138 million company’s nols generated primarily 2001 result deductions related exercises stock options utilized future portion us nols tax effected accounted direct increase additional paidin capital rather reduction year’s provision income taxes statement financial accounting standards 109 “accounting income taxes” sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance management recorded substantial valuation allowance amounting 182 million 241 million december 31 2001 2000 respectively deferred tax assets management believes net deferred tax asset 239 million reflected december 31 2001 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond company’s control assurance given sufficient taxable income generated full utilization net deferred tax assets accordingly company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income achieved liquidity capital resources december 31 2001 company total borrowings net cash hand 84 million compared 824 million december 31 2000 company able reduce borrowings cash provided operating activities 356 million proceeds secondary offering common stock december 2001 company’s borrowings december 31 2001 reported shortterm debt company’s primary credit facility expires july 2002 cash provided operating activities 2001 totaled 277 million compared cash provided operating activities 2000 39 million cash provided operating activities 2001 primarily due net earnings generated year reductions inventories offset increase accounts receivable cash provided operating activities 2000 primarily due reductions accounts receivable inventories offset net loss year net noncash charges reduction accounts payable accrued liabilities december 31 2001 company accounts receivable amount 580 million compared 397 million december 31 2000 increase receivable balance primarily due increase sales fourth quarter 2001 compared fourth quarter 2000 650 million 572 million respectively timing sales within quarter consequently days sales outstanding increased 78 days december 31 2000 99 days december 31 2001 timing sales particularly recording large quantity higherpriced system sales significantly impact calculation days sales outstanding point time december 31 2001 company inventories hand 476 million compared 555 million december 31 2000 decrease primarily due continued efforts initiatives better manage reduce inventory levels portland boston facilities december 31 2001 company prepaid expenses current assets 105 million compared 59 million december 31 2000 increase primarily due increase sales demonstration units increase value added tax receivables europe due increased purchases timing collections taxes year increases certain prepaid items december 31 2001 company deferred revenue 53 million compared 16 million december 31 2000 increase due larger number extended warranty contracts received 2001 accrued payroll liabilities increased 50 million 176 million december 31 2000 225 million december 31 2001 increase primarily due assumption certain liabilities optronics division acquired company 2001 pension longterm liabilities increased 32 million 60 million december 31 2000 92 million december 31 2001 increase primarily due increase fair value company’s interest rate swap agreements assumption put option obligation 14 million shares company’s common stock issued acquisition optronics division company’s investing activities consisted primarily expenditures fixed assets totaled 40 million 73 million years ended december 31 2001 2000 respectively company entered credit agreement number lender banks december 16 1999 credit agreement amended january 23 2001 credit agreement amended provided company borrowing facility maximum 934 million required certain principal payments permanently reduced maximum borrowing facility december 31 2001 result principal payments made date company 199 million borrowings addition 19 million standby letters credit 41 million financing available company amended credit agreement december 31 2001 interest rate amended credit agreement 65 prime rate primary lender domestic borrowings plus 175 amended credit agreement requires minimum cumulative payments june 30 2002 expires july 15 2002 december 31 2001 company made payments required june 30 2002 february 11 2002 company paid remaining 199 million amended credit agreement retains 19 million standby letters credit 41 million available financing amended credit agreement includes one financial covenant related company achieving certain levels profitability determined rolling fourquarter basis beginning quarter ending march 31 2001 december 31 2001 company compliance covenant amended credit agreement collateralized substantially assets company additionally company one subsidiaries 40000000 swedish kronar approximately 38 million line credit 43 december 31 2001 december 31 2001 company 35 million outstanding line credit line secured primarily accounts receivable inventories subsidiary subject automatic renewal annual basis continuously evaluate need cash requirements foreseeable future generated 394 million cash operating activities fifteen months ended december 31 2001 operating cash flows combined cash generated secondary offering common stock december 2001 proceeds received relation stock option plans sufficient fund operations significantly reduce borrowing facilities believe based upon assessment growth potential markets relative position markets current cost structure asset management abilities cash operating activities continue primary source financing amended credit agreement currently operate expires july 15 2002 february 11 2002 executed commitment letter bank 35 million syndicated senior credit facility replace amended credit agreement form funding arrangement threeyear revolving credit facility includes option increase credit facility additional 25 million first two years term agreement terms proposed agreement borrowings bear interest based upon bank’s prime lending rate libor rates provision spread rates based upon certain financial criteria company expects variable rates approximate bank’s prime lending rate facility subject company several financial covenants including maintenance certain fixed charge leverage ratios addition minimum levels net worth ebitda management expects able comply covenants based upon forecast future earnings minimum company’s operating results 2001 considered company’s net worth december 31 2001 would sufficient satisfy proposed covenants expect sign final agreement credit facility shortly filing form 10k present significant capital commitments 2002 fiscal year consequently anticipate cash requirements primarily related funding operating activities cash recently generated operating activities additional funds available pending credit facility believe sufficient resources available meet cash requirements however significant changes anticipated cash requirements significant changes business conditions could negatively impact generation cash operating activities could require company seek additional financing sources possible changes business conditions discussed detail section entitled “risk factors” located herein company’s offbalance sheet arrangements limited operating rents leases certain facilities equipment expensed incurred december 31 2001 future annual minimal rental payments required noncancelable leases total 34 million 2002 34 million 2003 31 million 2004 17 million 2005 03 million 2006 company interest rate swap agreements one lender banks agreements include notional principal amounts 30 million 10 million terminate march 2003 march 2005 respectively agreements company pays interest based upon fixed rates ranging 669 718 receiving interest based upon variable onemonth libor rates 193 december 31 2001 december 31 2001 company recorded fair value obligation related agreements 23 million risk factors addition factors discussed forwardlooking statements section management’s discussion analysis financial condition results operations elsewhere form 10k following important factors could cause actual results events differ materially contained forwardlooking statements made behalf company addition know risks uncertainties described ones face unforeseen risks could arise problems issues view minor could become significant unable adequately respond listed risks business financial condition results operations could materially adversely affected additionally cannot certain give assurances actions taken reduce known risks uncertainties work inability respond risks could cause financial condition results operations materially adversely affected fluctuations quarterly annual operating results make difficult predict future performance quarterly annual operating results likely fluctuate future due variety factors beyond control result fluctuations quarterly operating results believe quartertoquarter comparisons operating results necessarily meaningful relied upon indicators future performance factors may affect future operating results include • timing number size orders shipments customers well relative mix orders • significant portion sales made last month quarter sales frequently concentrated last week days quarter • timing market acceptance competitors’ new products product enhancements technologies • timing release government funds procurement products • changes competitors’ pricing policies • timing amount inventory writedowns • ability obtain sufficient supplies critical components • foreign currency fluctuations • costs associated acquisition businesses product lines technologies • ability integrate acquired businesses product lines technologies • general economic conditions domestically internationally seasonal fluctuations operating results particularly increase sales generally experience every year fourth quarter result • seasonal pattern contracting us certain foreign governments • frequent requirement international customers take delivery equipment prior january due funding considerations • tendency commercial enterprises fully utilize yearly capital budgets prior expiration difficulties managing growth grown rapidly 313 employees 1993 798 employees december 31 2001 annual revenue period grew 40 million 214 million operations became global nature past experienced problems developing implementing financial reporting controls system commensurate substantial growth increased complexity business taken number steps improve controls systems including implementation new set reporting control procedures protocols retention new executive management team financial reporting personnel however measures take inadequate address growth continuing experience business financial condition results operations could materially adversely affected pending investigation sec could harm business june 8 2000 securities exchange commission “sec” issued formal order investigation us certain officers directors employees individuals presently formerly associated company determine whether violations federal securities laws occurred 1998 1999 investigation relates company’s revenue recognition policies accounting controls financial reports public disclosures time period believe investigation relates among things set facts gave rise restatements financial statements periods class action lawsuits shareholders settled part investigation sec subpoenaed documents testimony current former officers employees others february 19 2002 staff sec advised us intend recommend sec bring civil injunctive action us seeking permanent injunction us violations section 17a securities act 1933 “securities act” sections 10b 13a 13b2 securities exchange act 1934 “exchange act” rules 10b5 12b20 13a1 13a13 13b21 thereunder statutes rules generally include antifraud provisions securities act antifraud reporting record keeping provisions exchange act rules thereunder recommendation sec staff include civil penalties fines claims damages years 1998 1999 engaged discussions staff sec attempt reach settlement legal action contemplated staff date unable reach agreement terms settlement also submitted written statement sec believe sec bring civil injunctive action recommended staff time know whether sec authorize commencement injunctive action recommended staff whether sec authorize legal action commence administrative actions us able negotiate settlement sec regard injunctive actions administrative proceedings intend vigorously defend actions proceedings legal injunctive action administrative proceeding sec may bring us could material adverse effect business financial condition results operations adverse finding us sec terms proposed staff could also result loss ability rely safe harbor forwardlooking statements provided securities litigation reform act 1995 addition expect continue incur expenses associated responding investigation legal administrative proceedings commenced sec involving company former current officers directors employees proceedings may divert efforts management team normal business operations reduction government purchasing could significantly decrease revenue government procurement process complex highly competitive substantial portion revenue derived sales us foreign government agencies business continue substantially dependent upon sales single agency us government accounted 10 revenue last year aggregate sales us government agencies accounted 182 revenue 2000 217 revenue 2001 accordingly results operations would adversely impacted governmental spending cuts general budgetary constraints additionally even though government sales made defense applications significant reduction purchases thermal imaging systems defense applications could result certain competitors committing attention resources nondefense applications thereby exposing us greater competitive pressures primary markets significant decline sales us foreign governments disqualification making sales reason would material adverse effect business financial condition results operations may able reduce costs quickly enough sales decline expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may result us carrying higher levels inventories finished goods components raw materials thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs result may carry adequate reserves offset writedowns writeoffs liquidity limited result restrictions borrowings bank credit agreement limited duration agreement entered credit agreement number banks december 16 1999 credit agreement amended january 23 2001 december 31 2001 result principal payments made date 199 million borrowings addition 19 million standby letters credit 41 million available us additional borrowings amended credit agreement borrowings amended credit agreement must repaid july 15 2002 amended credit agreement expires amended credit agreement also includes certain covenants past could future compliance covenants failure satisfy covenants would result default amended credit agreement february 11 2002 executed commitment letter bank 35 million syndicated senior credit facility replace amended credit agreement form funding arrangement threeyear revolving credit facility includes option increase credit facility additional 25 million first two years term agreement credit facility provide variable interest rates approximate bank’s prime rate credit facility subject company several financial covenants including maintenance certain fixed charge leverage ratios addition minimum levels net worth ebitda expect sign final agreement credit facility shortly filing form 10k successful either completion new facility compliance proposed covenants liquidity would reduced could material adverse effect business financial condition results operations future success depend ability respond rapid technological change markets compete market thermal imaging equipment characterized rapid technological developments frequent new product introductions enhancements modifications success depend large part ability develop new technologies anticipate changing customer requirements may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail timely develop introduce new technologies business financial condition results operations would adversely affected time competitors may announce new products product enhancements technological innovations potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence must successfully introduce new enhanced products successful future success depends ability continue improve existing products develop new products using latest technology satisfy customer requirements example nearterm success depend continued acceptance star safire thermacam 695 sales expect generate substantial amount annual revenue also investing significant amount financial resources enhancement existing products cannot certain successfully complete enhancements within necessary time period customers accept new products future products failure complete enhancement products failure current future products gain maintain market acceptance could material adverse effect business financial condition results operations competition market thermal imaging equipment intense failure compete effectively would adversely affect business competition markets products intense speed companies identify new applications thermal imaging develop products meet needs supply commercial quantities low prices market important competitive factors believe principal competitive factors markets product features reliability price additionally products compete indirectly numerous products image intensifiers lowlight cameras limited military governmental funds finally many competitors greater financial technical research development marketing resources factors result greater challenges existing competitors well increasing competition new competitors require us continue invest focus research development new product innovation assurance given able compete effectively future would material adverse effect business financial condition results operations dependence sole source limited source suppliers components products exposes us risks could result delays satisfying customer demand increased costs loss revenue rely number sole source limited source suppliers provide certain key components products accordingly could experience shortage supply components particular contract bae systems “bae” supply uncooled detectors integration thermacam fireflir product lines bae currently one three large producers specialized uncooled detectors subject certain exceptions contract gives us exclusive right purchase uncooled detectors use commercial market limited nonexclusive right purchase uncooled detectors use government market contract corresponding obligation purchase uncooled detectors solely bae certain defined commercial applications currently thermacam series handheld products thermovision sentry fireflir products use bae detectors however intend use uncooled detectors supplied bae products contract provides monthly delivery fixed number uncooled detectors may increased decreased us within certain limits business financial condition results operations could materially adversely affected event either number detectors delivered us contract insufficient satisfy requirements ii obligated purchase detectors excess number require contract covers purchase fixed aggregate number units expiration contract may able successfully negotiate new contract bae another company uncooled detectors failure us renew contract identify another source uncooled detectors would material adverse effect business financial condition results operations based past experience expect occasionally receive late deliveries experience inadequate supplies certain components provided bae significant supplier become unavailable manufacturing operations would disrupted unless could identify qualify acceptable replacement components redesign products different components might able obtain necessary components timely basis acceptable prices extended interruption supply sole limited source components would material adverse effect business financial condition results operations future success depends part attracting retaining key senior management qualified technical sales personnel future success depends efforts continued services key executives ability attract retain qualified technical sales personnel significant competition exists personnel cannot assure retention key technical sales personnel ability attract assimilate retain highly qualified technical sales personnel may required future also cannot assure employees leave subsequently compete us unable attract retain key personnel business financial condition results operations could adversely affected acquisition equity investment make could disrupt business harm financial condition results operations past may future acquire complementary businesses technologies enter joint ventures may experience difficulties assimilating personnel operations products technology acquired future acquisitions investments make additionally could lose key personnel companies acquire incur unanticipated costs assume new liabilities difficulties could disrupt ongoing business distract management employees increase expenses furthermore might incur additional debt issue additional equity securities pay future acquisitions issuance additional equity securities could dilute existing shareholders’ ownership assurance given realize anticipated benefits acquisition material adverse effect business financial condition results operations face risks international sales currency fluctuations market sell products worldwide international sales accounted expected continue account significant portion revenue years ended december 31 2001 2000 international sales accounted 470 484 respectively total revenue international sales subject number risks including • imposition governmental controls • restrictions export critical technology • trade restrictions • difficulty collecting receivables • inadequate protection intellectual property • labor union activities • changes tariffs taxes • difficulties staffing managing international operations • political economic instability • general economic conditions historically currency fluctuations affected operating results changes value foreign currencies sales denominated costs incurred past caused could future cause fluctuations operating results seek reduce exposure currency fluctuations denominating majority international sales us dollars respect international sales denominated us dollars decrease value foreign currencies relative us dollar could make products less price competitive assurance given factors material adverse effect future international sales operations consequently business financial condition results operations may successful maintaining obtaining necessary licenses conduct operations abroad congress may prevent proposed sales foreign governments licenses required government agencies export administration act trading enemy act 1917 arms export control act 1976 export many products give assurance successful obtaining licenses failure obtain delays obtaining licenses would prevent delay us selling products outside us would material adverse effect business financial condition results operations products may suffer defects errors leading substantial damage warranty claims products use complex system designs components may contain errors defects particularly incorporate new technology products release new versions yet recall product products defective might required redesign recall products pay substantial damages warranty claims event could result significant expenses disrupt sales affect reputation products would material adverse effect business financial condition results operations furthermore product defects could result substantial product liability maintain product liability insurance cannot certain adequate remain available acceptable terms inability protect intellectual property proprietary rights avoid infringing rights others could harm competitive position business ability compete successfully achieve future revenue growth depends part ability protect proprietary technology operate without infringing rights others accomplish rely combination patent trademark trade secret laws confidentiality agreements contractual provisions protect proprietary rights proprietary rights held confidence trade secrets covered patents making difficult protect although currently hold us patents covering certain aspects technologies products cannot certain obtain additional patents trademarks technology products trade names furthermore cannot certain patents trademarks challenged circumvented competitors likewise cannot certain measures taken protect proprietary rights adequately deter misappropriation disclosure failure us meaningfully protect intellectual property could material adverse effect business financial condition results operations moreover intellectual property necessarily represent barrier entry thermal imaging industry assurance able maintain competitive advantage competitors develop capabilities equal superior litigation patents intellectual property common industry cannot sure subject patent litigation future defending intellectual property lawsuits related legal administrative proceedings could result substantial expense us significant diversion effort personnel adverse determination patent suit proceeding may party could subject us significant liabilities adverse determination could require us seek licenses third parties licenses available commercially reasonable terms business could harmed would harmed unable use one facilities manufacture products facilities located portland boston stockholm inability continue manufacture products one facilities result example prolonged power shortage fire natural disaster would prevent us supplying products customers could material adverse effect business financial condition results operations principal shareholder substantial voting power may exert significant influence direction policies including matter requiring shareholder approval february 15 2002 thermo electron corporation beneficially owned 166 outstanding common stock virtue stock ownership position thermo electron may able significantly influence direction policies election board directors outcome matter requiring shareholder approval including merger consolidation sale substantially assets change control transaction concentration ownership may delay prevent change control discourage potential acquiror making tender offer otherwise attempting obtain control company articles bylaws shareholder rights plan well oregon law contain provisions could discourage takeover provisions second restated articles incorporation first restated bylaws oregon law shareholder rights plan could make difficult third party acquire us even would beneficial shareholders item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits neighborhoods helping determine whether abnormal leakage heat coming doors windows walls roofs house demand application declined company began focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since company continued develop thermal imaging products growing number applications become one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets years due growth company experienced significant changes structure operations business organized around two principal business segments thermography imaging thermography market primarily consists use handheld thermal imaging systems detect measure minute temperature differences useful wide variety commercial applications fall four basic categories predictive maintenance also known condition monitoring research development process control monitoring product development market significant transition phased many products utilizing older infrared detector technology called “cooled” technology focused products utilize newer less expensive detector technology known “uncooled” technology thermography products produced facility sweden imaging market primarily consists use infrared imaging cameras incorporated highly stabilized turrets call gimbals use helicopters fixedwing aircraft types ships addition also manufacture groundbased handheld systems also make products specifically developed firefighters applications imaging products include search rescue navigation safety drug interdiction law enforcement support maritime border patrol surveillance reconnaissance perimeter security firefighting imaging products primarily produced portland boston facilities continue enhance stateoftheart products within markets well develop products new market applications use advanced thermal imaging technologies example uncooled detector technology used thermography systems enable systems operate room temperature allowing systems less expensive smaller lighter energy efficient additionally developing image analysis software tools enhance capability thermography products hardware prices decline sophistication image analysis software incremental functionality provided analysis tools expected become important component thermography systems imaging products begun utilize new type cooled infrared detector technology called quantum well infrared photodetector qwip provides superior resolution yet less expensive produce addition continually improving stabilization airborne systems offering additional imaging options ccd tv cameras laser rangefinders laser designators international revenue accounted approximately 440 470 484 revenue 2002 2001 2000 respectively anticipate international sales continue account significant percentage revenue production distribution thermography products sweden contributing large volume sales denominated foreign currencies exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies company typically experiences longer payment cycles international sales adverse impact upon company’s liquidity addition substantial portions company’s operations conducted outside united states particularly sweden international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal variances customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement international customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related revenue recognition bad debts inventories goodwill impairment warranty obligations contingencies income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee company’s board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition policy recognize revenue upon delivery product customer passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 101 revenue recognition financial statements sab 101 issued securities exchange commission design market sell products standard offtheshelf products many imaging customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts recognize revenue determined elements essential functionality system delivered undelivered items considered essential functionality deferred estimated fair value judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined risk uncollectibility minimal allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2002 accounts receivable balance 558 million reported net allowances doubtful accounts 14 million believe reported allowances december 31 2002 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory reserves designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy establish inventory reserves conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded reserves intended reduce carrying value inventories net realizable value december 31 2002 inventories 501 million stated net inventory reserves 103 million actual demand products deteriorate market conditions less favorable project additional inventory reserves may required goodwill impairment company recorded goodwill connection acquisition agema infrared systems ab 1997 year ended december 31 2002 adopted provisions statement financial accounting standards 142 “goodwill intangible assets” sfas 142 sfas 142 changed accounting goodwill amortization method impairmentonly approach annually review goodwill impairment determine events changes business conditions indicate carrying value asset may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundary overall market capitalization company current review indicates adjustments necessary goodwill asset carrying value 125 million december 31 2002 response changes industry market conditions may required strategically realign resources future could result impairment goodwill product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 34 million december 31 2002 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets amount determine likely realized future valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination estimate future taxable income based upon historic operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2002 determined valuation allowance deferred tax assets 349 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue 1 excluding onetime charges connection 2000 charges related streamlining manufacturing corporate operations cost goods sold gross profit operating expenses loss taxes net loss would 488 512 462 10 30 respectively years ended december 31 2002 2001 2000 revenue 2002 totaled 2611 million increase 218 2144 million revenue reported 2001 revenue imaging business segment increased 361 1229 million 2001 1672 million 2002 thermography business segment reported revenue increase 26 915 million 2001 938 million 2002 increase imaging revenue primarily due increase unit volumes particularly groundbased products mix shipments within airborne product offerings thermography revenue increase due greater unit volume shipments primarily due market acceptance new eseries products offset lower prices associated eseries products reductions capital spending customer base impacted higher priced thermography products revenue increased 150 1864 million 2000 2144 million 2001 increase primarily due increased sales company’s imaging products revenue business segment increased 239 992 million 2000 1229 million 2001 revenue increase experienced across imaging product lines thermography revenue increased 50 871 million 2000 915 million 2001 increases revenue due increase unit volumes attributable growth number applications infrared technology ability products meet applications addition price increases implemented late 2000 international revenue 2002 totaled 1148 million representing 440 revenue compares international revenue 2001 totaled 1007 million representing 470 revenue 902 million 484 revenue 2000 sales mix domestic international sales may fluctuate slightly one year anticipate mix approximately 50 domestic 50 international longterm basis gross profit percentage revenue gross profit 2002 525 compared 545 2001 decrease gross profit percentage primarily due change relative mix revenue business segments historically experience higher gross margins thermography business imaging business 2002 imaging revenue represented 641 total revenue compared 573 total revenue 2001 believe gross margins within business segments representative margins company able realize ongoing basis however relative mix revenue two business segments continue influence total gross margins percentage revenue gross profit 2001 545 compared 441 2000 onetime charges taken 2000 related company’s restructuring streamlining operations included 133 million cost goods sold without onetime charges 2000 gross profit would 512 2000 improvement gross profit primarily due price increases implemented late 2000 decrease manufacturing costs resulted restructuring operations occurred 2000 including elimination older lower margin products research development research development expenses 269 million 2002 compared 272 million 2001 percentage revenue research development expenses decreased 127 2001 103 2002 believe spending levels sufficient support development new products continued growth business expect research development expenses represent 10 12 revenue longterm basis percentage revenue research development expenses decreased 156 2000 127 2001 absolute dollars research development expenses decreased 292 million 2000 272 million 2001 research development expenses 2000 included 31 million onetime charges related cost accumulations asset valuations workforce reductions costs associated company’s efforts restructure streamline operations 2000 without charges research development expenses 2000 would 261 million 140 revenue selling general administrative expenses selling general administrative expenses increased 523 million 244 revenue 2001 600 million 230 revenue 2002 increase spending primarily due increase selling marketing expenses arising general business revenue growth 2002 partially offset reduction 11 million expenses 2001 2002 related discontinuance amortization goodwill 2002 anticipate selling general administrative expenses continue represent 22 24 revenue future selling general administrative expenses decreased 639 million 343 revenue 2000 523 million 244 revenue 2001 expenses 2000 include onetime charges 39 million associated company’s streamlining operations year without charges selling general administrative expenses would 600 million 322 revenue 2000 decrease selling general administrative expenses primarily due onetime charges taken 2000 reduction expense levels result restructuring actions 2000 reductions certain administrative expenses legal audit fees abnormally high 2000 interest expense interest expense totaled 17 million 94 million 120 million years ended 2002 2001 2000 respectively decrease interest 2001 2002 due primarily reduction debt company able use cash operations proceeds december 2001 secondary stock offering repay outstanding debt company’s outstanding indebtedness primary credit agreement declined 899 million beginning 2001 199 million end 2001 paid full february 2002 decline 2000 2001 due debt payments 2001 slightly lower average interest rate 2001 due reductions prime lending rates year reductions rates provided credit agreement based level principal payments made 2001 interest expense 2002 2001 2000 also includes expenses associated company’s interest rate swap agreements amounts 10 million 22 million 14 million respectively swap agreements settled 2002 income taxes company’s income tax provision 73 million 28 million 37 million 2002 2001 2000 respectively mix taxable income company’s us foreign operations years expected utilization company’s deferred tax assets significantly impacted recording tax provisions 2002 2001 2000 tax provision primarily represented taxes provided income generated company’s foreign subsidiaries principally sweden state income taxes us 2000 company recognize federal tax benefit losses united states due inability carry losses back prior years accordingly valuation allowances recorded deferred tax assets associated net operating loss carryforwards “nols” 2002 2001 company able recognize previously unrecognized loss benefits december 31 2002 company us nols totaling 665 million expire years 2019 2021 additionally company various us tax credits available aggregating 43 million expire years 2007 2021 company generated deductions us taxes related exercise stock options served offset reductions nols utilization stock option exercise deductions accounted direct increase additional paidin capital rather reduction company’s tax provision statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance management believes deferred tax assets 349 million reflected december 31 2002 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond company’s control assurance given sufficient taxable income generated full utilization deferred tax assets accordingly company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved liquidity capital resources december 31 2002 company 466 million cash compared 84 million total borrowings net cash hand december 31 2001 company borrowings outstanding december 31 2002 company able reduce borrowings cash provided operating activities cash provided operating activities 2002 totaled 550 million compared 277 million 2001 cash provided operating activities 2002 primarily due net earnings reductions accounts receivable increase accrued liabilities offset increase inventories reduction accounts payable cash provided operating activities 2001 primarily due net earnings generated year reductions inventories offset increase accounts receivable december 31 2002 company accounts receivable amount 558 million compared 580 million december 31 2001 decrease receivable balance primarily due increase collection efforts consequently days sales outstanding decreased 99 days december 31 2001 78 days december 31 2002 timing sales particularly recording large quantity higherpriced system sales significantly impact calculation days sales outstanding point time december 31 2002 company inventories 501 million compared 466 million december 31 2001 increase primarily due general growth company’s revenues however continue manage growth company able improve inventory turns 19 2001 25 2002 december 31 2002 company prepaid expenses current assets 127 million compared 115 million december 31 2001 increase primarily due increase supplier advances certain prepaid expenses including insurance december 31 2002 company longterm assets 44 million compared 19 million december 31 2001 increase primarily due increase intangible asset associated minimum liability company’s supplemental executive retirement plan accrued payroll related liabilities increased 46 million 64 million december 31 2001 110 million december 31 2002 increase primarily due timing annual performance bonus payments pension longterm liabilities decreased 03 million 92 million december 31 2001 89 million december 31 2002 decrease primarily due settlement company’s interest rate swap agreements reclassification shareholders’ equity put option obligation 14 million related common stock issued acquisition optronics division offset accruals company’s retirement programs company’s investing activities consisted primarily expenditures fixed assets totaled 66 million 42 million years ended december 31 2002 2001 respectively march 22 2002 company entered new credit agreement bank america na keybank na union bank california na agreement provides 35 million threeyear revolving line credit option additional 25 million first two years credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread rates based upon company’s leverage ratio december 31 2002 interest rate ranged 301 425 credit agreement contains five financial covenants require maintenance certain fixed charge leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures credit agreement collateralized substantially assets company december 31 2002 company amounts outstanding credit agreement compliance covenants company two subsidiaries 60 million swedish kroner approximately 68 million line credit 455 2 million line credit 600 december 31 2002 december 31 2002 company amounts outstanding lines 60 million swedish kroner line credit secured primarily accounts receivable inventories applicable subsidiary subject automatic renewal annual basis 2 million line credit secured substantially assets applicable subsidiary subject renegotiation annually present significant capital commitments 2003 fiscal year consequently anticipate cash requirements primarily related funding operating activities cash recently generated operating activities additional funds available credit agreements believe sufficient resources available meet cash requirements however significant changes anticipated cash requirements significant changes business conditions could negatively impact generation cash operating activities could require company seek additional financing sources possible changes business conditions discussed detail section entitled “risk factors” located herein company’s offbalance sheet arrangements limited operating rents leases certain facilities equipment expensed incurred december 31 2002 future annual minimal rental payments required noncancelable leases total 48 million 2003 46 million 2004 26 million 2005 11 million 2006 08 million 2007 risk factors addition factors discussed forwardlooking statements section provided beginning annual report form 10k following important factors could cause actual results events differ materially contained forwardlooking statements made behalf company addition know risks uncertainties described ones face unforeseen risks could arise problems issues view minor could become significant unable adequately respond risks business financial condition results operations could materially adversely affected additionally cannot certain give assurances actions taken reduce known risks uncertainties work fluctuations quarterly annual operating results make difficult predict future performance quarterly annual operating results likely fluctuate future due variety factors beyond control result fluctuations quarterly operating results believe quartertoquarter comparisons operating results necessarily meaningful relied upon indicators future performance factors may affect future operating results include • timing number size orders shipments customers well relative mix orders • significant portion sales made last month quarter sales frequently concentrated last week days quarter • timing market acceptance competitors’ new products product enhancements technologies • timing release government funds procurement products • changes competitors’ pricing policies • timing amount inventory writedowns • ability obtain sufficient supplies critical components • foreign currency fluctuations • costs associated acquisition businesses product lines technologies • ability integrate acquired businesses product lines technologies • general economic conditions domestically internationally seasonal fluctuations operating results particularly increase sales generally experience every year fourth quarter result • seasonal pattern contracting us certain foreign governments • frequent requirement international customers take delivery equipment prior january due funding considerations • tendency commercial enterprises fully utilize yearly capital budgets prior expiration difficulties managing growth grown rapidly 313 employees 1993 838 employees december 31 2002 annual revenue period grew 40 million 261 million operations became global nature past experienced problems developing implementing financial reporting controls system commensurate substantial growth increased complexity business taken number steps improve controls systems including implementation new set reporting control procedures protocols retention new executive management team financial reporting personnel however measures take inadequate address growth continuing experience business financial condition results operations could materially adversely affected cease desist order sec violation could harm business june 8 2000 securities exchange commission “sec” issued formal order investigation company certain officers directors employees individuals presently formerly associated company determine whether violations federal securities laws occurred 1998 1999 investigation relates company’s revenue recognition policies accounting controls financial reports public disclosures time period pursuant offer settlement submitted company september 30 2002 sec instituted simultaneously settled proceeding company section 8a securities act 1933 “securities act” section 21c securities exchange act 1934 “exchange act” without admitting denying allegations sec’s order company agreed entry order requiring cease desist committing causing violations future violations antifraud provisions securities act antifraud periodic reporting record keeping internal control provisions federal securities laws set forth section 17a securities act sections 10b 13a 13b2a 13b2b exchange act rules 10b5 12b20 13a1 13a13 thereunder company incurred financial fine penalty terms settlement sec’s order states company materially overstated earnings income taxes quarters 1998 1999 well fiscal year 1998 company’s revenue recognition practices resulted material misstatements omissions financial statements contained company’s annual report form 10k originally filed year ended december 31 1998 company’s quarterly reports form 10q originally filed first three quarters 1998 1999 2000 2001 company restated financial statements 1998 1999 restatements company’s financial statements required order company expect entry order material adverse impact financial condition results operations company found violated terms commission’s order future may subject enforcement action including legal action imposing injunctive relief assessing fines penalties could material impact business reduction government purchasing inability act us government contractor could significantly decrease revenue government procurement process complex highly competitive substantial portion revenue derived sales us foreign government agencies business continue substantially dependent upon sales single agency us government accounted 10 revenue last year aggregate sales us government agencies accounted 217 revenue 2001 247 revenue 2002 accordingly results operations would adversely impacted governmental spending cuts general budgetary constraints even though government sales made defense applications significant reduction purchases thermal imaging systems defense applications could result certain competitors committing attention resources nondefense applications thereby exposing us greater competitive pressures primary markets addition ability business us government conditioned upon continuing eligibility act federal contractor significant decline sales us foreign governments disqualification making sales reason would material adverse effect business financial condition results operations may able reduce costs quickly enough sales decline expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may result us carrying higher levels inventories finished goods components raw materials thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs result may carry adequate reserves offset writedowns writeoffs future success depend ability respond rapid technological change markets compete market thermal imaging equipment characterized rapid technological developments frequent new product introductions enhancements modifications success depend large part ability develop new technologies anticipate changing customer requirements may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail timely develop introduce new technologies business financial condition results operations would adversely affected time competitors may announce new products product enhancements technological innovations potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence must successfully introduce new enhanced products successful future success depends ability continue improve existing products develop new products using latest technology satisfy customer requirements example nearterm success depend continued acceptance star safire imaging product line pseries eseries thermography product lines sales expect generate substantial amount annual revenue also investing significant amount financial resources enhancement existing products cannot certain successfully complete enhancements within necessary time period customers accept new products future products failure complete enhancement products failure current future products gain maintain market acceptance could material adverse effect business financial condition results operations competition market thermal imaging equipment intense failure compete effectively would adversely affect business competition markets products intense speed companies identify new applications thermal imaging develop products meet needs supply commercial quantities low prices market important competitive factors believe principal competitive factors markets product features reliability price additionally products compete indirectly numerous products image intensifiers lowlight cameras limited military governmental funds finally many competitors greater financial technical research development marketing resources factors result greater challenges existing competitors well increasing competition new competitors require us continue invest focus research development new product innovation assurance given able compete effectively future would material adverse effect business financial condition results operations dependence sole source limited source suppliers components products exposes us risks could result delays satisfying customer demand increased costs loss revenue rely number sole source limited source suppliers provide certain key components products accordingly could experience shortage supply components particular contract bae systems “bae” supply uncooled detectors integration pseries eseries fireflir product lines bae currently one three large producers specialized uncooled detectors subject certain exceptions contract gives us exclusive right purchase uncooled detectors use commercial market limited nonexclusive right purchase uncooled detectors use government market contract corresponding obligation purchase uncooled detectors solely bae certain defined commercial applications currently pseries eseries thermacam series handheld products thermovision 2000 thermovision sentry fireflir products use bae detectors however intend use uncooled detectors supplied bae products contract provides monthly delivery fixed number uncooled detectors may increased decreased us within certain limits business financial condition results operations could materially adversely affected event either number detectors delivered us contract insufficient satisfy requirements ii obligated purchase detectors excess number require contract covers purchase fixed aggregate number units expiration contract may able successfully negotiate new contract bae another company uncooled detectors failure us renew contract identify another source uncooled detectors would material adverse effect business financial condition results operations based past experience expect occasionally receive late deliveries experience inadequate supplies certain components provided bae significant supplier become unavailable manufacturing operations would disrupted unless could identify qualify acceptable replacement components redesign products different components might able obtain necessary components timely basis acceptable prices extended interruption supply sole limited source components would material adverse effect business financial condition results operations future success depends part attracting retaining key senior management qualified technical sales personnel future success depends efforts continued services key executives ability attract retain qualified technical sales personnel significant competition exists personnel cannot assure retention key technical sales personnel ability attract assimilate retain highly qualified technical sales personnel may required future also cannot assure employees leave subsequently compete us unable attract retain key personnel business financial condition results operations could adversely affected acquisition equity investment make could disrupt business harm financial condition results operations past may future acquire complementary businesses technologies enter joint ventures may experience difficulties assimilating personnel operations products technology acquired future acquisitions investments make additionally could lose key personnel companies acquire incur unanticipated costs assume new liabilities difficulties could disrupt ongoing business distract management employees increase expenses furthermore might incur additional debt issue additional equity securities pay future acquisitions issuance additional equity securities could dilute existing shareholders’ ownership assurance given realize anticipated benefits acquisition material adverse effect business financial condition results operations face risks international sales currency fluctuations market sell products worldwide international sales accounted expected continue account significant portion revenue years ended december 31 2002 2001 international sales accounted 440 470 respectively total revenue international sales subject number risks including • imposition governmental controls • restrictions export critical technology • trade restrictions • difficulty collecting receivables • inadequate protection intellectual property • labor union activities • changes tariffs taxes • difficulties staffing managing international operations • political economic instability • general economic conditions historically currency fluctuations affected operating results changes value foreign currencies sales denominated costs incurred past caused could future cause fluctuations operating results seek reduce exposure currency fluctuations denominating majority international sales us dollars respect international sales denominated us dollars decrease value foreign currencies relative us dollar could make products less price competitive assurance given factors material adverse effect future international sales operations consequently business financial condition results operations may successful maintaining obtaining necessary licenses conduct operations abroad us congress may prevent proposed sales foreign governments licenses required us government agencies export administration act trading enemy act 1917 arms export control act 1976 export many products give assurance successful obtaining licenses failure obtain delays obtaining licenses would prevent delay us selling products outside us would material adverse effect business financial condition results operations products may suffer defects errors leading substantial damage warranty claims products use complex system designs components may contain errors defects particularly incorporate new technology products release new versions yet recall product products defective might required redesign recall products pay substantial damages warranty claims event could result significant expenses disrupt sales affect reputation products would material adverse effect business financial condition results operations furthermore product defects could result substantial product liability maintain product liability insurance cannot certain adequate remain available acceptable terms inability protect intellectual property proprietary rights avoid infringing rights others could harm competitive position business ability compete successfully achieve future revenue growth depends part ability protect proprietary technology operate without infringing rights others accomplish rely combination patent trademark trade secret laws confidentiality agreements contractual provisions protect proprietary rights proprietary rights held confidence trade secrets covered patents making difficult protect although currently hold us patents covering certain aspects technologies products cannot certain obtain additional patents trademarks technology products trade names furthermore cannot certain patents trademarks challenged circumvented competitors likewise cannot certain measures taken protect proprietary rights adequately deter misappropriation disclosure failure us meaningfully protect intellectual property could material adverse effect business financial condition results operations moreover intellectual property necessarily represent barrier entry thermal imaging industry assurance able maintain competitive advantage competitors develop capabilities equal superior litigation patents intellectual property common industry cannot sure subject patent litigation future defending intellectual property lawsuits related legal administrative proceedings could result substantial expense us significant diversion effort personnel adverse determination patent suit proceeding may party could subject us significant liabilities adverse determination could require us seek licenses third parties licenses available commercially reasonable terms business could harmed would harmed unable use one facilities manufacture products facilities located portland boston stockholm inability continue manufacture products one facilities result example prolonged power shortage fire natural disaster would prevent us supplying products customers could material adverse effect business financial condition results operations articles bylaws shareholder rights plan well oregon law contain provisions could discourage takeover provisions second restated articles incorporation first restated bylaws oregon law shareholder rights plan could make difficult third party acquire us even would beneficial shareholders recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits neighborhoods helping determine whether abnormal leakage heat coming doors windows walls roofs house demand application declined company began focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since company continued develop thermal imaging products growing number applications become one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets internationally well domestically business organized around two principal business segments thermography imaging thermography market primarily consists use handheld thermal imaging systems detect measure minute temperature differences useful wide variety industrial commercial applications uses thermography products include predictive preventative maintenance process control condition monitoring moisture detection scientific analysis 2002 introduced new inexpensive camera known eseries increased number markets applications thermography serves thermography products produced facility sweden growing distribution network enabled us penetrate existing developing markets applications worldwide imaging business offers wide array products allow user see total darkness many types obscurants smoke haze types fog product offerings include handheld fixedmounted products ground airborne maritime applications imaging products include force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol electronic news gathering antipiracy firefighting imaging products primarily produced portland boston sweden facilities substantial portion revenue imaging business derived sales government agencies continuing expand military program business united states internationally continue enhance stateoftheart products within business segments well develop products new market applications use advanced thermal imaging technologies example “uncooled” detector technology used thermography systems enable systems operate room temperature allowing systems less expensive smaller lighter energy efficient imaging products continually improving performance systems utilizing skills system design systems integration improving component performance also improving stabilization airborne systems offering additional imaging options ccd tv cameras laser rangefinders laser designators october 22 2003 announced acquisition indigo systems corporation located goleta santa barbara california indigo leading producer infrared detectors infrared cameras camera subsystems acquisition indigo provides us ability design produce infrared detectors “cooled” “uncooled” imaging thermography business indigo also allow us expand presence certain markets including highend scientific cameras oem’s certain military program markets international revenue accounted approximately 432 440 470 revenue 2003 2002 2001 respectively anticipate international sales continue account significant percentage revenue production distribution thermography products sweden contributing large volume sales denominated foreign currencies exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies 2003 significant fluctuations values major currencies conduct business particular weakening us dollar impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations company typically experiences longer payment cycles international sales adverse impact upon company’s liquidity addition substantial portions company’s operations conducted outside united states including manufacturing sweden sales operations worldwide international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement international customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related revenue recognition bad debts inventories investments goodwill impairment warranty obligations contingencies income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee company’s board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition policy recognize revenue upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” “sab 104” issued securities exchange commission december 2003 sab 104 clarified existing guidance principally provided sab 101 “revenue recognition financial statements” regarding revenues contracts contain multiple elements design market sell products commercial offtheshelf products many imaging customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts recognize revenue determined elements stand alone values delivered undelivered elements objective reliable evidence fair value judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined risk uncollectibility minimal allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2003 accounts receivable balance 793 million reported net allowances doubtful accounts 13 million believe reported allowances december 31 2003 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory write downs designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy establish inventory write downs conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded write downs intended reduce carrying value inventories net realizable value december 31 2003 inventories 760 million stated net inventory write downs 119 million actual demand products deteriorates market conditions less favorable project additional inventory write downs may required costbasis investments flir invested two thirdparty entities investments accounted cost basis since controlling interests entities ability exercise significant influence december 31 2003 carrying values investments including debt approximately 14 million periodically review investments impairment determine events changes business conditions entities indicate carrying value investments may recoverable reviews may based upon factors include limited hypothetical liquidations investees book value current recent financings received investees future changes business results market conditions indicate impairment temporary exists investments may need record reserves investments goodwill impairment company recorded goodwill connection acquisition agema infrared systems ab 1997 year ended december 31 2002 adopted provisions statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 changed accounting goodwill amortization method impairmentonly approach review goodwill june year impairment determine events changes business conditions indicate carrying value asset may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundary overall market capitalization company current review indicates adjustments necessary goodwill asset carrying value 125 million december 31 2003 response changes industry market conditions may required strategically realign resources future could result impairment goodwill product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 35 million december 31 2003 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets amount determine likely realized future valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2003 determined valuation allowance deferred tax assets 300 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2003 2002 2001 revenue 2003 totaled 3120 million increase 195 2611 million revenue reported 2002 revenue imaging business segment increased 155 1672 million 2002 1931 million 2003 revenue thermography business segment increased 267 938 million 2002 1188 million 2003 increase imaging revenue primarily due increase unit volumes particularly maritime products shift mix shipments groundbased law enforcement broadcast products higher priced systems thermography revenue increase primarily due increase unit volumes particularly eseries products predictive maintenance market segments unit increases due increases capital spending worldwide economies improved also due penetration new markets identification additional applications approximately onefifth increase total revenue well increase segments due fluctuations currency exchange rates 2003 revenue 2002 totaled 2611 million increase 218 2144 million revenue reported 2001 revenue imaging business segment increased 361 1229 million 2001 1672 million 2002 thermography business segment reported revenue increase 26 915 million 2001 938 million 2002 increase imaging revenue primarily due increase unit volumes particularly groundbased products mix shipments within airborne product offerings thermography revenue increase due greater unit volume shipments primarily due market acceptance new eseries products offset lower prices associated eseries products reductions capital spending customer base impacted higher priced thermography products international revenue 2003 totaled 1349 million representing 432 revenue compares international revenue 2002 totaled 1148 million representing 440 revenue 1007 million 470 revenue 2001 sales mix domestic international sales may fluctuate slightly year anticipate mix approximately 55 domestic 45 international longterm basis gross profit gross profit 2003 531 revenue compared 525 2002 increase gross profit percentage primarily due increase thermography business imaging business percentage revenue 2003 thermography revenue 381 total revenue compared 359 total revenue 2002 historically experience higher gross margins thermography business imaging business increased use distributors whose commissions reported reduction revenue thermography business partially offset increase gross profit percentage attributable change mix business segments percentage revenue gross profit 2002 525 compared 545 2001 decrease gross profit percentage primarily due change relative mix revenue business segments 2002 imaging revenue represented 641 total revenue compared 573 total revenue 2001 research development research development expenses 307 million 98 revenue 2003 compared 269 million 103 revenue 2002 believe spending levels sufficient support development new products continued growth business expect research development expenses represent 8 10 revenue longterm basis research development expenses 269 million 2002 compared 272 million 2001 percentage revenue research development expenses decreased 127 2001 103 2002 selling general administrative expenses selling general administrative expenses 650 million 208 revenue 2003 compared 596 million 228 revenue 2002 decrease expenses percentage revenue result revenue increase year ability manage spending growth lower level revenue growth anticipate selling general administrative expenses future increase slower rate revenue selling general administrative expenses increased 519 million 242 revenue 2001 596 million 228 revenue 2002 increase spending primarily due increase selling marketing expenses arising general business revenue growth 2002 partially offset reduction 11 million expenses 2001 2002 related discontinuance amortization goodwill 2002 interest expense interest expense totaled 49 million 20 million 98 million years ended 2003 2002 2001 respectively increase interest 2002 2003 primarily due accrual partial year interest convertible notes issued june 2003 decrease interest 2001 2002 due primarily reduction debt company able use cash operations proceeds december 2001 followon common stock offering repay outstanding debt company’s outstanding indebtedness primary credit agreement declined 899 million beginning 2001 199 million end 2001 paid full february 2002 interest expense 2002 2001 also includes expenses associated company’s interest rate swap agreements amounts 10 million 22 million respectively swap agreements settled 2002 interest income interest income 24 million 05 million 04 million years ended december 31 2003 2002 2001 respectively increase interest income 2003 due invested cash second half year result june issuance convertible notes expense income company reported expenses 36 million 2003 expenses 01 million 2002 income 04 million 2001 significant increase expense 2003 due currency losses transactions denominated currencies functional currency company’s european operations european currencies strengthened significantly us dollar 2003 income taxes company’s income tax provision 192 million 73 million 28 million 2003 2002 2001 respectively effective tax rates 2003 2002 2001 300 150 98 respectively mix taxable income company’s us foreign operations impacted income tax provisions years changes company’s valuation allowance deferred tax assets 2002 2001 related assessment ability realize deferred tax assets generated prior tax loss benefits result keeping effective tax rates years lower december 31 2003 company us tax net operating loss carryforwards “nols” totaling 547 million expire years 2019 2021 additionally company various us tax credits available aggregating 64 million expire years 2007 2022 company generated deductions us tax purposes related exercise stock options served offset reductions nols utilization stock option exercise deductions accounted direct increase additional paidin capital rather reduction company’s tax provision statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance management believes deferred tax assets 300 million reflected december 31 2003 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond company’s control assurance given sufficient taxable income generated full utilization deferred tax assets accordingly company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved liquidity capital resources december 31 2003 company 1980 million cash equivalents compared 466 million december 31 2002 increase cash equivalents primarily proceeds issuance convertible notes june 2003 cash provided operations less cash used capital expenditures repurchase shares company’s common stock cash provided operating activities 2003 totaled 272 million compared 550 million 2002 decrease cash provided operating activities primarily due increase accounts receivable inventories 2003 december 31 2003 company accounts receivable amount 793 million compared 558 million december 31 2002 increase 235 million receivable balance primarily due increase revenue fourth quarter 2003 compared fourth quarter 2002 approximately 50 million increase receivables attributable change currency rates end 2002 december 31 2003 company inventories 760 million compared 501 million december 31 2003 increase inventories primarily due general growth business anticipation production demands evidenced december 31 2003 order backlog 146 million increase workinprogress inventories accounts 503 total increase inventories additionally approximately 59 million total increase inventories relates change currency rates year december 31 2003 company prepaid expenses current assets 200 million compared 127 million december 31 2002 increase primarily due net increase number demonstration units increase supplier advances company’s investing activities year ended december 31 2003 totaled 183 million capital expenditures 2003 include purchase new building boston operations 106 million investing activities year ended december 31 2002 totaled 71 million consisting primarily expenditures fixed assets including relocation certain company’s operations 2002 december 31 2003 company longterm assets 79 million compared 44 million december 31 2002 increase primarily relates insurance investment contracts purchased year longterm portion customer receivable accounts payable increased 165 million december 31 2002 264 million december 31 2003 increase relates increase inventories general growth company’s business current liabilities december 31 2003 82 million increase 19 million end 2002 increase related increase commissions payable sales representatives accrual interest convertible debt pension longterm liabilities increased 20 million 89 million december 31 2002 109 million december 31 2003 increase primarily due increase accrued expenses associated supplemental executive retirement plan company maintains credit agreement bank america na keybank na union bank california na agreement dated march 22 2002 amended june 5 2003 provides 35 million threeyear revolving line credit option additional 25 million september 27 2004 credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread rates based upon company’s leverage ratio december 31 2003 interest rate ranged 260 400 credit agreement contains five financial covenants require maintenance certain fixed charge leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures credit agreement collateralized substantially assets company december 31 2003 company amounts outstanding credit agreement compliance covenants company two subsidiaries 50 million swedish kroner approximately 68 million line credit 37 2 million line credit 525 december 31 2003 december 31 2003 company amounts outstanding lines 50 million swedish kroner line credit secured primarily accounts receivable inventories applicable subsidiary subject automatic renewal annual basis july 10 2003 50 million swedish kroner credit agreement replaced old agreement 60 million swedish kroner terms 2 million line credit secured substantially assets applicable subsidiary subject renegotiation annually june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 issuance made initial offering 175 million made june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year beginning december 1 2003 holders notes may convert notes shares company’s common stock conversion rate 225306 shares per 1000 principal amount notes subject adjustments prior maturity date certain circumstances generally include market price company’s common stock exceeding 130 conversion price b company calling notes redemption c occurrence specified corporate transactions notes become rated rating lowered two rating levels company may redeem cash part notes june 8 2010 note holders right require company purchase notes june 1 2010 proceeds used general corporate purposes include acquisition indigo systems corporation working capital expenditure needs year ended december 31 2003 company used 755 million cash purchase 27 million shares company’s common stock october 21 2003 company indigo systems corporation “indigo” entered definitive agreement plan merger pursuant company acquire indigo security holders receive cash consideration approximately 165 million outstanding indigo stock options converted options purchase flir stock transaction valued excluding acquisition related costs approximately 190 million closed january 6 2004 successful completion indigo transaction consumed significant portion cash december 31 2003 believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future except described significant capital commitments coming year offbalance sheet arrangements december 31 2003 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2003 company’s contractual obligations follows thousands risk factors addition factors discussed forwardlooking statements section provided beginning annual report form 10k following important factors could cause actual results events differ materially contained forwardlooking statements made behalf company addition know risks uncertainties described ones face unforeseen risks could arise problems issues view minor could become significant unable adequately respond risks business financial condition results operations could materially adversely affected additionally cannot certain give assurances actions taken reduce known risks uncertainties work fluctuations quarterly annual operating results make difficult predict future performance quarterly annual operating results likely fluctuate future due variety factors beyond control due fluctuations quarterly operating results believe quartertoquarter comparisons operating results necessarily meaningful relied upon indicators future performance factors may affect future operating results include • timing number size orders shipments customers well relative mix orders • variations volume orders particular product line particular quarter substantial may result variations revenue gross margins • significant portion sales made last month quarter sales frequently concentrated last week days quarter • timing market acceptance competitors’ new products product enhancements technologies • ability obtain sufficient supplies critical components • timing release government funds procurement products • changes competitors’ pricing policies • timing amount inventory writedowns • foreign currency fluctuations • costs risks associated acquisition integration businesses product lines technologies • general economic conditions domestically internationally seasonal fluctuations operating results particularly increase sales generally experience every year fourth quarter result • seasonal pattern contracting united states certain foreign governments • frequent requirement international customers take delivery equipment prior january due funding considerations • tendency commercial enterprises fully utilize annual capital budgets prior expiration difficulties managing growth operations become global revenue grown 177 million year ended december 31 1998 312 million year ended december 31 2003 past experienced problems developing implementing financial reporting controls system commensurate substantial growth increased complexity business taken number steps improve controls systems however measures take inadequate address growth continue experience business financial condition results operations could materially adversely affected may unable successfully integrate indigo systems future acquisition equity investment operations thereby disrupting business harming financial condition results operations january 2004 completed acquisition indigo systems corporation located goleta santa barbara california intend integrate indigo’s cooled uncooled infrared detectors thermography imaging products thereby lowering product costs begin selling indigo’s infrared camera cores camera systems integration businesses personnel product lines technologies typically difficult time consuming subject number risks example integration indigo infrared detectors existing products requires extensive engineering manufacturing effort may take longer anticipated may successful integration products product lines requires coordination research development manufacturing sales marketing service efforts company indigo future acquisitions indigo acquisition occurred recently limited experience managing operations additionally could lose key personnel indigo future companies acquire incur unanticipated costs assume new liabilities difficulties could disrupt ongoing business distract management employees increase expenses decrease revenue furthermore might incur additional debt issue additional equity securities pay future acquisitions issuance additional equity securities could dilute existing shareholders’ ownership currently acquisitions planned negotiated frequently evaluate strategic opportunities available us may near long term pursue acquisitions complementary businesses product lines technologies result assurance given realize anticipated benefits acquisition indigo future acquisition equity investment acquisition investment material adverse effect business financial condition results operations cease desist order sec violation could harm business june 8 2000 sec issued formal order investigation us certain officers directors employees individuals presently formerly associated us determine whether violations federal securities laws occurred 1998 1999 investigation relates revenue recognition policies accounting controls financial reports public disclosures time period pursuant offer settlement submitted us september 30 2002 sec instituted simultaneously settled proceeding us section 8a securities act 1933 amended “securities act” section 21c securities exchange act 1934 amended “exchange act” without admitting denying allegations sec’s order agreed entry order requiring cease desist committing causing violations future violations antifraud provisions securities act antifraud periodic reporting record keeping internal control provisions federal securities laws set forth section 17a securities act sections 10b 13a 13b2a 13b2b exchange act rules 10b5 12b20 13a1 13a13 thereunder incurred financial fine penalty terms settlement sec’s order stated materially overstated earnings income taxes quarters 1998 1999 well fiscal year 1998 revenue recognition practices resulted material misstatements omissions financial statements contained annual report form 10k originally filed year ended december 31 1998 quarterly reports form 10q originally filed first three quarters 1998 1999 2000 2001 restated financial statements 1998 1999 restatements financial statements required order entry order material adverse impact financial condition results operations found violated terms sec’s order future may subject enforcement action including legal action imposing injunctive relief assessing fines penalties could material impact business reduction government purchasing inability act united states government contractor could significantly decrease revenue government procurement process complex highly competitive substantial portion revenue derived sales united states foreign government agencies business continue substantially dependent upon sales single agency united states government accounted 10 revenue last year aggregate sales united states government agencies accounted 25 26 revenue years ended december 31 2002 2003 respectively however one agency accounted 10 total sales either period accordingly results operations would adversely impacted governmental spending cuts general budgetary constraints government sales made defense applications united states government reduces nonmilitary spending result increases military spending due instability iraq elsewhere developments revenues could adversely affected conversely significant reduction purchases thermal imaging systems defense applications could result certain competitors committing attention resources nondefense applications thereby increasing competitive pressures primary markets addition seeking secure additional government contracts design longterm supply commercially developed military qualified thermal imaging devices successful winning contracts perform obligations contracts secure future operating results may adversely affected ability business united states government conditioned upon continuing eligibility act federal contractor significant decline sales united states foreign governments disqualification making sales reason would material adverse effect business financial condition results operations future success depend ability respond rapid technological change markets compete market thermal imaging equipment characterized rapid technological developments frequent new product introductions enhancements modifications success depend large part ability develop new technologies anticipate changing customer requirements may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail develop introduce new technologies timely manner business financial condition results operations would adversely affected time competitors may announce new products product enhancements technological innovations potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence must successfully introduce new enhanced products manage costs associated producing numerous product lines successful future success depends ability continue improve existing products develop new products using latest technology satisfy customer requirements example nearterm success depend continued acceptance star safire™ imaging product line thermacam® pseries eseries thermography product lines sales expect generate substantial amount revenue also investing significant amount financial resources enhancement existing products cannot certain successfully complete enhancements within necessary time period customers accept new products future products addition complexity associated production multiple product lines may inhibit ability maintain improve gross margins failure complete enhancement products failure current future products gain maintain market acceptance failure successfully manage cost production could material adverse effect business financial condition results operations competition markets thermal imaging equipment intense failure compete effectively would adversely affect business competition markets products intense speed companies identify new applications thermal imaging develop products meet needs supply commercial quantities low prices market important competitive factors believe principal competitive factors markets product features reliability price additionally products compete indirectly numerous products image intensifiers lowlight cameras limited governmental military funds finally many competitors greater financial technical research development marketing resources factors result greater challenges existing competitors well increasing competition new competitors require us continue invest focus research development new product innovation assurance given able compete effectively future would material adverse effect business financial condition results operations dependence sole source limited source suppliers components products transition manufacturing cooled uncooled infrared detectors exposes us risks could result delays satisfying customer demand increased costs loss revenue currently rely number sole source limited source suppliers provide certain key components products particularly cooled uncooled infrared detectors recently completed acquisition indigo systems corporation manufactures cooled uncooled infrared detectors intend use detectors thermography imaging products accordingly transition use indigo’s infrared detectors could experience shortage supply components including cooled uncooled infrared detectors particular winding contract bae systems “bae” supply uncooled detectors integration thermacam® pm695 thermacam® pseries thermacam® eseries thermovision® a20 thermovision® a40 thermovision® security thermovision® sentry fireflir® product lines bae currently one three large producers specialized uncooled detectors subject certain exceptions contract gives us exclusive right purchase uncooled detectors use commercial market limited nonexclusive right purchase uncooled detectors use government market contract corresponding obligation purchase uncooled detectors solely bae certain defined commercial applications currently thermacam® pm695 thermacam® pseries thermacam® eseries thermovision® a20 thermovision® security thermovision® sentry fireflir® product lines use bae detectors conclusion contract bae longer bound exclusivity requirement commercial market expiration contract expect occur 2005 may able successfully transition use uncooled detectors indigo systems business financial condition results operations could materially adversely affected event unable acquire bae unable supply requisite number detectors satisfy needs remaining term contract bae ii unable transition uncooled detectors manufactured indigo systems within expected time period iii detectors receive bae manufacture indigo systems defective otherwise meet performance standards failure us transition use cooled uncooled detectors made indigo systems identify another source uncooled detectors timely manner would material adverse effect business financial condition results operations based past experience expect occasionally receive late deliveries experience inadequate supplies certain components provided bae significant supplier become unavailable manufacturing operations would disrupted unless sufficient leadtime otherwise able identify qualify acceptable replacement components redesign products different components might able obtain necessary components timely basis acceptable prices extended interruption supply sole limited source components would material adverse effect business financial condition results operations may successful maintaining obtaining necessary export licenses conduct operations abroad united states congress may prevent proposed sales foreign governments export licenses required united states government agencies export administration act trading enemy act 1917 arms export control act 1976 export many products give assurance successful obtaining licenses recently heightened government scrutiny export licenses products market resulted lengthened review periods license applications failure obtain delays obtaining licenses would prevent delay us selling products outside united states would material adverse effect business financial condition results operations may able reduce costs quickly enough sales decline expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may result us carrying higher levels inventories finished goods components raw materials thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs may carry adequate reserves offset writedowns writeoffs future success depends part attracting retaining key senior management qualified technical sales personnel future success depends part efforts continued services key executives ability attract retain qualified technical sales personnel significant competition exists personnel cannot assure retention key senior managerial technical sales personnel ability attract integrate retain personnel may required future also cannot assure employees leave subsequently compete us unable attract retain key personnel business financial condition results operations could adversely affected significantly increased indebtedness result sale convertible notes june 2003 issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 result indebtedness principal interest payment obligations increased substantially increased debt could materially adversely affect ability obtain financing working capital acquisitions purposes could make us vulnerable industry downturns competitive pressures ability meet debt service obligations dependent upon future performance subject financial business factors affecting operations many beyond control face risks international sales currency fluctuations market sell products worldwide international sales accounted expected continue account significant portion revenue years ended december 31 2002 2003 international sales accounted 44 43 respectively total revenue international sales subject number risks including • imposition governmental controls • restrictions export critical technology • trade restrictions • difficulty collecting receivables • inadequate protection intellectual property • labor union activities • changes tariffs taxes • difficulties staffing managing international operations • political economic instability • general economic conditions historically currency fluctuations affected operating results changes value foreign currencies sales denominated costs incurred past caused could future cause fluctuations operating results seek reduce exposure currency fluctuations denominating possible international sales united states dollars respect international sales denominated united states dollars decrease value foreign currencies relative united states dollar could make products less price competitive assurance given factors material adverse effect future international sales operations consequently business financial condition results operations products may suffer defects errors leading substantial damage warranty claims include complex system designs components products may contain errors defects particularly incorporate new technology products release new versions yet recall product products defective might required redesign recall products pay substantial damages warranty claims event could result significant expenses disrupt sales affect reputation products would material adverse effect business financial condition results operations furthermore product defects could result substantial product liability maintain product liability insurance cannot certain adequate remain available acceptable terms inability protect intellectual property proprietary rights avoid infringing rights others could harm competitive position business ability compete successfully achieve future revenue growth depends part ability protect proprietary technology operate without infringing rights others accomplish rely combination patent trademark trade secret laws confidentiality agreements contractual provisions protect proprietary rights proprietary rights held confidence trade secrets covered patents making difficult protect although currently hold united states patents covering certain aspects technologies products cannot certain obtain additional patents trademarks technology products trade names furthermore cannot certain patents trademarks challenged circumvented competitors likewise cannot certain measures taken protect proprietary rights adequately deter misappropriation disclosure failure us meaningfully protect intellectual property could material adverse effect business financial condition results operations moreover intellectual property necessarily represent barrier entry thermal imaging industry assurance able maintain competitive advantage competitors develop capabilities equal superior litigation patents intellectual property common industry cannot sure subject patent litigation future defending intellectual property lawsuits related legal administrative proceedings could result substantial expense us significant diversion effort personnel adverse determination patent suit proceeding may party could subject us significant liabilities adverse determination could require us seek licenses third parties licenses available commercially reasonable terms business could harmed would harmed unable use one facilities manufacture products facilities located portland boston stockholm areas inability continue manufacture products one facilities result example prolonged power shortage fire natural disaster would prevent us supplying products customers could material adverse effect business financial condition results operations oregon law charter documents contain provisions could discourage prevent potential takeover even transaction would benefit shareholders companies may seek acquire merge us acquisition merger company could result benefits shareholders including increase value common stock provisions articles incorporation bylaws including shareholder rights plan ability issue preferred stock without action shareholders well provisions oregon law may discourage delay prevent merger acquisition shareholder may consider favorable recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits neighborhoods helping determine whether abnormal leakage heat coming doors windows walls roofs house demand application declined company began focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since company continued develop thermal imaging products growing number applications become one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets internationally well domestically business organized around two principal business segments thermography imaging thermography market primarily consists use handheld thermal imaging systems detect measure minute temperature differences useful wide variety industrial commercial applications uses thermography products include predictive preventative maintenance process control condition monitoring moisture detection scientific analysis 2002 introduced new inexpensive product line known eseries increased number markets applications thermography serves thermography products produced facilities sweden santa barbara growing distribution network enabled us penetrate existing developing markets applications worldwide imaging business offers wide array products allow user see total darkness many types obscurants smoke haze types fog product offerings include handheld fixedmounted products ground airborne maritime applications imaging products include force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol electronic news gathering antipiracy firefighting imaging products primarily produced portland boston santa barbara sweden facilities substantial portion revenue imaging business derived sales government agencies continuing expand military program business united states internationally january 6 2004 completed acquisition indigo systems corporation “indigo” located goleta santa barbara california indigo leading producer infrared detectors infrared cameras camera subsystems acquisition indigo provides us ability design produce infrared detectors imaging thermography business indigo also allows us expand presence certain markets including highend scientific cameras oem’s certain military program markets international revenue accounted approximately 420 432 440 revenue 2004 2003 2002 respectively anticipate international sales continue account significant percentage revenue production distribution thermography products sweden contributing large volume sales denominated foreign currencies exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies 2004 significant fluctuations values major currencies conduct business particular weakening us dollar impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations company typically experiences longer payment cycles international sales adverse impact upon company’s liquidity addition substantial portions company’s operations conducted outside united states including manufacturing sweden sales operations worldwide international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement certain customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related revenue recognition bad debts inventories investments goodwill impairment warranty obligations contingencies income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee company’s board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” “sab 104” issued securities exchange commission december 2003 typically design market sell products commercial offtheshelf products many imaging customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined risk uncollectibility minimal also limited number design development contracts principally governmental customers accounted accordance statement position 811 “accounting performance constructiontype certain productiontype contracts “sop 811” sop 811 revenues related costs recognized using percentageofcompletion method allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years insignificant also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2004 accounts receivable balance 1163 million reported net allowances doubtful accounts 16 million believe reported allowances december 31 2004 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory writedowns designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy establish inventory writedowns conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value december 31 2004 inventories 983 million stated net inventory writedowns 143 million actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required costbasis investments flir invested two thirdparty entities investments accounted cost basis since controlling interests entities ability exercise significant influence december 31 2004 carrying values investments approximately 19 million periodically review investments impairment determine events changes business conditions entities indicate carrying value investments may recoverable reviews may based upon factors include limited hypothetical liquidations investees book value current recent financings received investees future changes business results market conditions indicate impairment temporary exists investments may need record reserves investments goodwill impairment company recorded goodwill connection acquisition agema infrared systems ab 1997 acquisition indigo 2004 year ended december 31 2002 adopted provisions statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 changed accounting goodwill amortization method impairmentonly approach review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value assets may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundary overall market capitalization company current review indicates adjustments necessary goodwill assets carrying value 1495 million december 31 2004 response changes industry market conditions may required strategically realign resources future could result impairment goodwill product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 55 million december 31 2004 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets amount determine likely realized future valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2004 determined valuation allowance deferred tax assets 223 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2004 2003 2002 revenue 2004 totaled 4827 million increase 547 3120 million revenue 2003 revenue imaging business segment increased 654 1931 million 2003 3195 million 2004 revenue thermography business segment increased 373 1188 million 2003 1631 million 2004 increase imaging revenue primarily due increase unit volumes arising strong demand virtually markets revenue provided acquisition indigo january increase thermography revenue primarily due increase unit volumes particularly eseries pseries aseries products due new emerging markets increased penetration expanding distribution network revenue 2003 totaled 3120 million increase 195 2611 million revenue reported 2002 revenue imaging business segment increased 155 1672 million 2002 1931 million 2003 revenue thermography business segment increased 267 938 million 2002 1188 million 2003 increase imaging revenue primarily due increase unit volumes particularly maritime products shift mix shipments groundbased law enforcement broadcast products higher priced systems thermography revenue increase primarily due increase unit volumes particularly eseries products predictive maintenance market segments unit increases due increases capital spending worldwide economies improved also due penetration new markets identification additional applications approximately onefifth increase total revenue well increase segments due fluctuations currency exchange rates 2003 international revenue 2004 totaled 2015 million representing 418 revenue compares international revenue 2003 totaled 1349 million representing 432 revenue 1148 million 440 revenue 2002 sales mix domestic international sales may fluctuate slightly year anticipate mix approximately 55 60 domestic 40 45 international longterm basis gross profit gross profit 2004 516 revenue compared 531 2003 gross profit 2004 included 28 million amortization expense attributable developed technology intangibles acquired part acquisition indigo 13 million expense related recognition onetime stepped values acquired inventories indigo without charges gross profit 2004 percentage revenue 525 remaining decrease gross profit due lower gross profits currently indigo products change mix revenue imaging thermography businesses thermography revenue represented 338 total revenue 2004 compared 381 2003 historically experience higher gross margins thermography business imaging business offsetting portion factors manufacturing improvements efficiencies implemented within imaging operations percentage revenue gross profit 2003 531 compared 525 2002 increase gross profit percentage primarily due increase thermography business imaging business percentage revenue 2003 thermography revenue 381 total revenue compared 359 total revenue 2002 increased use distributors whose commissions reported reduction revenue thermography business partially offset increase gross profit percentage attributable change mix business segments research development research development expenses 458 million 95 revenue 2004 compared 307 million 98 revenue 2003 significant increase spending 2004 due research development expenses indigo continued growth spending related existing imaging thermography businesses believe spending levels sufficient support development new products continued growth business expect research development expenses represent 8 10 revenue longterm basis research development expenses 307 million 2003 compared 269 million 2002 percentage revenue research development expenses decreased slightly 103 2002 98 2003 selling general administrative expenses selling general administrative expenses 942 million 195 revenue 2004 compared 650 million 209 revenue 2003 significant increase spending 2004 due indigo acquisition including amortization expense 27 million certain customer trademark intangible assets acquired due growth company’s business past year decrease expenses percentage revenue result revenue increase year ability manage spending growth lower level revenue growth anticipate selling general administrative expenses future increase slower rate revenue selling general administrative expenses increased 596 million 228 revenue 2002 650 million 209 revenue 2003 interest expense interest expense totaled 81 million 49 million 20 million years ended december 31 2004 2003 2002 respectively increase interest 2002 2004 primarily due interest convertible notes issued june 2003 interest income interest income 05 million 24 million 05 million years ended december 31 2004 2003 2002 respectively decrease interest income 2004 primarily due decrease invested cash result indigo acquisition beginning 2004 increase interest income 2003 due invested cash second half year result june issuance convertible notes expense company reported expenses 16 million 36 million 01 million 2004 2003 2002 increase expense 2004 2003 2002 due currency losses transactions denominated currencies functional currency company’s european operations european currencies strengthened significantly us dollar 2004 2003 income taxes company’s income tax provision 284 million 192 million 73 million 2004 2003 2002 respectively effective tax rates 2004 2003 2002 284 300 150 respectively mix taxable income company’s us foreign operations impacted income tax provisions years lower rate 2002 result change company’s valuation allowance deferred tax assets 2002 related assessment ability realize deferred tax assets generated prior tax loss benefits december 31 2004 company us tax net operating loss carryforwards “nol’s” totaling 630 million expire years 2019 2024 additionally company various us tax credits available aggregating 113 million expire years 2007 2024 company generated deductions us tax purposes related exercise stock options served offset reductions nol’s utilization stock option exercise deductions accounted direct increase additional paidin capital rather reduction company’s tax provision statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance management believes deferred tax assets 223 million reflected december 31 2004 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond company’s control absolute assurance given sufficient taxable income generated full utilization deferred tax assets accordingly company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved liquidity capital resources december 31 2004 company 1207 million cash equivalents compared 1980 million december 31 2003 decrease cash equivalents primarily cash used acquisition indigo capital expenditures partially offset cash provided operations cash provided operating activities 2004 totaled 751 million compared 272 million 2003 increase cash provided operating activities primarily due increase net earnings 2004 increase income tax benefit related exercise stock options december 31 2004 company accounts receivable amount 1163 million compared 793 million december 31 2003 increase 369 million receivable balance primarily due inclusion accounts receivable indigo 113 million december 31 2004 increase revenue fourth quarter 2004 compared fourth quarter 2003 december 31 2004 company inventories 983 million compared 760 million december 31 2003 increase inventories primarily due inclusion inventory indigo 111 million december 31 2004 continued growth business december 31 2004 company prepaid expenses current assets 218 million compared 200 million december 31 2003 increase primarily due net increase number demonstration units offset decrease supplier advances deferred tax assets decreased 300 million december 31 2003 223 million december 31 2004 decrease primarily related deferred tax liabilities recorded relation indigo acquisition company’s investing activities year ended december 31 2004 totaled 1752 million primarily arising acquisition indigo 1600 million net cash acquired capital expenditures 139 million investing activities year ended december 31 2003 totaled 183 million including purchase new building boston operations 106 million accounts payable increased 264 million december 31 2003 323 million december 31 2004 increase relates increase inventories general growth company’s business 45 million indigo’s accounts payable december 31 2004 accrued payroll related liabilities increased 128 million december 31 2003 224 million december 31 2004 increase primarily due accrued payroll indigo 20 million december 31 2004 timing payroll payments increases commissions incentives arising sales earnings growth 2004 advance payments december 31 2004 50 million decrease 71 million end 2003 decrease due revenue recorded orders advance payments previously received primarily europe april 28 2004 company signed amended restated credit agreement “credit agreement” bank america na union bank california na us bank national association agreement provides 50 million five year revolving line credit option additional 50 million april 28 2008 credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread underover rates based upon company’s leverage ratio december 31 2004 interest rate ranged 383 500 credit agreement contains four financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures collateralized substantially assets company december 31 2004 company amounts outstanding credit agreement compliance four financial covenants company 22 million letters credit outstanding credit agreement december 31 2004 reduces total available credit company two subsidiaries 40 million swedish kroner approximately 60 million line credit 27 2 million line credit 625 december 31 2004 december 31 2004 company amounts outstanding lines 40 million swedish kroner line credit secured primarily accounts receivable inventories company’s sweden subsidiary subject automatic renewal annual basis 2 million line credit secured substantially assets company’s united kingdom subsidiary subject renegotiation annually june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended issuance made initial offering 175 million june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year beginning december 1 2003 holders notes may convert notes shares company’s common stock conversion rate 450612 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 proceeds used primarily general corporate purposes included acquisition indigo working capital expenditure needs quarter ended september 30 2004 one terms allow conversion company’s convertible notes described prospectus met company’s stock closed price higher 5770 per share fewer 20 last 30 trading days quarter ended september 30 2004 december 31 2004 note holders elected convert notes company stock company anticipate conversions 2010 november 5 2004 company entered purchase sale agreement purchase building related land wilsonville oregon purchase price 102 million payable cash transaction expected close first quarter 2005 believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future company significant commitments aware significant events conditions likely material impact company’s liquidity offbalance sheet arrangements december 31 2004 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2004 company’s contractual obligations follows thousands payments company’s postretirement obligations based upon actuarial assumptions actual payments may differ terms timing amounts risk factors addition factors discussed forwardlooking statements section provided beginning annual report form 10k following important factors could cause actual results events differ materially contained forwardlooking statements made behalf company addition know risks uncertainties described ones face unforeseen risks could arise problems issues view minor could become significant unable adequately respond risks business financial condition results operations could materially adversely affected additionally cannot certain give assurances actions taken reduce known risks uncertainties work fluctuations quarterly annual operating results make difficult predict future performance quarterly annual operating results likely fluctuate future due variety factors beyond control due fluctuations quarterly operating results believe quartertoquarter comparisons operating results necessarily meaningful relied upon indicators future performance factors may affect future operating results include • timing number size orders shipments customers well relative mix orders • variations volume orders particular product line particular quarter substantial may result variations revenue gross margins • significant portion sales made last month quarter sales frequently concentrated last week days quarter • timing market acceptance competitors’ new products product enhancements technologies • ability obtain sufficient supplies critical components • timing release government funds procurement products • changes competitors’ pricing policies • ability collect trade receivables • timing amount inventory writedowns • foreign currency fluctuations • ability secure export licenses international sales orders • costs risks associated acquisition integration businesses product lines technologies • general economic conditions domestically internationally seasonal fluctuations operating results particularly increase sales generally experience every year fourth quarter result • seasonal pattern contracting united states certain foreign governments • frequent requirement international customers take delivery equipment prior january due funding considerations • tendency commercial enterprises fully utilize annual capital budgets prior expiration may unable successfully integrate indigo systems future acquisition equity investment operations thereby disrupting business harming financial condition results operations january 2004 completed acquisition indigo systems corporation located goleta santa barbara california begun integrate indigo’s cooled uncooled infrared detectors thermography imaging products thereby lowering product costs begun selling indigo’s infrared camera cores camera systems integration businesses personnel product lines technologies typically difficult time consuming subject number risks example integration indigo infrared detectors existing products requires extensive engineering manufacturing effort may take longer anticipated may successful integration products product lines requires coordination research development manufacturing sales marketing service efforts company indigo future acquisitions indigo acquisition occurred last year limited experience managing operations additionally could lose key personnel indigo future companies acquire incur unanticipated costs assume new liabilities difficulties could disrupt ongoing business distract management employees increase expenses decrease revenue furthermore might incur additional debt issue additional equity securities pay future acquisitions issuance additional equity securities could dilute existing shareholders’ ownership currently acquisitions planned negotiated frequently evaluate strategic opportunities available us may near long term pursue acquisitions complementary businesses product lines technologies result assurance given realize anticipated benefits acquisition indigo future acquisition equity investment acquisition investment material adverse effect business financial condition results operations cease desist order sec violation could harm business june 8 2000 sec issued formal order investigation us certain officers directors employees individuals presently formerly associated us determine whether violations federal securities laws occurred 1998 1999 investigation relates revenue recognition policies accounting controls financial reports public disclosures time period pursuant offer settlement submitted us september 30 2002 sec instituted simultaneously settled proceeding us section 8a securities act 1933 amended “securities act” section 21c securities exchange act 1934 amended “exchange act” without admitting denying allegations sec’s order agreed entry order requiring cease desist committing causing violations future violations antifraud provisions securities act antifraud periodic reporting record keeping internal control provisions federal securities laws set forth section 17a securities act sections 10b 13a 13b2a 13b2b exchange act rules 10b5 12b20 13a1 13a13 thereunder incurred financial fine penalty terms settlement sec’s order cited material misstatements omissions financial statements originally filed 1998 1999 2000 2001 restated financial statements 1998 1999 restatements financial statements required order entry order material adverse impact financial condition results operations found violated terms sec’s order future may subject enforcement action including legal action imposing injunctive relief assessing fines penalties could material impact business reduction government purchasing inability act united states government contractor could significantly decrease revenue government procurement process complex highly competitive substantial portion revenue derived sales united states foreign government agencies business continue substantially dependent upon sales single agency united states government accounted 10 revenue aggregate sales united states government agencies accounted 40 26 revenue years ended december 31 2004 2003 respectively accordingly results operations would adversely impacted governmental spending cuts general budgetary constraints addition seeking secure additional government contracts design longterm supply commercially developed military qualified thermal imaging devices successful winning contracts perform obligations contracts secure future operating results may adversely affected ability business united states government conditioned upon continuing eligibility act federal contractor significant decline sales united states foreign governments disqualification making sales reason would material adverse effect business financial condition results operations future success depend ability respond rapid technological change markets compete market thermal imaging equipment characterized rapid technological developments frequent new product introductions enhancements modifications success depend large part ability develop new technologies anticipate changing customer requirements may need make substantial capital expenditures incur significant research development costs develop introduce new products enhancements fail develop introduce new technologies timely manner business financial condition results operations would adversely affected time competitors may announce new products product enhancements technological innovations potential replace shorten life cycles products may cause customers defer purchasing existing products resulting inventory obsolescence must successfully introduce new enhanced products manage costs associated producing numerous product lines successful future success depends ability continue improve existing products develop new products using latest technology satisfy customer requirements example nearterm success depend continued acceptance major product lines star safire™ imaging product line thermacam® pseries eseries thermography product lines sales expect generate substantial amount revenue also investing significant amount financial resources enhancement existing products search surveillance products cannot certain successfully complete enhancements within necessary time period customers accept new products future products addition complexity associated production multiple product lines may inhibit ability maintain improve gross margins failure complete enhancement products failure current future products gain maintain market acceptance failure successfully manage cost production could material adverse effect business financial condition results operations competition markets thermal imaging equipment intense failure compete effectively would adversely affect business competition markets products intense speed companies identify new applications thermal imaging develop products meet needs supply commercial quantities low prices market important competitive factors believe principal competitive factors markets product features performance reliability price additionally products compete indirectly numerous products image intensifiers lowlight cameras limited governmental military funds finally many competitors greater financial technical research development marketing resources factors result greater challenges existing competitors well increasing competition new competitors require us continue invest focus research development new product innovation assurance given able compete effectively future would material adverse effect business financial condition results operations dependence sole source limited source suppliers components products transition manufacturing cooled uncooled infrared detectors exposes us risks could result delays satisfying customer demand increased costs loss revenue currently rely number sole source limited source suppliers provide certain key components products completed acquisition indigo systems corporation manufactures cooled uncooled infrared detectors intend use detectors thermography imaging products transition use indigo’s infrared detectors could experience shortage supply components including cooled uncooled infrared detectors prior contract bae systems “bae” gave us exclusive right purchase uncooled detectors use commercial market limited nonexclusive right purchase uncooled detectors use government market conclusion contract bae longer bound exclusivity requirement commercial market may able successfully transition use uncooled detectors indigo business financial condition results operations could materially adversely affected event unable transition uncooled detectors manufactured indigo within expected time period event detectors manufacture indigo receive another supplier defective otherwise meet performance standards failure us transition use cooled uncooled detectors made indigo identify another source uncooled detectors timely manner would material adverse effect business financial condition results operations based past experience expect occasionally receive late deliveries experience inadequate supplies certain components manufactured indigo provided significant supplier become unavailable manufacturing operations would disrupted unless sufficient leadtime otherwise able identify qualify acceptable replacement components redesign products different components might able obtain necessary components timely basis acceptable prices extended interruption supply sole limited source components would material adverse effect business financial condition results operations may successful obtaining necessary export licenses conduct operations abroad united states congress may prevent proposed sales foreign governments export licenses required united states government agencies export administration act trading enemy act 1917 arms export control act 1976 export many products give assurance successful obtaining licenses recently heightened government scrutiny export licenses products market resulted lengthened review periods license applications failure obtain delays obtaining licenses would prevent delay us selling products outside united states would material adverse effect business financial condition results operations may able reduce costs quickly enough sales decline expense levels based part expectations regarding future sales expenses largely fixed particularly short term addition enable us promptly fill orders maintain inventories finished goods components raw materials result commit considerable costs advance anticipated sales accordingly may able reduce costs timely manner compensate unexpected shortfall forecasted actual sales significant shortfall sales may result us carrying higher levels inventories finished goods components raw materials thereby increasing risk inventory obsolescence corresponding inventory writedowns writeoffs may carry adequate reserves offset writedowns writeoffs future success depends part attracting retaining key senior management qualified technical sales personnel future success depends part efforts continued services key executives ability attract retain qualified technical sales personnel significant competition exists personnel cannot assure retention key senior managerial technical sales personnel ability attract integrate retain personnel may required future also cannot assure employees leave subsequently compete us unable attract retain key personnel business financial condition results operations could adversely affected significantly increased indebtedness result sale convertible notes june 2003 issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 result indebtedness principal interest payment obligations increased substantially increased debt could materially adversely affect ability obtain financing working capital acquisitions purposes could make us vulnerable industry downturns competitive pressures ability meet debt service obligations dependent upon future performance subject financial business factors affecting operations many beyond control face risks international sales currency fluctuations market sell products worldwide international sales accounted expected continue account significant portion revenue years ended december 31 2004 2003 international sales accounted 42 43 respectively total revenue international sales subject number risks including • imposition governmental controls • restrictions export critical technology • trade restrictions • difficulty collecting receivables • inadequate protection intellectual property • labor union activities • changes tariffs taxes • difficulties staffing managing international operations • political economic instability • general economic conditions historically currency fluctuations affected operating results changes value foreign currencies sales denominated costs incurred past caused could future cause fluctuations operating results seek reduce exposure currency fluctuations denominating possible international sales united states dollars respect international sales denominated united states dollars decrease value foreign currencies relative united states dollar could make products less price competitive assurance given factors material adverse effect future international sales operations consequently business financial condition results operations products may suffer defects errors leading substantial damage warranty claims include complex system designs components products may contain errors defects particularly incorporate new technology products release new versions yet recall product products defective might required redesign recall products pay substantial damages warranty claims event could result significant expenses disrupt sales affect reputation products would material adverse effect business financial condition results operations furthermore product defects could result substantial product liability maintain product liability insurance cannot certain adequate remain available acceptable terms inability protect intellectual property proprietary rights avoid infringing rights others could harm competitive position business ability compete successfully achieve future revenue growth depends part ability protect proprietary technology operate without infringing rights others accomplish rely combination patent trademark trade secret laws confidentiality agreements contractual provisions protect proprietary rights proprietary rights held confidence trade secrets covered patents making difficult protect although currently hold united states patents covering certain aspects technologies products cannot certain obtain additional patents trademarks technology products trade names furthermore cannot certain patents trademarks challenged circumvented competitors likewise cannot certain measures taken protect proprietary rights adequately deter misappropriation disclosure failure us meaningfully protect intellectual property could material adverse effect business financial condition results operations moreover intellectual property necessarily represent barrier entry thermal imaging industry assurance able maintain competitive advantage competitors develop capabilities equal superior litigation patents intellectual property common industry cannot sure subject patent litigation future defending intellectual property lawsuits related legal administrative proceedings could result substantial expense us significant diversion effort personnel adverse determination patent suit proceeding may party could subject us significant liabilities adverse determination could require us seek licenses third parties licenses available commercially reasonable terms business could harmed would harmed unable use one facilities manufacture products facilities located portland boston stockholm santa barbara areas inability continue manufacture products one facilities result example earthquake prolonged power shortage fire natural disaster would prevent us supplying products customers could material adverse effect business financial condition results operations oregon law charter documents contain provisions could discourage prevent potential takeover even transaction would benefit shareholders companies may seek acquire merge us acquisition merger company could result benefits shareholders including increase value common stock provisions articles incorporation bylaws including shareholder rights plan ability issue preferred stock without action shareholders well provisions oregon law may discourage delay prevent merger acquisition shareholder may consider favorable recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits neighborhoods helping determine whether abnormal leakage heat coming doors windows walls roofs house demand application declined began focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since continued develop thermal imaging products growing number applications become one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets internationally well domestically business organized around two principal business segments thermography imaging thermography market primarily consists use handheld thermal imaging systems detect measure minute temperature differences useful wide variety industrial commercial applications uses thermography products include predictive preventative maintenance process control condition monitoring moisture detection commercial residential building inspection scientific analysis thermography products produced facilities stockholm boston santa barbara growing distribution network enabled us penetrate existing emerging markets applications worldwide imaging business offers wide array products allow user see total darkness many types obscurants smoke haze types fog product offerings include handheld fixed mounted products ground airborne maritime applications imaging products include force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol electronic news gathering antipiracy firefighting imaging products primarily produced portland boston santa barbara stockholm facilities substantial portion revenue imaging business derived sales government agencies continuing expand military program business united states internationally 2004 acquisition indigo systems corporation “indigo” leading producer infrared detectors infrared cameras camera subsystems located santa barbara california provides us ability design produce infrared detectors imaging thermography business indigo also allowed us expand presence certain markets including highend scientific cameras oem’s certain military program markets international revenue accounted approximately 44 42 43 revenue 2005 2004 2003 respectively anticipate international sales continue account significant percentage revenue exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies factors contributing variability include significant manufacturing activity stockholm significant sales denominated currencies us dollar cross currency fluctuations currencies us dollar euro swedish kroner 2005 significant fluctuations values major currencies conduct business particular strengthening us dollar swedish kroner impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations typically experience longer payment cycles international sales adverse impact upon liquidity addition substantial portions operations conducted outside united states including manufacturing stockholm sales operations worldwide international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement certain customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related revenue recognition bad debts inventories investments goodwill impairment warranty obligations contingencies income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” “sab 104” issued securities exchange commission december 2003 typically design market sell products commercial offtheshelf products many imaging customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value recognition revenue contracts multiple elements consistent guidance provided eitf 0021 “revenue arrangements multiple deliverables” judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined risk uncollectibility minimal also limited number design development contracts principally governmental customers accounted accordance statement position 811 “accounting performance constructiontype certain productiontype contracts “sop 811” sop 811 revenues related costs recognized using percentageofcompletion method allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years insignificant also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2005 accounts receivable balance 1428 million reported net allowances doubtful accounts 13 million believe reported allowances december 31 2005 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory writedowns designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy establish inventory writedowns conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2005 inventories 1038 million stated net inventory writedowns 125 million actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required costbasis investments invested three thirdparty entities investments accounted cost basis since controlling interests entities ability exercise significant influence december 31 2005 carrying values investments approximately 24 million periodically review investments impairment determine events changes business conditions entities indicate carrying value investments may recoverable reviews may based upon factors include limited hypothetical liquidations investees book value current recent financings received investees future changes business results market conditions indicate impairment temporary exists investments may need record reserves investments goodwill impairment recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value assets may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundary overall market capitalization company current review indicates adjustments necessary goodwill assets carrying value 1581 million december 31 2005 response changes industry market conditions may required strategically realign resources future could result impairment goodwill product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 51 million december 31 2005 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets amount determine likely realized future valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2005 determined valuation allowance net deferred tax assets 271 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2005 2004 2003 revenue 2005 totaled 5086 million increase 54 4827 million revenue 2004 revenue imaging business segment increased 17 3195 million 2004 3250 million 2005 revenue thermography business segment increased 125 1631 million 2004 1836 million 2005 slight increase imaging revenue primarily due increases sales airborne products offset decrease sales land products increase thermography revenue primarily due increase unit volumes particularly eseries oem products due new markets applications identified addressed revenue 2004 totaled 4827 million increase 547 3120 million revenue 2003 revenue imaging business segment increased 654 1931 million 2003 3195 million 2004 revenue thermography business segment increased 373 1188 million 2003 1631 million 2004 increase imaging revenue primarily due increase unit volumes arising strong demand virtually markets revenue provided acquisition indigo january increase thermography revenue primarily due increase unit volumes particularly eseries pseries aseries products due new emerging markets increased penetration expanding distribution network international revenue 2005 totaled 2217 million representing 436 revenue compares international revenue 2004 totaled 2015 million representing 418 revenue 1349 million 432 revenue 2003 sales mix domestic international sales may fluctuate slightly year anticipate mix approximately 55 60 domestic 40 45 international longterm basis gross profit gross profit 2005 544 revenue compared 516 2004 increase gross profit primarily due product mix within imaging thermography segments ability lower component costs including successfully integrating indigo sensors products production efficiencies imaging facilities product mix thermography imaging segments 13 million expense 2004 related recognition onetime stepped values acquired inventories indigo historically experience higher gross margins thermography business imaging business thermography represented 361 total revenue 2005 compared 338 2004 gross profit 2004 516 revenue compared 531 2003 gross profit 2004 included 28 million amortization expense attributable developed technology intangibles acquired part acquisition indigo 13 million expense related recognition onetime stepped values acquired inventories indigo remaining decrease gross profit due lower gross profits indigo products change mix revenue imaging thermography businesses thermography revenue represented 338 total revenue 2004 compared 381 2003 offsetting portion factors manufacturing improvements efficiencies implemented within imaging operations research development research development expenses 515 million 101 revenue 2005 compared 458 million 95 revenue 2004 increase spending 2005 due continued investment new products engineering enable future growth believe spending levels sufficient support development new products continued growth business expect research development expenses represent 8 10 revenue longterm basis research development expenses 458 million 95 revenue 2004 compared 307 million 98 revenue 2003 significant increase spending 2004 due research development expenses indigo continued growth spending related existing imaging thermography businesses also incurred expenses associated customer funded design development contracts expenses 106 million 2005 124 million 2004 40 million 2003 expenses reported cost goods sold since related funding reported revenue selling general administrative expenses selling general administrative expenses 992 million 195 revenue 2005 compared 942 million 195 revenue 2004 included selling general administrative expense charges related legal professional fees associated indemnification cost advancement payments behalf former officers subject criminal civil enforcement actions indemnification cost advancement expenses totaled 46 million 21 2005 2004 respectively anticipate selling general administrative expenses future increase slower rate revenue selling general administrative expenses 942 million 195 revenue 2004 compared 650 million 209 revenue 2003 significant increase spending 2004 due indigo acquisition including amortization expense 27 million certain customer trademark intangible assets acquired due growth company’s business year decrease expenses percentage revenue result revenue increase year ability manage spending growth lower level revenue growth interest expense interest expense totaled 79 million 81 million 49 million years ended december 31 2005 2004 2003 respectively increase interest 2003 2004 primarily due interest convertible notes issued june 2003 interest income interest income 26 million 05 million 24 million years ended december 31 2005 2004 2003 respectively decrease interest income 2004 primarily due decrease invested cash result indigo acquisition beginning 2004 incomeexpense reported income 15 million 2005 expenses 16 million 36 million 2004 2003 incomeexpense primarily currency gains losses transactions denominated currencies functional currency european operations income 2005 primarily due us dollar strengthening european currencies year expense 2004 2003 primarily due european currencies strengthening us dollar years income taxes income tax provision 315 million 284 million 192 million 2005 2004 2003 respectively effective tax rates 2005 2004 2003 257 284 300 respectively mix taxable income us foreign operations impacted income tax provisions years effective tax rate lower us federal tax rate 35 percent lower foreign tax rates effect current foreign tax structure established third quarter 2004 estimated tax credits fourth quarter calendar year 2005 completed evaluation repatriation provisions american jobs creation act 2004 based upon evaluation made decision repatriate 375 million jobs act repatriation caused recognition 10 million net foreign tax credits tax expense tax expense reflected current income tax expense 2005 december 31 2005 us tax net operating loss carryforwards “nol’s” totaling approximately 239 million state tax nol’s totaling approximately 644 million expire years 2019 2024 additionally various federal tax credits available aggregating 145 million various state tax credits available aggregating 25 million net federal benefit expire years 2007 2025 generated deductions us tax purposes related exercise stock options served offset reductions nol’s utilization stock option exercise deductions accounted direct increase additional paidin capital rather reduction income tax provision statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets extent assess utilization assets “more likely not” otherwise valuation allowance required recorded based guidance believe net deferred tax assets 271 million reflected december 31 2005 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond control absolute assurance given sufficient taxable income generated full utilization deferred tax assets accordingly may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved liquidity capital resources december 31 2005 1071 million cash equivalents compared 1207 million december 31 2004 decrease cash equivalents primarily 485 million used repurchase approximately 2 million shares common stock capital expenditures 340 million including purchase building associated property wilsonville oregon 102 million acquisition brysen optical corporation 42 million scientific materials corporation 135 million partially offset cash provided operations 731 million proceeds 273 million exercise stock options issuance shares employee stock purchase plan cash provided operating activities 2005 totaled 731 million compared 751 million 2004 decrease cash provided operating activities primarily due increase accounts receivables decrease income tax benefit related exercise stock options partially offset increase net earnings december 31 2005 accounts receivable amount 1428 million compared 1169 million december 31 2004 increase 259 million receivable balance primarily due increase revenue fourth quarter 2004 compared fourth quarter 2005 december 31 2005 inventories 1038 million compared 983 million december 31 2004 57 increase inventories consistent revenue growth 2005 december 31 2005 prepaid expenses current assets 332 million compared 218 million december 31 2004 increase primarily due overpayments tax deposits europe 2005 increases advances vendors investing activities year ended december 31 2005 totaled 529 million primarily arising purchase wilsonville oregon property capital expenditures acquisition brysen optical corporation scientific materials corporation investing activities year ended december 31 2004 totaled 1752 million primarily due acquisition indigo 1600 million net cash acquired accounts payable increased 323 million december 31 2004 345 million december 31 2005 increase relates increase inventories accrued payroll related liabilities decreased 224 million december 31 2004 204 million december 31 2005 decrease primarily due timing payroll payments lower bonus accruals april 28 2004 signed amended restated credit agreement “credit agreement” bank america na union bank california na us bank national association agreement provides 50 million five year revolving line credit option additional 50 million april 28 2008 credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread underover rates based upon leverage ratio december 31 2005 interest rate ranged 570 675 credit agreement contains four financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures collateralized substantially assets december 31 2005 amounts outstanding credit agreement compliance four financial covenants 34 million letters credit outstanding credit agreement december 31 2005 reduces total available credit two subsidiaries 30 million swedish kroner approximately 38 million line credit 220 2 million line credit 600 december 31 2005 december 31 2005 amounts outstanding lines 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis 2 million line credit secured substantially assets united kingdom subsidiary subject renegotiation annually june 2003 issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended issuance made initial offering 175 million june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares common stock conversion rate 450612 shares per 1000 principal amount notes prior maturity date certain circumstances may redeem cash part notes june 8 2010 proceeds used primarily general corporate purposes included acquisition indigo working capital expenditure needs quarter ended september 30 2004 one terms allow conversion convertible notes described prospectus met december 31 2005 note holders elected convert notes stock anticipate conversions 2010 believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future significant commitments aware significant events conditions likely material impact liquidity offbalance sheet arrangements december 31 2005 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2005 contractual obligations follows thousands interest obligations longterm debt based upon assumption convertible notes held maturity postretirement obligations based upon actuarial assumptions actual payments may differ terms timing amounts recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits neighborhoods helping determine whether abnormal leakage heat coming doors windows walls roofs house demand application declined began focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since continued develop thermal imaging products growing number applications become one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets internationally well domestically 2006 separated imaging business segment government systems commercial vision systems segments business organized around three principal business segments thermography commercial vision systems government systems accordingly restated previously reported periods comparable basis thermography business primarily consists use handheld thermal imaging systems detect measure minute temperature differences useful wide variety industrial commercial applications uses thermography products include highend predictive preventative maintenance research development test measurement leak detection scientific analysis thermography products primarily produced facilities stockholm growing distribution network enabled us penetrate existing emerging markets applications worldwide commercial vision systems business focused development manufacture sale generally lower cost uncooled products emerging commercial markets primary requirement see night adverse conditions markets developing rapidly include uses automotive night vision recreational marine firefighting airborne law enforcement commercial security cvs also sell camera cores readout integrated circuits subcomponents original equipment manufacturers certain markets infrared sensor business supplies internal external customers also part cvs vertical integration infrared sensors accomplished 2004 acquisition indigo systems corporation “indigo” provides us ability design produce infrared detectors turn allowed us reduce costs open new markets government systems business offers wide array products allow user see total darkness many types obscurants smoke haze types fog primary market products government customers use handheld fixed mounted products applications force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol antipiracy government systems products primarily produced portland boston stockholm facilities substantial portion revenue government systems business derived sales government agencies continuing expand military program business united states internationally international revenue accounted approximately 45 44 42 revenue 2006 2005 2004 respectively anticipate international sales continue account significant percentage revenue exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies factors contributing variability include significant manufacturing activity stockholm significant sales denominated currencies us dollar cross currency fluctuations currencies us dollar euro swedish kroner 2006 significant fluctuations values major currencies conduct business particular weakening us dollar swedish kroner impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations typically experience longer payment cycles international sales adverse impact upon liquidity addition substantial portions operations conducted outside united states including manufacturing stockholm sales operations worldwide international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement certain customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance restatement consolidated financial statements stock option practices 2006 undertook voluntary review historical stock option practices related accounting treatment result apparent issuance options favorable dates prior 2000 based upon preliminary results review board directors “board” formed special committee comprised two outside directors investigate stock option grants practices procedures 1995 2006 special committee conducted investigation assistance independent legal counsel perkins coie llp outside forensic accountants deloitte financial advisory services llp retained independent counsel course investigation special committee legal accounting advisors reviewed approximately 135000 paper electronic documents conducted interviews relevant management personnel current former members compensation committee evaluated accounting documentation surrounding 263 million options representing approximately 91 options issued period 1995 2006 special committee completed investigation provided findings recommendations full board respect stock options granted period early 1995 middle 2000 special committee found inaccuracies determination measurement dates certain stock option grants affecting accounting disclosures years special committee also found strong circumstantial evidence improper selection grant dates given lack supporting documentation fact exercise price certain grants lowest stock price first quarter years 1995 1999 respect stock options granted period middle 2000 2006 special committee identified certain procedural corporate governance issues resulted use incorrect measurement dates find evidence grant dates selected based upon attempt seek favorable price special committee also reported investigated certain option practices period 1995 2006 identified evidence improper dating option exercises limited exceptions related accelerated vesting leaves absences addition special committee’s investigation stock option practices reviewed restricted stock grants 1996 2006 review restricted stock grants 1996 1999 also found strong circumstantial evidence improper selection measurement dates used recognize compensation expense years based findings special committee’s investigation subsequent internal analysis including findings restricted stock concluded audit committee board agreed restatement certain annual historical consolidated financial statements appropriate therefore recording additional noncash compensation expense related tax effects regard past stockbased compensation programs restating previously filed financial statements annual report form 10k aggregate noncash compensation expense recognized 1995 2004 143 million related tax effects adjustments record noncash compensation expense also resulted recognition additional payroll tax obligations 18 million period resulting cumulative reduction earnings taxes 161 million 2004 since portion compensation expense financial statement purposes yet recognizable deduction tax purposes aggregate benefit income tax provision period recognized recording deferred tax assets 39 million thereby resulting cumulative net income effect 122 million adjustments made 1995 2004 net income effect recorded 09 million 2004 114 million cumulatively prior 2004 according accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related authoritative accounting literature place prior 2006 measurement date accounting purposes first date number shares individual entitled receive option purchase price known option share granted apb 25 requires recognition compensation expense equal market price stock measurement date minus amount individual required pay option share measurement date change effective date grant determine compensation expense required recognized accounting purposes connection grant result review stock option restricted stock grants 1995 2006 certain cases established new measurement dates based upon date believe apb 25 criteria satisfied cases established new measurement date considered information included limited dates option grants communicated individuals dates option grant details provided thirdparty service providers used internally enter grants stock option system contemporaneous emails minutes meetings board compensation committee information obtained interviews current former compensation committee members management employees payroll records personnel files various records maintained legal finance human resources departments grants sufficient evidence documentation support original measurement date determine precise date number options exercise price finalized used available relevant information form reasonable conclusion likely measurement date grants following summarizes results investigation special committee review impact primary stock option restricted stock accounting errors terms noncash compensation expense related tax effects underlying restatement references number options restricted shares share prices discussion adjusted stock splits since 1995 inaccurate measurement dates certain stock options restricted shares granted january 5 1995 june 30 2000 period january 5 1995 june 30 2000 issued total 106 million stock options 70 million issued part annual bonus programs 13 million issued connection acquisitions 05 million issued nonemployee directors 18 million issued purposes primarily connection hiring promoting employees determined inaccurate measurement dates used connection six annual stock option bonus grants period also restricted stock program officers 1996 1999 determined inaccurate measurement dates used originally recognize compensation expenses awards made restricted stock programs totaled 06 million shares amount additional compensation expense recorded period stock option grants restricted stock awards 36 million discussion following italicized headings provides details types errors identified accounts entire 36 million additional compensation expense arising awards 1995 middle 2000 determination appropriate measurement date used stock option grants january 5 1995 june 30 2000 based upon best available information corroborative evidence respective grant described although determined measurement date may subsequent actual measurement date grants based upon sensitivity analysis potential price variance original grant date determined measurement date impact alternative revised measurement dates would exceed 13 million incremental compensation expense 143 million recognized restatement errors arising likely grant dates selected hindsight incomplete lists awards option grant dates26 million special committee identified strong circumstantial evidence option grant dates used annual awards 1995 1999 totaling 54 million options selected based upon stock price considerations likely using hindsight additionally inadequate documentation validate complete lists recipients awards available grant dates used option awards january 6 1995 january 19 1996 january 2 1997 february 3 1998 march 5 1999 dated prior dates complete lists stock option recipients appear available option grants years dated dates lowest stock price first quarter respective year options awarded conjunction annual performance review program occurred first quarter year determined appropriate measurement date grants date complete lists stock option recipients corroborative evidence including thirdparty billing statements option agreements available aggregate additional compensation expense related errors 26 million errors relating valuing compensation expense related restricted stock awards measurement dates likely selected hindsight07 million beginning 1996 restricted stock program officers program officers eligible receive maximum number shares based upon attainment defined annual financial performance criteria size award based upon level attainment performance criteria 1996 1999 total 06 million shares awarded officers compensation expense recognized respective year based upon market price originally determined measurement date measurement dates used 1998 october 7 lowest price fourth quarter second lowest price year 1999 october 21 lowest price year actual results performance criteria could determined end respective year compensation committee given opportunity make discretionary adjustments provided program accordingly determined measurement date awards 1996 1997 programs date first board meetings completion audits years 1998 1999 program years however shares awarded end year apparently anticipation annual results 1998 1999 determined measurement date list awards provided transfer agent issuance shares occurred december 1998 1999 respectively aggregate compensation expense related errors restricted stock 07 million errors related incomplete list awards options grant date03 million april 17 2000 awarded us based employees options purchase aggregate 16 million shares common stock primarily based upon length service criteria due financial difficulties experiencing time broad issuance options lieu cash bonuses normally paid time year option grant date coincided public release audited financial statements 1999 calendar year although majority awards based length service criteria individual sufficient exceptions made criteria establishing final list awards determined appropriate measurement date awards date lists final provided thirdparty responsible generating individual option agreements compensation expense related error 03 million existence ambiguous documentation information providing following sensitivity analysis related april 17 2000 option grants determination special committee management appropriate measurement date stock option grants april 17 2000 based upon best available information described however circumstantial evidence could suggest communication recipients february 18 2000 sufficient result grant date subsequent award april 17 2000 essentially repricing february 18 2000 grant resulting options needing treated variable awards january 1 2006 date adopted sfas 123r cumulative impact interpretation december 31 2005 would 72 million incremental compensation expense related tax effects inaccurate measurement dates certain stock options restricted shares granted july 1 2000 february 4 2005 period july 1 2000 december 31 2006 issued total 189 million stock options 72 million issued officers either retention bonus purposes 73 million issued employees officers either retention bonus purposes 14 million issued connection acquisitions 12 million related 2000 hiring earl lewis president chief executive officer 09 million issued nonemployee directors 09 million shares issued purposes primarily related hiring employees determined inaccurate measurement dates used period july 1 2000 february 4 2005 related 70 million options issued retention bonuses purposes 41 million 29 million officers employees respectively also determined extensions time given two former employees exercise options accounted differently discussion following italicized headings provides details types errors identified accounts 107 million additional compensation expense arising awards july 1 2000 december 31 2006 errors related incomplete list awards options grant date65 million identified three instances lists stock option recipients approved compensation committee either incomplete subsequently modified follows • december 27 2001 compensation committee awarded options purchase 28 million shares common stock officers bonus purposes exercise price 925 compensation committee award made understanding 30 million shares available 1992 stock incentive plan “1992 plan” shortly thereafter determined number shares available 1992 plan actually 25 million shares order remain compliance 1992 plan officers voluntarily agreed forfeit certain options awarded final award 24 million options determined time next meeting compensation committee february 12 2002 market price common stock day 1173 determined measurement date option grants february 12 2002 list awards final compensation expense related grants 59 million • january 8 2004 compensation committee approved issuance 18 million stock options pool employees market price day 1958 complete list option recipients number options awarded recipient final february 17 2004 market price 1994 determined measurement date option grants february 17 2004 thus recognizing compensation expense grants 06 million • february 4 2005 compensation committee approved award 11 million stock options list employees exercise price 3140 modifications made list subsequent compensation committee’s meeting determined measurement date grants february 28 2005 list final employees notified individual awards however since market price day 3125 compensation expense required recognized error related failure recognize performance criteria stock options30 million january 1 2001 awarded shares restricted stock officers vesting provisions based upon attainment certain financial results year september 7 2001 chief executive officer submitted proposal compensation committee convert shares restricted stock options september 12 2001 compensation committee approved proposal awarded 07 million stock options us officers market price day 722 however special committee determined compensation committee intended apply performance criteria place restricted stock grants stock options since one restrictions deemed intended compensation committee related completion audit fiscal 2001 determined measurement date grants february 12 2002 board met accepted audited 2001 financial statements accordingly based market price 1173 day recognizing compensation expense 30 million error related extension time exercise stock options10 million 2001 allowed two individuals extension time exercise vested stock options past time provided option agreements determined extension time resulted new award individuals recognized compensation expense fair value new awards dates respective shares would cancelled compensation expense recognized new awards 10 million error related stock options granted subject shareholder approval option plan01 million february 12 2002 compensation committee awarded options purchase 10 million shares common stock exercise price 1173 officers contingent upon shareholder approval new stock option plan annual meeting held april 24 2002 plan approved options issued however since options subject shareholders’ approval plan measurement date day approval market price 1181 consequently recognizing compensation expense 01 million grants adjustments reclassifications also adjusted previously recognized deferred tax assets originally recorded credit additional paidin capital shareholders’ equity previous periods result certain stock options qualify deductible performancebased compensation accordance internal revenue code section 162m adjustments primarily impact previously reported net operating loss carryforwards amount deferred tax assets accrued income taxes reported consolidated balance sheets since original tax benefit items recorded shareholders’ equity impact previously reported consolidated statements income related resulting section 162m limitations section 162m limitations resulted cumulative reduction net operating losses 335 million cumulative increase income taxes payable net tax credit utilization 89 million december 31 2006 critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis evaluate estimates including related revenue recognition bad debts inventories investments goodwill impairment warranty obligations contingencies income taxes stockbased compensation base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” issued securities exchange commission december 2003 typically design market sell products primarily commercial offtheshelf products many government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value recognition revenue contracts multiple elements consistent guidance provided eitf 0021 “revenue arrangements multiple deliverables” judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectibility reasonably assured also limited number design development contracts principally governmental customers accounted accordance statement position 811 “accounting performance constructiontype certain productiontype contracts “sop 811” sop 811 revenues related costs recognized using percentageofcompletion method allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years insignificant also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2006 accounts receivable balance 1675 million reported net allowances doubtful accounts 16 million believe reported allowances december 31 2006 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory writedowns designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy record inventory writedowns conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2006 inventories 1359 million stated net inventory writedowns 162 million actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill impairment recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value assets may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries market capitalization applicable business divisions company current review indicates adjustments necessary goodwill assets carrying value 1598 million december 31 2006 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 52 million december 31 2006 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits probable recognized amount determine likely realized future valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2006 determined valuation allowance net deferred tax assets 189 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2006 2005 2004 revenue 2006 totaled 5750 million increase 131 percent 5086 million revenue 2005 revenue thermography business segment increased 194 percent 1836 million 2005 2192 million 2006 increase thermography revenue primarily due sales infracam product launched 2006 increased unit sales product lines revenue government systems business segment increased 71 percent 2414 million 2005 2584 million 2006 increase government systems revenue primarily due increase sales gimbaled products partially offset decrease sales handheld fixed mounted products revenue commercial vision systems business segment increased 164 percent 836 million 2005 973 million 2006 increase commercial vision systems revenue due increased unit sales across product lines revenue 2005 totaled 5086 million increase 54 percent 4827 million revenue 2004 revenue thermography business segment increased 177 percent 1560 million 2004 1836 million 2005 increase thermography revenue primarily due increase unit volumes particularly eseries oem products due new markets applications identified addressed revenue government systems business segment decreased 36 percent 2503 2004 2414 million 2005 decrease government systems revenue primarily due decrease sales landbased products partially offset increase airborne products revenue commercial vision systems business segment increased 94 percent 764 million 2004 836 million 2005 increase commercial vision systems revenue primarily due increased unit sales across product lines international revenue 2006 totaled 2599 million representing 452 percent revenue compares international revenue 2005 totaled 2217 million representing 436 percent revenue 2015 million 418 percent revenue 2004 sales mix domestic international sales may fluctuate slightly year anticipate mix approximately 55 percent 60 percent domestic 40 percent 45 percent international longterm basis gross profit gross profit 2006 548 percent revenue compared 544 percent revenue 2005 slight increase gross profit primarily due product mix within three business segments cost efficiencies santa barbara operations offset stockbased compensation expense 12 million included 2006 cost goods sold gross profit 2005 544 percent revenue compared 516 percent 2004 increase gross profit primarily due product mix within three business segments ability lower component costs including successfully integrating indigo sensors products production efficiencies facilities 13 million expense 2004 related recognition onetime stepped values acquired inventories indigo historically experience higher gross margins thermography business government systems commercial vision systems businesses thermography represented 361 percent total revenue 2005 compared 323 percent 2004 research development research development expenses 606 million 105 percent revenue 2006 compared 515 million 101 percent revenue 2005 increase research development expenses due continued investment new product development business segments enable future growth impact stockbased compensation expense 31 million 2006 believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 10 percent revenue longterm basis research development expenses 515 million 101 percent revenue 2005 compared 458 million 95 percent revenue 2004 increase spending 2005 due continued investment new products engineering enable future growth also incurred expenses associated customer funded design development contracts expenses 116 million 2006 106 million 2005 124 million 2004 expenses reported cost goods sold since related funding reported revenue selling general administrative expenses selling general administrative expenses 1174 million 205 percent revenue 2006 compared 992 million 195 percent revenue 2005 increase selling general administrative expenses due continued growth business including costs associated new product launches stockbased compensation expense 66 million 2006 anticipate selling general administrative expenses future increase slower rate revenue selling general administrative expenses 992 million 195 percent revenue 2005 compared 956 million 198 percent revenue 2004 interest expense interest expense totaled 90 million 79 million 81 million years ended december 31 2006 2005 2004 respectively interest expense primarily attributable accrual interest convertible notes issued june 2003 amortization costs related issuance notes small increase interest expense 2006 relates credit line borrowings third quarter 2006 fund repurchases common shares interest income interest income 34 million 26 million 05 million years ended december 31 2006 2005 2004 respectively increase interest income since 2004 primarily due increase invested cash incomeexpense reported income 13 million 2006 15 million 2005 expenses 16 million 2004 incomeexpense primarily currency gains losses transactions denominated currencies functional currency european operations income taxes income tax provision 317 million 315 million 279 million 2006 2005 2004 respectively effective tax rates 2006 2005 2004 239 257 283 respectively mix taxable income us foreign operations impacted income tax provisions years effective tax rate lower us federal tax rate 35 percent lower foreign tax rates effect foreign tax credits federal state tax credits 2006 effective tax rate reduced 27 result recognition foreign tax credits december 31 2006 us tax net operating loss carryforwards “nols” totaling approximately 33 million state tax nols totaling approximately 288 million expire years 2019 2025 additionally various state tax credits available aggregating 13 million net federal benefit expire years 2008 2026 generated deductions us tax purposes related exercise stock options served offset reductions nols utilization stock option exercise deductions accounted direct increase additional paidin capital rather reduction income tax provision statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets benefits probable recognized extent assess realization assets “more likely not” valuation allowance required recorded based guidance believe net deferred tax assets 189 million reflected december 31 2006 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon therefore recorded valuation allowance future levels taxable income dependent upon general economic conditions including limited continued growth business markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond control absolute assurance given sufficient taxable income generated full utilization deferred tax assets accordingly may required record valuation allowance deferred tax assets future periods forecasts taxable income achieved liquidity capital resources december 31 2006 1386 million cash equivalents compared 1071 million december 31 2005 increase cash equivalents primarily due cash provided operations proceeds credit agreement proceeds exercise stock options offset repurchase approximately 47 million shares common stock capital expenditures cash provided operating activities 2006 totaled 1152 million compared 731 million 2005 increase cash provided operating activities primarily due increase net earnings increased collections accounts receivables decrease current assets partially offset increase inventories december 31 2006 accounts receivable amount 1675 million compared 1428 million december 31 2005 increase 247 million receivable balance primarily due increase revenue fourth quarter 2006 compared fourth quarter 2005 december 31 2006 inventories 1359 million compared 1038 million december 31 2005 309 percent increase inventories primarily due increase product offerings segments general growth segments including anticipated growth 2007 december 31 2006 prepaid expenses current assets 292 million compared 332 million december 31 2005 decrease primarily due decrease income taxes receivable partially offset increase sales demonstration units investing activities year ended december 31 2006 totaled 434 million primarily consisting capital expenditures including purchase facility orlando florida expansions improvements manufacturing facilities investing activities year ended december 31 2005 totaled 529 million primarily arising purchase wilsonville oregon property capital expenditures acquisition brysen optical corporation scientific materials corporation accounts payable increased 345 million december 31 2005 406 million december 31 2006 increase primarily relates increase inventories accrued payroll related liabilities increased 222 million december 31 2005 258 million december 31 2006 increase primarily due timing payroll payments october 6 2006 signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement replaces previous credit agreement dated april 28 2004 credit agreement provides 300 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting us certain designated subsidiaries borrow euro kroner sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread underover eurodollar rates based upon company’s leverage ratio december 31 2006 interest rate ranged 610 percent 825 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum liquidity cash availability credit agreement credit agreement collateralized substantially assets company december 31 2006 455 million outstanding credit agreement compliance financial covenants 55 million letters credit outstanding credit agreement december 31 2006 reduces total available credit sweden subsidiary 30 million swedish kroner approximately 44 million line credit 370 percent december 31 2006 december 31 2006 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis june 2003 issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended issuance made initial offering 175 million june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares common stock conversion rate 450612 shares per 1000 principal amount notes prior maturity date certain circumstances may redeem cash part notes june 8 2010 proceeds used primarily general corporate purposes included acquisition indigo working capital expenditure needs quarter ended september 30 2004 one terms allow conversion convertible notes described prospectus met december 31 2006 note holders elected convert notes stock anticipate conversions 2010 believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future significant commitments aware significant events conditions likely material impact liquidity offbalance sheet arrangements december 31 2006 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2006 contractual obligations follows thousands principal interest obligations longterm debt based upon assumption convertible notes held maturity 2023 postretirement obligations based upon actuarial assumptions actual payments may differ terms timing amounts recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 “management’s discussion analysis financial condition results operations” item 8 “financial statements supplementary data” 1 per share amounts restated periods presented reflect twoforone stock split effected december 10 2007 item 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits later expanded focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since grown substantially due increasing demand infrared products across growing number markets executed series acquisitions today one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets internationally well domestically thermography business primarily consists design manufacture handheld thermal imaging systems detect measure minute temperature differences useful wide variety industrial commercial applications uses thermography products include highend predictive preventative maintenance research development test measurement leak detection scientific analysis thermography products primarily produced facilities stockholm growing distribution network enabled us penetrate existing emerging markets applications worldwide commercial vision systems “cvs” business focused development manufacture sale generally lower cost uncooled products emerging commercial markets primary requirement see night adverse conditions markets developing rapidly include uses automotive night vision recreational marine firefighting airborne law enforcement commercial security cvs also sells camera cores readout integrated circuits subcomponents oems certain markets infrared sensor business supplies internal external customers also part cvs vertical integration infrared sensors provides us ability design produce infrared detectors allowing us reduce costs open new markets cvs products primarily produced santa barbara facility government systems business focused primarily markets high performance required primary market products government customers use handheld fixed mounted products applications force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol antipiracy government systems products primarily produced portland boston stockholm facilities substantial portion revenue government systems business derived sales government agencies continuing expand military program business us internationally international revenue accounted approximately 39 percent 45 percent 44 percent revenue 2007 2006 2005 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies factors contributing variability include significant manufacturing activity stockholm significant sales denominated currencies us dollar cross currency fluctuations currencies us dollar euro swedish kroner 2006 2007 significant fluctuations values major currencies conduct business particular weakening us dollar euro swedish kroner impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations typically experience longer payment cycles international sales adverse impact upon liquidity addition substantial portions operations conducted outside united states including manufacturing stockholm sales operations worldwide international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting us certain foreign governments frequent requirement certain customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” issued securities exchange commission december 2003 design market sell products primarily commercial offtheshelf products many government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectibility reasonably assured also limited number design development contracts principally governmental customers revenues related costs recognized using percentageofcompletion method allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2007 accounts receivable balance 2034 million reported net allowances doubtful accounts 13 million believe reported allowances december 31 2007 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy record inventory writedowns conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2007 inventories 1794 million stated net inventory writedowns 214 million actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value assets may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable business divisions company current review indicates adjustments necessary goodwill assets carrying value 1762 million december 31 2007 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 66 million december 31 2007 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits likely recognized valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2007 determined valuation allowance net deferred tax assets 133 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would charged income period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2007 2006 2005 revenue 2007 totaled 7794 million increase 355 percent 5750 million revenue 2006 revenue thermography business segment increased 194 percent 2192 million 2006 2618 million 2007 increase thermography revenue primarily due introduction new products increased unit sales existing product lines revenue government systems business segment increased 479 percent 2584 million 2006 3823 million 2007 increase primarily due significant increases unit sales products revenue commercial vision systems business segment increased 389 percent 973 million 2006 1352 million 2007 increase commercial vision systems revenue also primarily due increase unit sales across major product lines segment revenue 2006 totaled 5750 million increase 131 percent 5086 million revenue 2005 revenue thermography business segment increased 194 percent 1836 million 2005 2192 million 2006 increase thermography revenue primarily due sales infracam® product launched 2006 increased unit sales product lines revenue government systems business segment increased 71 percent 2414 million 2005 2584 million 2006 increase government systems revenue primarily due increase sales gimbaled products partially offset decrease sales handheld fixed mounted products revenue commercial vision systems business segment increased 164 percent 836 million 2005 973 million 2006 increase commercial vision systems revenue due increased unit sales across product lines international revenue 2007 totaled 3019 million representing 387 percent revenue compares international revenue 2006 totaled 2599 million representing 452 percent revenue 2217 million 2005 representing 436 percent revenue sales mix domestic international sales may fluctuate slightly year anticipate mix approximately 55 percent 60 percent domestic 40 percent 45 percent international longterm basis gross profit gross profit 2007 556 percent revenue compared 548 percent revenue 2006 increase gross profit percentage revenue primarily due cost efficiencies realized increased volumes government systems commercial vision systems manufacturing facilities gross profit 2006 548 percent revenue compared 544 percent revenue 2005 slight increase gross profit primarily due product mix within three business segments cost efficiencies santa barbara operations offset stockbased compensation expense 12 million included 2006 cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development research development expenses 725 million 93 percent revenue 2007 compared 606 million 105 percent revenue 2006 increase research development expenses due continued investment new product development business segments enable future growth believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 10 percent revenue longterm basis research development expenses 606 million 105 percent revenue 2006 compared 515 million 101 percent revenue 2005 increase research development expenses due growth business impact stockbased compensation 31 million 2006 also incurred expenses associated customer funded design development contracts expenses 89 million 2007 116 million 2006 106 million 2005 expenses reported cost goods sold since related funding reported revenue selling general administrative expenses selling general administrative expenses 1689 million 217 percent revenue 2007 compared 1174 million 205 percent revenue 2006 increase selling general administrative expenses due continued growth business including costs associated new product launches increased performance incentive stockbased compensation costs addition 2007 incurred significantly higher legal accounting costs related investigation historical stock option practices various legal matters see note 11 “contingencies” notes consolidated financial statements anticipate selling general administrative expenses future increase slower rate revenue selling general administrative expenses 1174 million 205 percent revenue 2006 compared 992 million 195 percent revenue 2005 increase selling general administrative expenses due growth business impact stockbased compensation 66 million 2006 interest expense interest expense totaled 102 million 90 million 79 million years ended december 31 2007 2006 2005 respectively interest expense primarily attributable accrual interest convertible notes issued june 2003 amortization costs related issuance notes interest shortterm borrowings interest income interest income 56 million 34 million 26 million years ended december 31 2007 2006 2005 respectively increase interest income primarily due increase invested cash income net reported income 39 million 13 million 15 million years ended december 31 2007 2006 2005 income primarily currency gains transactions denominated currencies functional currency european operations income taxes income tax provision 544 million 317 million 315 million 2007 2006 2005 respectively effective tax rates 2007 2006 2005 285 percent 239 percent 257 percent respectively mix taxable income us foreign operations impacted income tax provisions years effective tax rate lower us federal tax rate 35 percent lower foreign tax rates effect foreign tax credits federal state tax credits december 31 2007 us tax net operating loss carryforwards “nols” totaling approximately 30 million state tax nols totaling approximately 73 million expire years 2019 2025 additionally federal tax credits available aggregating 20 million various state tax credits available aggregating 03 million net federal benefit expire years 2008 2017 utilization stock option exercise deductions generally accounted direct increase additional paidin capital rather reduction income tax provision statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded based guidance believe net deferred tax assets 133 million reflected december 31 2007 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon therefore recorded valuation allowance liquidity capital resources december 31 2007 2037 million cash equivalents compared 1386 million december 31 2006 increase cash equivalents primarily due cash provided operations proceeds exercise stock options offset acquisition extech instruments corporation capital expenditures repayments borrowings credit agreement cash provided operating activities 2007 totaled 1161 million compared 1152 million 2006 slight increase cash provided operating activities primarily due increase net earnings offset increases accounts receivable inventories current assets december 31 2007 accounts receivable amount 2034 million compared 1675 million december 31 2006 increase 359 million receivable balance primarily due increase revenue fourth quarter 2007 compared fourth quarter 2006 december 31 2007 inventories 1794 million compared 1359 million december 31 2006 32 percent increase inventories primarily due increase purchases materials support business growth increased backlog orders new product introductions december 31 2007 prepaid expenses current assets 537 million compared 292 million december 31 2006 increase primarily due estimated tax payments 2007 made federal foreign jurisdictions increases vendor advances increases sales demonstration units related recently introduced products accounts payable increased 406 million december 31 2006 540 million december 31 2007 increase primarily relates increase inventories overall company growth accrued payroll related liabilities increased 258 million december 31 2006 394 million december 31 2007 increase primarily due timing payroll payments increased headcount increased annual incentive accruals accrued income taxes payable decreased 173 million december 31 2006 38 million december 31 2007 decrease relates prepayments estimated taxes foreign jurisdictions greater expected 2007 tax liability jurisdictions cash used investing activities year ended december 31 2007 totaled 875 million primarily consisting capital expenditures principally expansions improvements manufacturing facilities purchase equipment utilized fabrication microbolometers thirdparty site costs associated continued implementation enterprise resource planning system acquisition extech instruments corporation cash used investing activities year ended december 31 2006 totaled 434 million primarily consisting capital expenditures including purchase facility orlando florida expansions improvements manufacturing facilities implementation enterprise resource planning system october 6 2006 signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting us certain designated subsidiaries borrow euro kroner sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon company’s leverage ratio eurodollar interest rate 565 percent prime lending rate 725 percent december 31 2007 rates 610 percent 825 percent respectively december 31 2006 credit agreement requires us pay commitment fee amount unused credit rate based leverage ratio ranges 0175 percent 0325 percent december 31 2007 2006 commitment fee rate 0175 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum liquidity cash availability credit agreement credit agreement collateralized substantially assets company december 31 2007 2006 190 million 455 million respectively outstanding credit agreement compliance financial covenants 66 million 55 million letters credit outstanding credit agreement december 31 2007 2006 respectively reduces total available credit sweden subsidiary 30 million swedish kroner approximately 47 million line credit interest rate 470 percent december 31 2007 december 31 2007 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis june 2003 issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares common stock conversion rate 901224 shares per 1000 principal amount notes prior maturity date certain circumstances may redeem cash part notes june 8 2010 convertible notes eligible conversion option note holders december 31 2007 notes value 4000 converted 360 shares company’s common stock currently anticipate conversions notes 2010 believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2007 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2007 contractual obligations follows thousands principal interest obligations longterm debt based upon assumption convertible notes held maturity 2023 postretirement obligations based upon actuarial assumptions actual payments may differ terms timing amounts recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 originally providing infrared imaging systems installed vehicles use conducting energy audits later expanded focus applications markets technology particular designing selling stabilized thermal imaging systems aircraft used law enforcement since grown substantially due increasing demand infrared products across growing number markets combined execution series acquisitions today one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets internationally well domestically thermography business primarily consists design manufacture handheld thermal imaging systems detect measure minute temperature differences useful wide variety industrial commercial applications uses thermography products include highend predictive preventative maintenance research development test measurement leak detection scientific analysis growing distribution network enabled us penetrate existing emerging markets applications worldwide commercial vision systems business focused development manufacture sale generally lower cost uncooled products emerging commercial markets primary requirement see night adverse conditions markets developing rapidly include uses automotive night vision recreational marine firefighting airborne law enforcement commercial security commercial vision systems also sells camera cores readout integrated circuits subcomponents oems certain markets infrared sensor business supplies internal external customers also part commercial vision systems vertical integration infrared sensors provides us ability design produce infrared detectors allowing us reduce costs open new markets government systems business focused primarily markets high performance required primary market products government customers use handheld fixed mounted products applications force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol antipiracy substantial portion revenue government systems business derived sales government agencies continuing expand military program business united states internationally international revenue accounted approximately 38 percent 39 percent 45 percent revenue 2008 2007 2006 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity sweden significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kroner past three years significant fluctuations values major currencies conduct business particular weakening united states dollar euro swedish kroner 2006 2007 strengthening united states dollar swedish kroner 2008 impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments frequent requirement certain customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result certain fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” issued securities exchange commission december 2003 design market sell products primarily commercial offtheshelf products many government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectibility reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectibility trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2008 accounts receivable balance 2392 million reported net allowances doubtful accounts 13 million believe reported allowances december 31 2008 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory designer manufacturer high technology infrared systems exposed number economic industry factors could result portions inventories becoming either obsolete excess anticipated usage factors include limited technological changes markets ability meet changing customer requirements competitive pressures products prices availability key components suppliers policy record inventory writedowns conditions exist suggest inventories may excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2008 inventories 2075 million stated net inventory writedowns 213 million actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value assets may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable business divisions company current review indicates adjustments necessary goodwill assets carrying value 2257 million december 31 2008 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 78 million december 31 2008 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits likely recognized valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2008 determined valuation allowance net deferred tax assets 216 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2008 2007 2006 revenue 2008 totaled 10770 million increase 382 percent 7794 million revenue 2007 revenue government systems business segment increased 488 percent 3823 million 2007 5690 million 2008 increase primarily due increase unit sales across product lines increase longterm program business thermography revenue increased 655 million 250 percent 2618 million 2007 3273 million 2008 excluding revenue extech instruments corporation “extech” acquired fourth quarter 2007 cedip infrared systems “cedip” acquired first quarter 2008 thermography revenue increased 51 percent 2008 2007 increase 2008 primarily due increased unit sales tseries™ iseries™ scseries™ product lines offset decreased unit sales pseries™ eseries™ product lines addition 2008 thermography revenue negatively impacted decline swedish kroner united states dollar fourth quarter 2008 revenue commercial vision systems business segment increased 336 percent 1352 million 2007 1806 million 2008 increase commercial vision systems revenue primarily due increase unit sales across major product lines segment second half 2008 also experienced impact particularly thermography business worldwide weakening economic conditions continuation conditions could impact revenue generate commercial markets especially thermography business revenue 2007 totaled 7794 million increase 355 percent 5750 million revenue 2006 revenue government systems business segment increased 479 percent 2584 million 2006 3823 million 2007 increase primarily due significant increases unit sales products revenue thermography business segment increased 194 percent 2192 million 2006 2618 million 2007 increase thermography revenue primarily due introduction new products increased unit sales existing product lines revenue commercial vision systems business segment increased 389 percent 973 million 2006 1352 million 2007 increase commercial vision systems revenue also primarily due increase unit sales across major product lines segment international revenue 2008 totaled 4078 million representing 379 percent revenue compares international revenue 2007 totaled 3019 million representing 387 percent revenue 2599 million 2006 representing 452 percent revenue sales mix domestic international sales may fluctuate year expect revenue customers outside united states account significant portion total revenue longterm basis gross profit gross profit 2008 563 percent revenue compared 556 percent 2007 increase gross profit percentage revenue primarily due cost efficiencies realized increased volumes government systems commercial vision systems manufacturing facilities slightly offset lower gross profit percentage recognized extech cedip gross profit 2007 556 percent revenue compared 548 percent revenue 2006 increase gross profit percentage revenue primarily due cost efficiencies realized increased volumes government systems commercial vision systems manufacturing facilities cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development research development expenses 900 million 84 percent revenue 2008 compared 725 million 93 percent revenue 2007 research development expenses 725 million 93 percent revenue 2007 compared 606 million 105 percent revenue 2006 increase research development expenses three year period due continued investment new product development business segments enable future growth believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis also incurred expenses associated customer funded design development contracts expenses 60 million 2008 89 million 2007 116 million 2006 expenses reported cost goods sold since related funding reported revenue selling general administrative expenses selling general administrative expenses 2317 million 215 percent revenue 2008 compared 1689 million 217 percent revenue 2007 selling general administrative expenses 1689 million 217 percent revenue 2007 compared 1174 million 205 percent revenue 2006 increase selling general administrative expenses 2006 2008 due continued growth business including costs associated new product launches increased performance incentive stockbased compensation costs 2008 2007 incurred significantly higher legal accounting costs related investigation historical stock option practices various legal matters see note 12 “contingencies” notes consolidated financial statements anticipate selling general administrative expenses future increase slower rate revenue interest expense interest expense totaled 90 million 102 million 90 million years ended december 31 2008 2007 2006 respectively interest expense primarily attributable accrual interest convertible notes issued june 2003 amortization costs related issuance notes interest shortterm borrowings interest income interest income 74 million 56 million 34 million years ended december 31 2008 2007 2006 respectively increase interest income primarily due increase invested cash income net reported income 120 million 39 million 13 million years ended december 31 2008 2007 2006 income primarily currency gains transactions denominated currencies functional currency european operations income taxes income tax provision 912 million 544 million 317 million 2008 2007 2006 respectively effective tax rates 2008 2007 2006 309 percent 285 percent 239 percent respectively mix taxable income united states foreign operations impacted income tax provisions years effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign tax credits federal state tax credits december 31 2008 united states tax net operating loss carryforwards totaling approximately 26 million expire 2025 additionally federal tax credits available aggregating 05 million expire 2015 statement financial accounting standards 109 “accounting income taxes” requires tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded based guidance believe net deferred tax assets 216 million reflected december 31 2008 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon therefore recorded valuation allowance liquidity capital resources december 31 2008 2894 million cash equivalents compared 2037 million december 31 2007 increase cash equivalents primarily due cash provided operations cash proceeds tax benefits generated exercise stock options offset business acquisitions capital expenditures repayments borrowings credit agreement repurchase common stock negative impact currency exchange rate changes cash provided operating activities 2008 totaled 2183 million compared 1161 million 2007 increase cash provided operating activities primarily due increase net earnings current liabilities offset increases accounts receivable inventories december 31 2008 accounts receivable amount 2392 million compared 2034 million december 31 2007 increase 358 million receivable balance primarily due increase revenue fourth quarter 2008 compared fourth quarter 2007 december 31 2008 inventories 2075 million compared 1794 million december 31 2007 increase inventories primarily due increase purchases materials support business growth increased backlog orders new product introductions cash used investing activities year ended december 31 2008 totaled 1140 million primarily consisting acquisitions cedip ifara tecnologias sl capital expenditures cash used investing activities year ended december 31 2007 totaled 875 million primarily consisting capital expenditures principally expansions improvements manufacturing facilities purchase equipment utilized fabrication microbolometers thirdparty site costs associated continued implementation enterprise resource planning system acquisition extech october 6 2006 signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting us certain designated subsidiaries borrow euro kroner sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon leverage ratio eurodollar interest rate 2175 percent prime lending rate 325 percent december 31 2008 rates 565 percent 725 percent respectively december 31 2007 credit agreement requires us pay commitment fee amount unused credit rate based leverage ratio ranges 0175 percent 0325 percent december 31 2008 2007 commitment fee rate 0175 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum level liquidity comprised cash undrawnunutilized availability credit agreement credit agreement collateralized substantially assets company december 31 2008 amounts outstanding 190 million outstanding december 31 2007 credit agreement 158 million 66 million letters credit outstanding credit agreement december 31 2008 2007 respectively reduces total available credit sweden subsidiary 30 million swedish kroner approximately 39 million line credit interest rate 281 percent december 31 2008 december 31 2008 amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis june 2003 issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares common stock conversion rate 901224 shares per 1000 principal amount notes prior maturity date certain circumstances may redeem cash part notes june 8 2010 convertible notes eligible conversion option note holders december 31 2008 notes aggregate principal amount 186 million converted 17 million shares company’s common stock february 5 2009 commenced exchange offer outstanding convertible notes offer made pursuant offer exchange related documents dated february 5 2009 completion offer subject conditions described offer documents holders elect exchange notes offer whose notes accepted exchange us receive 901224 shares common stock cash payment 20 per 1000 principal amount notes offer scheduled expire march 9 2009 making offer reduce amount outstanding debt interest expense believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2008 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2008 contractual obligations follows thousands principal interest obligations longterm debt based upon contractual maturities however believe based upon conversion redemption features convertible notes extinguished june 2010 operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include 57 million unrecognized tax benefits due uncertainty respect timing future cash flows december 31 2008 unable make reasonably reliable estimates period cash settlement respective taxing authorities total amounts income tax payable timing tax payments may depend resolution current future tax examinations cannot estimated recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir founded 1978 since grown substantially due increasing demand infrared products across growing number markets combined execution series acquisitions today one world leaders design manufacture marketing thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide thermography business primarily consists design manufacture handheld thermal imaging systems detect measure small temperature differences useful wide variety industrial commercial applications uses thermography products include highend predictive preventative maintenance research development test measurement leak detection scientific analysis growing distribution network enabled us penetrate existing emerging markets applications worldwide commercial vision systems business focused development manufacture sale generally lower cost uncooled products emerging commercial markets primary requirement see night adverse conditions markets developing rapidly include uses automotive night vision recreational marine firefighting airborne law enforcement commercial security commercial vision systems also sells camera cores readout integrated circuits subcomponents oems certain markets infrared sensor business supplies internal external customers also part commercial vision systems vertical integration infrared sensors provides us ability design produce infrared detectors allowing us reduce costs open new markets effective january 1 2010 company began consolidation commercial vision systems thermography divisions one unit commercial systems division new division continue focus large potential growth commercial industrial markets create value commonality distribution customers strategic product development focused uncooled infrared technology 2010 however continue report financial results former commercial vision systems division thermography division undergo transition consolidating two segments expect thermography commercial vision systems substantially consolidated end 2010 expect report financial results commercial systems single segment 2011 government systems business focused primarily markets high performance required primary market products government customers use handheld fixed mounted products applications force protection counter terrorism search rescue perimeter security navigation safety law enforcement narcotics detection maritime border patrol antipiracy substantial portion revenue government systems business derived sales government agencies continuing expand military program business united states internationally international revenue accounted approximately 41 percent 38 percent 39 percent revenue 2009 2008 2007 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kroner british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments frequent requirement certain customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products many government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2009 accounts receivable balance 2350 million reported net allowances doubtful accounts 20 million believe reported allowances december 31 2009 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2009 inventories 2165 million stated net inventory writedowns 186 million actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value goodwill may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable business divisions company current review indicates adjustments necessary goodwill assets carrying value 2623 million december 31 2009 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 87 million december 31 2009 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits likely recognized valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2009 determined valuation allowance net deferred tax assets 186 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 2009 2008 2007 revenue 2009 totaled 11471 million increase 65 percent 2008 revenue 10770 million revenue government systems business segment increased 152 percent 5690 million 2008 6553 million 2009 increase primarily due increase unit sales largegimbaled systems effects exchange rates decreased government systems revenue 29 percent 2008 thermography revenue decreased 128 percent 3273 million 2008 2855 million 2009 decrease thermography revenue primarily due worldwide economic conditions 2009 lower demand highvalue products currency translation effects exchange rates decreased thermography revenue 2009 36 percent 2008 commercial vision systems revenue increased 142 percent 1806 million 2008 2063 million 2009 increase commercial vision systems revenue primarily due increases unit sales across product lines effects exchange rates decreased commercial vision systems revenue 21 percent 2008 impacts revenue expenses arising business acquisitions 2009 significant 2009 results operations revenue 2008 totaled 10770 million increase 382 percent 7794 million revenue 2007 revenue government systems business segment increased 488 percent 3823 million 2007 5690 million 2008 increase primarily due increase unit sales across product lines increase longterm program business thermography revenue increased 655 million 250 percent 2618 million 2007 3273 million 2008 excluding revenue extech instruments corporation “extech” acquired fourth quarter 2007 cedip infrared systems “cedip” acquired first quarter 2008 thermography revenue increased 51 percent 2008 2007 increase 2008 primarily due increased unit sales tseries™ iseries™ scseries™ product lines offset decreased unit sales pseries™ eseries™ product lines addition 2008 thermography revenue negatively impacted decline swedish kroner united states dollar fourth quarter 2008 revenue commercial vision systems business segment increased 336 percent 1352 million 2007 1806 million 2008 increase commercial vision systems revenue primarily due increase unit sales across major product lines segment international revenue 2009 totaled 4748 million representing 414 percent revenue compares international revenue 2008 totaled 4078 million representing 379 percent revenue 3019 million 2007 representing 387 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states account significant portion total revenue longterm basis gross profit gross profit 2009 574 percent revenue compared 563 percent revenue 2008 increase gross profit percentage revenue primarily due cost production efficiencies related increased volume product mix lower production costs sweden estonia facilities gross profit 2008 563 percent revenue compared 556 percent 2007 increase gross profit percentage revenue primarily due cost efficiencies realized increased volumes government systems commercial vision systems manufacturing facilities slightly offset lower gross profit percentage recognized extech cedip cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs research development research development expenses 913 million 80 percent revenue 2009 compared 900 million 84 percent revenue 2008 725 million 93 percent revenue 2007 decrease research development expenses percentage revenue three year period primarily due cost containment efforts salary freezes reduction consultant expenses response weak economic conditions due currency translation believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis also incurred expenses associated customer funded design development contracts expenses 54 million 2009 60 million 2008 89 million 2007 expenses reported cost goods sold since related funding reported revenue selling general administrative expenses selling general administrative expenses 2199 million 192 percent revenue 2009 compared 2317 million 215 percent revenue 2008 1689 million 217 percent revenue 2007 decrease selling general administrative expenses 2008 2009 primarily due cost containment efforts response economic conditions currency translation lower annual incentive compensation costs 2009 2008 incurred significant legal costs related legal matter described note 13 “contingencies” notes consolidated financial statements increase selling general administrative expenses 2007 2008 due continued growth business including costs associated new product launches increased performance incentive stockbased compensation costs anticipate selling general administrative expenses future increase slower rate revenue interest expense interest expense totaled 69 million 143 million 153 million years ended december 31 2009 2008 2007 respectively interest expense primarily attributable interest convertible notes issued june 2003 amortization discounts recorded notes costs related issuance notes decrease interest expense 2009 primarily due conversion outstanding convertible notes fourth quarter 2008 third fourth quarters 2009 exchange portion convertible notes pursuant company’s exchange offer first quarter 2009 interest income interest income 17 million 74 million 56 million years ended december 31 2009 2008 2007 respectively decrease interest income 2009 compared 2008 primarily due lower interest rates 2009 increase interest income 2008 2007 primarily due increase invested cash income net reported expense 18 million 2009 income 128 million 39 million 2008 2007 respectively expense 2009 primarily currency losses offset investment gains income 2008 2007 primarily currency gains transactions denominated currencies functional currency european operations income taxes income tax provision 1102 million 894 million 525 million 2009 2008 2007 respectively effective tax rates 2009 2008 2007 324 percent 308 percent 282 percent respectively mix taxable income united states international operations impacted income tax provisions years effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign tax credits federal state tax credits december 31 2009 united states tax net operating loss carryforwards totaling approximately 58 million expire 2029 addition company colorado state net operating loss carryforwards totaling approximately 39 million expire 2029 tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded believe net deferred tax assets 186 million reflected december 31 2009 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon therefore recorded valuation allowance liquidity capital resources december 31 2009 4220 million cash equivalents compared 2894 million december 31 2008 increase cash equivalents primarily due cash provided operations cash proceeds tax benefits generated stockbased compensation programs offset business acquisitions capital expenditures repurchase common stock cash provided operating activities 2009 totaled 2718 million compared 2183 million 2008 increase cash provided operating activities primarily due increase net earnings lower level net cash used 2009 compared 2008 operating assets liabilities principally accounts receivable inventories accrued payroll cash used investing activities year ended december 31 2009 totaled 1077 million primarily consisting acquisitions salvador omnitech directed perception capital expenditures cash used investing activities year ended december 31 2008 totaled 1140 million primarily consisting acquisitions cedip ifara tecnologias l capital expenditures cash used financing activities year ended december 31 2009 totaled 435 million primarily consisting repurchase approximately 32 million shares common stock offset proceeds shares issued tax benefits recognized stockbased compensation plans cash provided financing activities year ended december 31 2008 totaled 26 million primarily consisting proceeds shares issued tax benefits recognized stockbased compensation plans offset repurchase approximately 12 million shares common stock repayments shortterm debt october 6 2006 signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting us certain designated subsidiaries borrow euro kroner pound sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon leverage ratio eurodollar interest rate 1001 percent prime lending rate 325 percent december 31 2009 rates 2175 percent 325 percent respectively december 31 2008 credit agreement requires us pay commitment fee amount unused credit rate based leverage ratio ranges 0175 percent 0325 percent december 31 2009 2008 commitment fee rate 0175 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum level liquidity comprised cash undrawnunutilized availability credit agreement credit agreement collateralized substantially assets company december 31 2009 2008 amounts outstanding credit agreement 78 million 158 million letters credit outstanding credit agreement december 31 2009 2008 respectively reduces total available credit sweden subsidiary 30 million swedish kroner approximately 42 million line credit interest rate 095 percent december 31 2009 december 31 2009 amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis june 2003 issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares common stock conversion rate 901224 shares per 1000 principal amount notes prior maturity date certain circumstances may redeem cash part notes june 8 2010 convertible notes eligible conversion option note holders february 5 2009 commenced exchange offer outstanding convertible notes offer made pursuant offer exchange related documents dated february 5 2009 holders elected exchange notes offer whose notes accepted exchange us received 901224 shares common stock cash payment 20 per 1000 principal amount notes offer expired march 9 2009 notes aggregate principal amount 999 million exchanged pursuant exchange offer approximately 90 million shares company’s common stock approximately 20 million cash addition july 2009 convertible notes aggregate principal amount 301 million converted approximately 27 million shares company’s common stock december 2009 convertible notes aggregate principal amount 27 million converted 244000 shares company’s common stock december 31 2009 notes aggregate principal amount 1512 million exchanged converted approximately 136 million shares company’s common stock anticipate remaining note holders exercise option convert remaining notes june 2010 believe existing cash combined cash anticipate generate operating activities available credit facilities financing available sources sufficient meet cash requirements foreseeable future significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2009 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2009 contractual obligations follows thousands principal interest obligations longterm debt based upon contractual maturities however believe based upon conversion redemption features convertible notes extinguished june 2010 operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include 83 million unrecognized tax benefits due uncertainty respect timing future cash flows december 31 2009 unable make reasonably reliable estimates period cash settlement respective taxing authorities total amounts income tax payable timing tax payments may depend resolution current future tax examinations cannot estimated include approximately 123 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir systems inc “flir” “company” “we” “us” “our” world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs multitude customers sell offtheshelf products wide variety markets efficient timely affordable manner well offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs december 31 2013 business organized two divisions commercial systems government systems within divisions five reporting segments thermal vision measurement raymarine comprise commercial systems division surveillance detection integrated systems make government systems division detailed description segments see “business segments” within item 1 effective january 1 2014 realigning business operations resulting elimination division structure formation six operating segments managements discussion analysis financial condition results operations prepared reported based reporting structure december 31 2013 international revenue accounted approximately 50 percent 49 percent 48 percent revenue 2013 2012 2011 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect certain exogenous macroeconomic factors including reduced spending united states government agencies economic weaknesses certain geographic markets present challenges us render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2013 accounts receivable balance 2866 million reported net allowances doubtful accounts 77 million believe reported allowances december 31 2013 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2013 inventories 3447 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill third quarter year interim basis warranted impairment determine events changes business conditions indicate carrying value goodwill may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable reporting units company review current year indicated adjustments necessary goodwill assets carrying value 5757 million december 31 2013 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy record warranty liabilities levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 177 million december 31 2013 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2013 determined valuation allowance net deferred tax assets 135 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding 2 certain expenses reclassified conform presentation year ended december 31 2013 see note 1 consolidated financial statements item 8 additional information following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2013 2012 2011 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months operating results 2012 include amounts either operations lorex technology inc lorex traficon international nv traficon acquired december 2012 amounts significant revenue 2013 totaled 14964 million increase 65 percent 2012 revenue 14054 million increase primarily due increased revenue thermal vision measurement raymarine integrated systems segments thermal vision measurements 2013 revenue included revenue acquisitions lorex traficon continued reductions demand certain products united states government agencies resulted decreased revenues surveillance detection segments revenue united states government customers declined 186 million 2012 2013 revenue 2012 totaled 14054 million decrease 90 percent 2011 revenue 15441 million operating segments except integrated systems reported decreases year revenues due reduced demand products united states government middle east government agencies weaker worldwide economic conditions resulting lower demand many commercial product lines decline 1387 million year revenue included decline 713 million united states government customers international revenue 2013 totaled 7407 million representing 495 percent revenue compares international revenue 2012 totaled 6875 million representing 489 percent revenue 7406 million 2011 representing 480 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold year ended december 31 2013 2012 7594 million 6702 million respectively increase primarily due increase revenues year discussed changes product mix addition year ended december 31 2013 cost goods sold included 17 million inventory write downs related restructuring activities cost goods sold 2012 6702 million compared cost goods sold 7147 million 2011 year decrease cost goods sold primarily relates lower year revenues changes product mix year ended december 31 2011 costs goods sold included charges 73 million amortization fair value adjustments inventory acquired acquisition icx 2010 cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2013 7370 million compared 7352 million 2012 gross margin defined gross profit divided revenue decreased 523 percent 2012 493 percent 2013 decrease gross margin 2013 primarily due unfavorable product mix surveillance thermal vision measurement segments inclusion lower gross margin revenues acquisition lorex portion thermal vision measurement segment gross profit year ended december 31 2012 7352 million compared 8293 million 2011 gross margin decreased 537 percent 2011 523 percent 2012 decrease gross profit 2012 primarily due lower revenue year lower consolidated gross margin gross margin decreased 2012 2011 primarily due shift product mix thermal vision measurement surveillance segments reduced absorption fixed costs due lower revenues partially offset elimination 2011 amortization expenses related fair value adjustments inventory icx research development research development expenses 1477 million 99 percent revenue 2013 compared 1374 million 98 percent revenue 2012 1472 million 95 percent revenue 2011 increase research development expenses 2013 partially due costs associated development several new products primarily thermal vision measurement segment operations lorex traficon decrease research development expenses 2012 2011 primarily due cost containment efforts light decrease revenue believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 3227 million 216 percent revenue 2013 compared 2925 million 208 percent revenue 2012 3689 million 239 percent revenue 2011 increase selling general administrative expenses 2013 primarily due higher compensation expense inclusion expenses lorex traficon decrease selling general administrative expenses 2011 2012 primarily due payment 390 million litigation settlement 2011 cost control efforts taken 2012 light revenue decline lower annual incentive expenses selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses restructuring expenses years ended december 31 2013 2012 recorded net pretax restructuring expenses totaling 275 million 20 million respectively restructuring expenses recorded 2013 258 million recorded operating expenses 17 million included costs goods sold fourth quarter 2013 initiated realignment plan includes closing six nottoscale sites united states europe transfer operations larger facilities also consolidating optics laser manufacturing businesses better realize benefits vertical integration areas total costs expected incurred related realignment plan approximately 38 million expect complete majority actions recognize remaining expenses approximately 11 million year ending december 31 2014 specific plans significant additional actions finalized time 2012 recorded restructuring expenses associated relocation one manufacturing facilities europe existing facility united states interest expense interest expense totaled 141 million 117 million 55 million years ended december 31 2013 2012 2011 respectively interest expense primarily attributable 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 issued august 2011 amortization costs related issuance notes 150 million term loan drawn april 5 2013 income taxes income tax provision 520 million 666 million 884 million 2013 2012 2011 respectively effective tax rates 2013 2012 2011 227 percent 228 percent 284 percent respectively mix taxable income united states international operations significant impact annual income tax provision effective tax rates effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign federal state tax credits discrete items amended tax filings business dispositions full year impact multiyear agreement effective august 1 2012 european jurisdiction primary reason effective tax rate 2013 comparable 2012 effective tax rate decrease 2011 2012 primarily due partial year impact multiyear agreement effect amended state tax filings impact revaluations deferred tax assets liabilities due changes certain foreign statutory tax rates expect effective tax rate 2014 approximately 23 25 percent excluding discrete items december 31 2013 united states tax net operating loss carryforwards totaling approximately 398 million expire 2018 2031 addition various state net operating loss carryforwards totaling approximately 751 million expire 2018 2033 federal state net operating losses primarily generated icx technologies inc prior acquired us 2010 finally various foreign net operating loss carryforwards totaling approximately 1015 million expire 2018 2033 tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded believe net deferred tax assets 440 million reflected december 31 2013 consolidated balance sheet materially realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 135 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized discontinued operations 2010 connection acquisition icx began pursue sale certain business units icx results operations business units reported discontinued operations respective dispositions second quarter 2012 sold remaining two business units reported discontinued operations operating losses operations including insignificant associated losses recognized subsequent disposal net losses sales units net tax reflected consolidated statements income year ended december 31 2012 segment operating results three year period ended december 31 2013 five operating segments following discusses operating results segment three year period thermal vision measurement thermal vision measurement operating results follows millions thermal vision measurement revenue increased 159 percent 2013 compared 2012 primarily due combined revenue 1232 million reported lorex traficon offset slightly lower revenues several product lines portion due lower demand cores components customers including united states government funded customers earnings operations decreased 58 percent primarily due restructuring charges 174 million recognized 2013 offset inclusion earnings operations acquired businesses revenue decreased 49 percent 2012 compared 2011 primarily due lower revenues cores components product line premium thermography product lines revenue declined geographies due worldwide economic weaknesses particularly significant europe middle east africa regions united states revenue adversely impacted lower revenue cores components customers earnings operations decreased 120 percent due flow lower revenues lower absorption factory costs partially offset 55 percent reduction operating expenses raymarine operating results follows millions raymarine segment revenue year ended december 31 2013 increased 32 percent compared 2012 year increase revenue primarily due increased deliveries americas europe partially related new product introductions increase earnings operations year ended december 31 2013 compared 2012 primarily due realizing benefit 2013 cost containment efforts taken 2012 higher revenues 2013 raymarine segment revenue year ended december 31 2012 decreased 78 percent compared 2011 primarily due weak market conditions europe earnings operations 2012 decreased 59 percent compared 2011 primarily due lower revenue resulting lower gross profit largely offset 99 percent reduction operating expenses surveillance operating results follows millions surveillance segment revenue decreased 61 percent 2013 compared 2012 primarily due reduced procurement activity united states government agencies earnings operations declined 213 percent due lower revenues lower gross margins resulting change segment product mix restructuring charges 36 million backlog decline 2013 also result reduced united states government procurement activity revenue decreased 158 percent 2012 compared 2011 primarily due 266 percent decrease revenue united states government customers earnings operations declined 232 percent due lower revenues lower gross margins resulting change segment product mix partially offset 105 percent decrease operating expenses detection operating results follows millions detection segment revenue year ended december 31 2013 decreased 160 percent compared 2012 primarily due lower research development contract revenues pursuant segments strategy reduce customerpaid research development activity began 2011 loss earnings operations 2013 2012 included restructuring charges 42 million 20 million respectively detection segment revenue year ended december 31 2012 decreased 208 percent compared period 2011 primarily due two significant program deliveries 2011 lower research development contract revenues loss operations 2011 included amortization fair value adjustments inventory 42 million elimination fair value inventory adjustment 279 percent reduction operating expenses partially offset lower revenues main factors contributing improvement operating results 2012 compared 2011 integrated systems integrated systems operating results follows millions integrated systems segment revenue year ended december 31 2013 increased 375 percent increase primarily due timing large program deliveries united states government programs ordered prior years decrease earnings operations 2013 primarily due lower margins recognized program deliveries 2013 including large program segment recognized loss earnings operations 2013 included restructuring charges 18 million decline backlog 2013 primarily due large program deliveries 2013 reduced united states government order activity integrated systems segment revenue year ended december 31 2012 increased 267 percent 2011 primarily due increase large program revenue recognized year backlog december 31 2012 reflects increase due several large program contracts booked 2012 liquidity capital resources december 31 2013 total 5425 million cash equivalents 2210 million united states 3215 million foreign subsidiaries compared cash equivalents december 31 2012 3217 million 1503 million united states 1714 million foreign subsidiaries intend indefinitely reinvest cash foreign subsidiaries operations activities outside united states increase cash equivalents 2013 primarily due 150 million borrowed term loan facility cash operations partially offset 1621 million spent repurchase shares common stock 721 million spent capital expenditures business acquisitions dividends paid 514 million 2013 cash provided operating activities 2013 totaled 3550 million compared 2855 million 2012 2439 million 2011 increase cash provided operations 2013 compared 2012 primarily due higher net collections accounts receivable decrease inventories increase cash provided operating activities 2012 compared 2011 primarily due year reduction cash used certain working capital components particularly inventories income tax related assets liabilities cash used investing activities year ended december 31 2013 totaled 721 million primarily consisting capital expenditures 521 million acquisition marine remote sensing solutions ltd 32 million acquisition certain tangible assets intellectual property related design manufacturing waferlevel optics digitaloptics corporation east 149 million capital expenditures 2013 included equipment purchases tvm anticipation production new generation detector capital expenditures 581 million 2012 included building improvements facilities nashua new hampshire taby sweden croissybeaubourg france equipment requirements existing future product lines cash used investing activities year ended december 31 2011 totaled 671 million primarily consisting acquisition aerius photonics llc 270 million capital expenditures 419 million capital expenditures 2011 included purchase building fareham united kingdom building improvements facilities nashua new hampshire taby sweden cash used financing activities year ended december 31 2013 totaled 661 million primarily consisting repurchase shares common stock payment dividends offset net borrowings 1388 million new term loan facility cash used financing activities year ended december 31 2012 totaled 2443 million primarily consisting payment dividends repurchases common stock cash provided financing activities year ended december 31 2011 totaled 754 million primarily consisting net proceeds 2477 million issuance 375 percent senior unsecured notes due september 1 2016 notes cash provided stockbased compensation plans partially offset payment dividends repurchase common stock february 8 2011 signed credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility february 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 150 million time prior april 5 2018 credit agreement allows us borrow united states dollars euros swedish kronor pound sterling japanese yen canadian dollars australian dollars agreed upon currencies credit agreement requires us pay commitment fee amount unused credit rate based company’s total leverage ratio ranges 025 percent 040 percent credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio compliance december 31 2013 fiveyear revolving line credit available credit agreement term loan facility thereunder secured assets noted credit agreement amendment april 5 2013 incorporated 150 million term loan facility matures april 5 2019 april 5 2013 drew 150 million term loan facility electing onemonth libor basis interest rate interest accrued libor plus scheduled spread paid monthly entering interest rate swap agreements effectively fixed basis calculating interest rate term loan effective interest rate paid equal fixed rate swap agreements plus credit spread effect december 31 2013 effective interest rate term loan 249 percent principal payments 375 million made quarterly installments commenced june 30 2013 continue december 31 2018 final maturity payment including accrued interest due april 5 2019 december 31 2013 revolving loans outstanding credit agreement commitment fee amount unused revolving credit 030 percent 195 million 106 million letters credit outstanding credit agreement december 31 2013 2012 respectively reduced total available revolving credit agreement august 19 2011 company issued 250 million aggregate principal amount notes net proceeds issuance notes approximately 2477 million deducting underwriting discounts offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases common stock believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2013 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2013 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts company cannot make reasonably reliable estimate period potential cash settlement unrecognized tax benefits 295 million therefore included unrecognized tax benefits table significant contractual obligations december 31 2013 detail unrecognized tax benefits see note 14 consolidated financial statements item 8 include approximately 195 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications 2014 also introduced first consumeroriented thermal imaging accessory mobile devices business model meets needs wide range customers sell offtheshelf products many markets also offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs effective january 1 2014 realigned business operations resulted elimination former divisional structure formation six new operating segments managements discussion analysis financial condition results operations prepared reported based reporting structure january 1 2014 detailed description segments see business segments within item 1 international revenue accounted approximately 50 percent 50 percent 49 percent revenue 2014 2013 2012 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations 2014 experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including reduced spending united states government agencies economic weaknesses certain geographic markets continue present challenges us render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2014 accounts receivable balance 3547 million reported net allowances doubtful accounts 80 million believe reported allowances december 31 2014 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2014 inventories 3206 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill represents excess purchase price acquired enterprise assets estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets exceeds fair value may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process qualitative factors may consider include limited macroeconomic conditions industry conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance indicators goodwill impaired proceed twostep impairment test whereby first step comparing fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying value goodwill impaired testing performed second step performed carrying value reporting unit exceeds fair value carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded impairment test current year indicate impairment goodwill reporting units product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy record warranty liabilities levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 162 million december 31 2014 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2014 determined valuation allowance deferred tax assets 133 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2014 2013 2012 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months revenue 2014 totaled 15307 million increase 23 percent 2013 revenue 14964 million year revenue growth primarily due increases commerciallyoriented segments instruments oem emerging markets maritime security offset declines surveillance detection segments continued reductions demand certain products united states government agencies resulted decreased revenues surveillance detection segments revenue united states government customers declined 445 million 2013 2014 revenue 2013 totaled 14964 million increase 65 percent 2012 revenue 14054 million operating segments reported increases year revenues revenue 2013 also included revenue december 2012 acquisitions lorex traficon revenue united states government customers declined 186 million 2012 2013 international revenue 2014 totaled 7667 million representing 501 percent revenue compares international revenue 2013 totaled 7407 million representing 495 percent revenue 6875 million 2012 representing 489 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold year ended december 31 2014 2013 7803 million 7594 million respectively increase primarily due increase revenues year discussed changes product mix years ended december 31 2014 2013 cost goods sold included 06 million 17 million respectively inventory write downs related restructuring activities cost goods sold 2013 7594 million compared cost goods sold 6702 million 2012 year increase cost goods sold primarily relates higher year revenues changes product mix cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2014 7504 million compared 7370 million 2013 gross margin defined gross profit divided revenue decreased slightly 493 percent 2013 490 percent 2014 gross profit year ended december 31 2013 7370 million compared 7352 million 2012 gross margin decreased 523 percent 2012 493 percent 2013 decrease gross margin 2013 primarily due unfavorable product mix surveillance instruments segments inclusion lower gross margin revenues acquisition lorex research development research development expenses 1428 million 93 percent revenue 2014 compared 1477 million 99 percent revenue 2013 1374 million 98 percent revenue 2012 increase research development expenses 2013 partially due costs associated development several new products primarily instruments oem emerging markets segments operations lorex traficon believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 3320 million 217 percent revenue 2014 compared 3227 million 216 percent revenue 2013 2925 million 208 percent revenue 2012 increase selling general administrative expenses 2014 primarily due increases marketing spending 138 million increase corporate expenses largely related higher legal expenses incurred litigation matters ordinary course business anticipated costs regulatory settlement partially offset costs savings arising result restructuring activities increase selling general administrative expenses 2013 primarily due higher compensation expense inclusion expenses lorex traficon selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses restructuring expenses years ended december 31 2014 2013 2012 recorded net pretax restructuring expenses totaling 170 million 275 million 20 million respectively restructuring expenses recorded 2014 164 million recorded operating expenses 06 million recorded costs goods sold restructuring expenses recorded 2013 258 million recorded operating expenses 17 million included costs goods sold fourth quarter 2013 initiated realignment plan included closing six nottoscale sites united states europe transfer operations larger facilities also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas total costs expected incurred related realignment plan approximately 45 million expect complete majority actions recognize remaining expenses approximately 07 million year ending december 31 2015 2012 also recorded restructuring expenses associated relocation one manufacturing facilities europe existing facility united states interest expense interest expense totaled 146 million 141 million 117 million years ended december 31 2014 2013 2012 respectively interest expense primarily attributable 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 issued august 2011 amortization costs related issuance notes 150 million term loan drawn april 5 2013 income taxes income tax provision 493 million 520 million 666 million 2014 2013 2012 respectively effective tax rates 2014 2013 2012 197 percent 227 percent 228 percent respectively mix taxable income united states international operations significant impact annual income tax provision effective tax rates effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign federal state tax credits discrete items release previously recorded tax reserves related tax positions longer required due closure statute audit settlements amended tax filings decrease effective tax rate 2013 2014 primarily due larger amount favorable discrete items recognized 2014 expect effective tax rate 2015 approximately 24 percent excluding discrete items december 31 2014 united states tax net operating loss carryforwards totaling approximately 169 million expire 2018 2031 addition various state net operating loss carryforwards totaling approximately 496 million expire 2015 2033 federal state net operating losses primarily generated icx technologies inc prior acquired us 2010 finally various foreign net operating loss carryforwards totaling approximately 745 million expire 2018 2033 tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2014 determined valuation allowance deferred tax assets 133 million required primarily related certain acquired net operating losses review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized discontinued operations 2010 connection acquisition icx began pursue sale certain business units icx results operations business units reported discontinued operations respective dispositions second quarter 2012 sold remaining two business units reported discontinued operations operating losses operations including insignificant associated losses recognized subsequent disposal net losses sales units net tax reflected consolidated statements income year ended december 31 2012 segment operating results effective january 1 2014 realigned business resulted elimination former divisional structure formation six reportable operating segments results years ended december 31 2013 2012 reclassified conform presentation year ended december 31 2014 following discusses operating results segment three year period surveillance operating results follows millions except percentages surveillance revenue decreased 74 percent 2014 compared 2013 primarily due continued reductions demand us government funded customers earnings operations decreased 74 percent primarily due decrease revenue partially offset cost savings generated result restructuring activities revenue decreased 51 percent 2013 compared 2012 primarily due reductions demand us government funded customers earnings operations decreased 282 percent due lower revenues lower gross margins resulting changes product mix restructuring charges 54 million backlog decline 2013 also result reduced us government procurement activity instruments operating results follows millions except percentages instruments segment revenue year ended december 31 2014 increased 49 percent compared 2013 year increase revenue primarily due increased deliveries geographic regions across product lines particularly products introduced late 2013 2014 increase earnings operations year ended december 31 2014 compared 2013 primarily due higher revenues lower restructuring expenses cost savings generated restructuring activities instruments segment revenue year ended december 31 2013 decreased slightly 04 percent compared 2012 primarily due weak market conditions europe earnings operations 2013 decreased 70 percent compared 2012 primarily due lower revenue resulting lower gross profit 155 million restructuring expenses recorded 2013 oem emerging markets oem emerging markets operating results follows millions except percentages oem emerging markets segment revenue increased 95 percent 2014 compared 2013 primarily due increased deliveries customers us particularly uncooled camera cores newly introduced mobile accessories earnings operations increased 222 percent due increase revenues cost savings restructuring activities revenue increased 63 percent 2013 compared 2012 primarily due inclusion revenue traficon 2013 earnings operations declined 150 percent due lower gross margins resulting change segment product mix maritime operating results follows millions except percentages maritime segment revenue year ended december 31 2014 increased 19 percent compared 2013 primarily due higher deliveries europe year unit volume increases raymarinebranded product lines maritime segment revenue year ended december 31 2013 increased 60 percent compared period 2012 primarily due increased deliveries americas europe partially related new product introductions increase earnings operations 2013 primarily due realizing benefit 2013 cost containment efforts taken 2012 higher revenues 2013 security operating results follows millions except percentages security segment revenue year ended december 31 2014 increased 270 percent increase primarily due increased deliveries product families expanded distribution increase earnings operations 434 percent primarily due increase year revenues partially offset increased marketing customer technical support product development expenses increase backlog primarily due increase orders international customers often longer delivery times security segment revenue earnings operations year ended december 31 2013 increased 1711 percent 146 percent 2012 respectively primarily due inclusion operating results lorex 2013 detection operating results follows millions except percentages detection segment revenue year ended december 31 2014 decreased 50 percent decline year revenue 2014 compared 2013 primarily due reduced deliveries us customers across product lines increase earnings operations 2014 primarily due realizing benefit 2014 restructuring measures taken 2013 increase backlog due large contract us customer calls deliveries 2015 detection segment revenue year ended december 31 2013 increased 116 percent 2012 primarily due 55 million deliveries major program 2013 liquidity capital resources december 31 2014 total 5314 million cash equivalents 1641 million united states 3673 million foreign subsidiaries compared cash equivalents december 31 2013 5425 million 2210 million united states 3215 million foreign subsidiaries intend indefinitely reinvest cash foreign subsidiaries operations activities outside united states decrease cash equivalents 2014 primarily due cash operations 2262 million offset primarily 1392 million spent repurchase shares common stock 613 million spent capital expenditures dividends paid 565 million 2014 cash provided operating activities 2014 totaled 2262 million compared 3550 million 2013 2855 million 2012 decrease cash provided operations 2014 compared 2013 primarily due lower net collections accounts receivable increase cash provided operations 2013 compared 2012 primarily due higher net collections accounts receivable decrease inventories cash used investing activities year ended december 31 2014 totaled 493 million primarily consisting capital expenditures 613 million partially offset 120 million proceeds sale certain tangible assets intellectual property related design manufacturing nonthermal microoptics cash used investing activities year ended december 31 2013 totaled 721 million primarily consisting capital expenditures 521 million acquisition marine remote sensing solutions ltd 32 million acquisition certain tangible assets intellectual property related design manufacturing waferlevel optics digitaloptics corporation east 149 million capital expenditures 2013 included equipment purchases oem emerging markets segment related development new lepton camera core capital expenditures 581 million 2012 included building improvements facilities nashua new hampshire taby sweden croissybeaubourg france equipment requirements existing future product lines cash used financing activities year ended december 31 2014 totaled 1520 million primarily consisting repurchase shares common stock payment dividends partially offset proceeds shares issued pursuant stockbased compensation plans cash used financing activities year ended december 31 2013 totaled 661 million primarily consisting payment dividends repurchases common stock offset net borrowings 1388 million term loan facility february 8 2011 signed credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility february 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 150 million time prior april 5 2018 credit agreement allows us borrow united states dollars euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies credit agreement requires us pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio ranges 025 percent 040 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio compliance december 31 2014 fiveyear revolving line credit available credit agreement term loan facility thereunder secured assets noted credit agreement amendment april 5 2013 incorporated 150 million term loan facility matures april 5 2019 april 5 2013 drew 150 million term loan facility electing onemonth libor basis interest rate interest accrued libor plus scheduled spread paid monthly entering interest rate swap agreements effectively fixed basis calculating interest rate term loan effective interest rate paid equal fixed rate swap agreements plus credit spread effect december 31 2014 effective interest rate term loan 249 percent per annum principal payments term loan 375 million made quarterly installments commenced june 30 2013 continue december 31 2018 final maturity payment term loan including accrued interest due april 5 2019 december 31 2014 revolving loans outstanding credit agreement commitment fee amount unused revolving credit 030 percent per annum 440 million 195 million letters credit outstanding credit agreement december 31 2014 2013 respectively reduced total available revolving credit agreement august 19 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 notes net proceeds issuance notes approximately 2477 million deducting underwriting discounts offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes include working capital expenditure needs business acquisitions repurchases common stock united states income taxes provided accumulated earnings certain subsidiaries outside united states currently intend reinvest earnings operations outside united states indefinitely subsequently elect repatriate foreign earnings would need accrue pay united states income taxes thereby reducing amount cash believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2014 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2014 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts company cannot make reasonably reliable estimate period potential cash settlement unrecognized tax benefits 154 million therefore included unrecognized tax benefits table significant contractual obligations december 31 2014 detail unrecognized tax benefits see note 14 consolidated financial statements item 8 include approximately 440 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs wide range customers sell offtheshelf products many markets also offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs managements discussion analysis financial condition results operations prepared reported based reporting structure six operating segments detailed description segments see business segments within item 1 international revenue accounted approximately 46 percent 47 percent 49 percent revenue 2016 2015 2014 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations 2016 experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including reduced spending united states government agencies economic weaknesses certain geographic markets continue present challenges us render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition allowance doubtful accounts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition revenue recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated contractual terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2016 accounts receivable balance 3520 million reported net allowances doubtful accounts 65 million believe reported allowances december 31 2016 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2016 inventories 3714 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill represents excess purchase price acquired enterprise assets estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process qualitative factors may consider include limited macroeconomic conditions industry conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance indicators goodwill impaired proceed twostep impairment test whereby first step comparing fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying value goodwill impaired testing performed second step performed carrying value reporting unit exceeds fair value carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded impairment test current year indicate impairment goodwill reporting units product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy record warranty liabilities levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 208 million december 31 2016 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals disclosures adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2016 determined valuation allowance deferred tax assets 29 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain believe positions taken appropriate reserves taxes address potential exposures involving tax positions challenged could challenged tax authorities record benefit tax position determine likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained measure tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available reporting date review tax reserves circumstances warrant adjust reserves changes available facts arise affect potential liability additional taxes consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2016 2015 2014 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months revenue 2016 totaled 16622 million increase 67 percent 2015 revenue 15571 million year revenue growth primarily due increases oem emerging surveillance security segments partially offset decline instruments segment acquisitions made year ended december 31 2016 constitute approximately 21 consolidated revenue 2015 totaled 15571 million increase 17 percent 2014 revenue 15307 million year revenue growth primarily due increases security detection segments partially offset declines surveillance instruments oem emerging markets maritime segments revenue increase negatively impacted year changes foreign currency rates particularly instruments maritime segments international revenue 2016 totaled 7586 million representing 456 percent revenue compares international revenue 2015 totaled 7266 million representing 467 percent revenue 7470 million 2014 representing 488 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold years ended december 31 2016 2015 8950 million 8035 million respectively increase primarily due increase revenues year discussed changes product mix increased manufacturing variances period costs cost goods sold 2015 8035 million compared cost goods sold 7803 million 2014 increase primarily due increase revenues year discussed changes product mix cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2016 7671 million compared 7536 million 2015 gross margin defined gross profit divided revenue decreased 484 percent 2015 462 percent 2016 primarily due changes product mix increased manufacturing variances period costs gross profit year ended december 31 2015 7536 million compared 7504 million 2014 gross margin decreased slightly 490 percent 2014 484 percent 2015 primarily due changes product mix negative impact year changes foreign currency rates research development research development expenses 1475 million 89 percent revenue 2016 compared 1329 million 85 percent revenue 2015 1428 million 93 percent revenue 2014 believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 3224 million 194 percent revenue 2016 compared 3135 million 201 percent revenue 2015 3320 million 217 percent revenue 2014 increase selling general administrative expenses 2016 compared 2015 primarily due increase selling expenses support increase revenue mentioned well increased operating expenses associated acquisitions dvtel november 2015 armasight june 2016 decrease selling general administrative expenses percentage revenue 2016 compared 2015 due successful implementation cost cutting measures 2016 decrease selling general administrative expenses 2015 compared 2014 primarily due 156 million decrease corporate expenses primarily related 2014 legal expenses incurred litigation matters costs regulatory settlement selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses restructuring expenses years ended december 31 2016 2015 2014 recorded net pretax restructuring expenses totaling 14 million 14 million 170 million respectively restructuring expenses recorded 2016 2015 recorded operating expenses restructuring expenses recorded 2014 164 million recorded operating expenses 06 million recorded costs goods sold fourth quarter 2013 initiated realignment plan included closing six nottoscale sites united states europe transfer operations larger facilities also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas benefits actions reflected operating results december 31 2016 completed majority actions realignment plan interest expense interest expense totaled 181 million 141 million 146 million years ended december 31 2016 2015 2014 respectively interest expense year primarily associated 250 million aggregate principal amount 375 percent senior unsecured notes repaid july 2016 425 million aggregate principal amount 3125 percent senior unsecured notes issued june 2016 amounts drawn credit facility increase interest expense 2016 compared 2015 primarily due increased amount interest bearing debt well 13 million loss extinguishment 250 million unsecured notes repaid july 2016 expense income net expense totaled 31 million year ended december 31 2016 income totaled 126 million 35 million years ended december 31 2015 2014 respectively change expenses income net 2016 compared 2015 primarily attributed gain sale costbasis investment private technology company year ended december 31 2015 income taxes income tax provision 1093 million 638 million 493 million 2016 2015 2014 respectively effective tax rates 2016 2015 2014 396 percent 209 percent 197 percent respectively mix taxable income united states international operations significant impact annual income tax provision effective tax rates effective tax rate 2016 higher united states federal tax rate 35 percent mainly due discrete charges partially offset mix lower foreign tax rates 2016 discrete items included 396 million primarily related european commission’s decision regarding certain tax legislation belgium impacting one company’s international subsidiaries 2015 discrete items included 121 million release previously recorded tax valuation allowance 2014 discrete items included 94 million release previously recorded unrecognized tax benefits longer required due closure applicable statute expect effective tax rate 2017 approximately 25 percent excluding discrete items december 31 2016 united states tax net operating loss carryforwards totaling approximately 42 million expire 2019 2031 addition various state net operating loss carryforwards totaling approximately 278 million expire 2017 2033 federal state net operating losses primarily generated icx technologies inc prior acquired us 2010 finally various foreign net operating loss carryforwards totaling approximately 743 million portion expire 2018 2033 portion indefinite carryforward period tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2016 determined valuation allowance deferred tax assets 29 million required primarily related certain acquired net operating losses review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized january 11 2016 european commission announced decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid impacts one company’s international subsidiaries belgian government announced appealed decision filed action annulment general court european union july 2016 company filed separate appeal general court european union accordance fasb asc topic 740 “income taxes” company recorded discrete tax expense 396 million 2016 related matter january 10 2017 received tax assessments belgium government similar amount company classified current taxes payable consolidated balance sheet december 31 2016 company filed complaint belgian tax assessments result complaint appeal general court european union new information received belgian government future events may cause income tax provision associated decision entirely partially reversed segment operating results six reportable operating segments following discusses operating results segments three year period surveillance operating results follows millions except percentages surveillance revenue increased 59 percent 2016 compared 2015 increase revenue primarily due acquisition armasight june 2016 earnings operations decreased 05 percent 2016 compared 2015 decrease earnings operations primarily due change product mix sold products lower gross margins 2016 compared 2015 acquisitionrelated amortization costs associated armasight acquisition june 2016 prox dynamics acquisition november 2016 revenue decreased 33 percent 2015 compared 2014 primarily due reductions demand united states government funded customers decreases airborne integrated systems product line revenues partially offset increase revenues land product line earnings operations increased 145 percent primarily due lower operating expenses higher gross margins partially offset decrease revenues year ended december 31 2015 surveillance restructuring charges 02 million compared 52 million 2014 instruments operating results follows millions except percentages instruments segment revenue decreased 33 percent 2016 compared 2015 decrease revenue primarily due revenue decline europe apac regions product line basis declines building predictive maintenance science products lines partially offset increases firefighting automation products lines earnings operations decreased 139 2016 compared 2015 decrease earnings operations due change product mix sold products lower gross margins 2016 compared 2015 increased manufacturing cost underabsorption revenue decreased 19 percent 2015 compared 2014 primarily due revenue decline americas region partially offset increase asia pacific region product line basis declines higher end thermography optical gas imaging product lines partially offset increases science test measurement fire product lines revenues year ended december 31 2015 also negatively impacted year changes currency exchange rates increase earnings operations year ended december 31 2015 compared year ended december 31 2014 primarily due lower restructuring expenses costs savings associated restructuring activities large portion segment expenses incurred europe segment experienced favorable impact operating expenses changes foreign currency rates largely offset associated decline revenues region year ended december 31 2015 instruments recorded restructuring charges 12 million compared 110 million year ended december 31 2014 security operating results follows millions except percentages security segment revenue increased 59 percent 2016 compared 2015 increase revenue primarily due acquisition dvtel november 2015 inclusion associated revenues current year partially offset decrease consumergrade security products earnings operations decreased 639 percent 2016 compared 2015 decrease earnings operations primarily due acquisitionrelated amortization higher operating expenses associated dvtel acquisition security segment revenue year ended december 31 2015 increased 265 percent compared prior year primarily due increased deliveries across product families americas europe geographic regions increase earnings operations 2015 131 percent 2014 primarily due increase revenues partially offset increases sales marketing support operating expenses oem emerging markets oem emerging markets operating results follows millions except percentages oem emerging markets segment revenue increased 305 percent 2016 compared 2015 increase revenue primarily due higher deliveries segment product lines particularly cores components mobile accessories acquisition point grey november 2016 earnings operations increased 453 2016 compared 2015 increase earnings operations primarily due increase revenue decreased 62 percent 2015 compared 2014 primarily due loss approximately 88 million 2014 revenue former optical components group sold august 2014 negative impacts changes currency exchange rates earnings operations declined 2015 compared 2014 primarily due decrease revenue lower gross margins partially offset lower operating expenses maritime operating results follows millions except percentages maritime segment revenue increased 44 percent 2016 compared 2015 increase revenue primarily due increase americas europe regions product basis increased shipments multifunction displays radar thermal cameras offset declines autopilot instrument shipments earnings operations increased 133 2016 compared 2015 increase earnings operations due increase revenue decrease operating expenses partially offset increase warranty costs maritime segment revenue year ended december 31 2015 decreased 76 percent compared period 2014 primarily due negative impact year changes currency exchange rates europe asia pacific regions since majority segments costs goods sold incurred united states dollars costs receive favorable impact changes currency exchange rates consequently decrease earnings operations 2015 compared 2014 primarily due revenue decline detection operating results follows millions except percentages detection segment revenue increased 77 percent 2016 compared 2015 increase revenue primarily due increased shipments cbrne threat response systems united states government customers earnings operations increased 258 percent 2016 compared 2015 increase earnings operations operating margin primarily due increases revenue reduced operating expenses decrease backlog primarily due significant orders cbrne threat response systems received first quarter fourth quarter 2015 delivered 2016 detection segment revenue year ended december 31 2015 increased 345 percent compared 2014 increase revenue primarily due increased deliveries cbrne threat response systems related spare parts services orders received second half 2014 large program united states government increase earnings operations operating margin primarily due increases revenues higher gross margins liquidity capital resources december 31 2016 total 3613 million cash equivalents 983 million united states 2630 million foreign subsidiaries compared cash equivalents december 31 2015 4728 million 1296 million united states 3432 million foreign subsidiaries intend indefinitely reinvest cash foreign subsidiaries operations activities outside united states decrease cash equivalents 2016 primarily due 4192 million spent acquisitions innovative security designs llc armasight inc point grey research inc prox dynamics 3674 million spent repayment longterm debt credit agreement 660 million spent repurchase common stock dividends paid 659 million 359 million spent capital expenditures partially offset 5246 million net proceeds longterm debt new credit agreement cash provided operations 3123 million cash provided operating activities 2016 totaled 3123 million compared 2758 million 2015 2262 million 2014 increase cash provided operations 2016 compared 2015 primarily due changes current balances gain sale costbasis investment 2015 partially offset decrease net earnings increase cash provided operations 2015 compared 2014 primarily due increase net earnings cash used investing activities year ended december 31 2016 totaled 4478 million consisting 4192 million spent primarily acquisitions innovative security designs llc armasight inc point grey research inc prox dynamics capital expenditures 359 million cash used investing activities year ended december 31 2015 totaled 1348 million consisting 923 million net cash acquired acquisition dvtel inc capital expenditures 682 million partially offset 256 million proceeds sale investment third party cash used investing activities year ended december 31 2014 totaled 493 million consisting capital expenditures 613 million offset 120 million proceeds sale certain tangible assets intellectual property related design manufacturing nonthermal microoptics capital expenditures 2015 2014 included 330 million 191 million respectively building improvements new facility goleta california cash provided financing activities year ended december 31 2016 totaled 386 million primarily consisting net proceeds longterm debt new credit agreement partially offset repayment longterm debt repurchases common stock payment dividends cash used financing activities years ended december 31 2015 2014 totaled 1665 million 1520 million respectively primarily consisting repurchase shares common stock payment dividends partially offset proceeds shares issued pursuant stockbased compensation plans february 8 2011 entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rate spreads right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 200 million may 31 2021 credit agreement allows us certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined based type borrowing interest associated borrowings based either prime lending rate bank america na published eurocurrency rate ie libor borrowings applicable margin ranges 0125 percent 2125 percent depending applicable base rate consolidated total leverage ratio including respective spreads ignoring effects hedging onemonth libor interest rate 2145 percent per annum prime lending rate 4125 percent per annum december 31 2016 credit agreement requires us pay commitment fee amount unused revolving commitments rate based total leverage ratio ranges 0150 percent 0300 percent unused revolving commitments credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2016 credit facilities available credit agreement unsecured noted credit agreement amendment april 5 2013 incorporated 150 million term loan facility scheduled mature april 5 2019 may 31 2016 drew 105 million revolving credit facility repaid term loan facility full interest accrued onemonth libor rate plus scheduled spread paid monthly entering interest rate swap agreements effectively fixed basis calculating interest rate revolving credit facility effective interest rate paid revolving credit facility equal median fixed rate swap agreements plus credit spread effect december 31 2016 effective interest rate revolving credit facility 237 percent principal payments 375 million option continue made quarterly installments december 31 2018 final maturity payment including accrued interest due april 5 2019 december 31 2016 975 million outstanding credit agreement commitment fee amount unused revolving credit 0175 percent per annum 179 million 301 million letters credit outstanding credit agreement december 31 2016 2015 respectively reduced total available revolving credit agreement august 19 2011 issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 2011 notes interest notes payable semiannually arrears march 1 september 1 proceeds notes used general corporate purposes include working capital expenditure needs business acquisitions repurchases common stock 2011 notes repaid july 5 2016 june 2016 issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “2016 notes” net proceeds issuance 2016 notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest 2016 notes payable semiannually arrears december 15 june 15 proceeds 2016 notes used repay 2011 notes july 2016 used general corporate purposes include working capital expenditure needs business acquisitions repurchases common stock february 5 2015 board directors authorized repurchase 150 million shares outstanding common stock december 31 2016 aggregate 63 million shares repurchased authorization expired february 5 2017 february 8 2017 board directors authorized repurchase 150 million shares outstanding common stock authorization expire february 8 2019 united states income taxes provided accumulated earnings certain subsidiaries outside united states currently intend reinvest earnings operations outside united states indefinitely subsequently elect repatriate foreign earnings would need accrue pay united states income taxes thereby reducing amount cash believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2016 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2016 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms revolving credit facility assumed held maturity interest paid effective rate effect december 31 2016 actual payments may differ terms timing amounts include approximately 179 million standby letters credit performance bonds due unlikely event payment amounts arrangements aside discrete tax charge 396 million recorded 2016 related belgian tax assessment company cannot make reasonably reliable estimate period potential cash settlement remaining unrecognized tax benefits 123 million therefore included related unrecognized tax benefits table contractual obligations december 31 2016 detail unrecognized tax benefits see note 14 consolidated financial statements item 8 recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs wide range customers sell offtheshelf products many markets also offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs managements discussion analysis financial condition results operations prepared reported based reporting structure six operating segments detailed description segments see business segments within item 1 international revenue accounted approximately 47 percent 46 percent 47 percent revenue 2017 2016 2015 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations 2017 experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including fluctuations spending united states government agencies rate gdp growth certain geographic markets fluctuations foreign currency exchange rates continue impact financial results may render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition allowance doubtful accounts inventory goodwill product warranties contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition revenue recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated contractual terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2017 accounts receivable balance 3467 million reported net allowances doubtful accounts 76 million believe reported allowances december 31 2017 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establishes new cost basis december 31 2017 inventories 3722 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill represents excess purchase price acquired enterprise estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process qualitative factors may consider include limited macroeconomic conditions industry conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance indicators goodwill impaired proceed twostep impairment test whereby first step comparing fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying value goodwill impaired testing performed second step performed carrying value reporting unit exceeds fair value carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded impairment test current year indicate impairment goodwill reporting units product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy record warranty liabilities levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 181 million december 31 2017 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals disclosures adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2017 determined valuation allowance deferred tax assets 34 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain record benefit tax position determine likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained measure tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available reporting date review tax positions circumstances warrant update liability additional taxes changes available facts arise consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2017 2016 2015 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months backlog absolute indicator future revenue portion orders backlog could canceled customers discretion backlog subject order cancellations historically experienced significant number order cancellations revenue 2017 totaled 18004 million increase 83 percent 2016 revenue 16622 million year revenue increased segments except security segment acquisitions armasight prox dynamics point grey primary drivers revenue growth year ended december 31 2017 revenue 2016 totaled 16622 million increase 67 percent 2015 revenue 15571 million year revenue growth primarily due increases oem emerging surveillance security segments partially offset decline instruments segment acquisitions made year ended december 31 2016 constitute approximately 21 consolidated revenue 2016 international revenue 2017 totaled 8440 million representing 469 percent revenue compares international revenue 2016 totaled 7586 million representing 456 percent revenue 7266 million 2015 representing 467 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold years ended december 31 2017 2016 9417 million 8950 million respectively increase primarily due increase revenues year discussed changes product mix cost goods sold 2016 8950 million compared cost goods sold 8035 million 2015 increase primarily due increase revenues year discussed changes product mix increased manufacturing variances period costs cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2017 8588 million compared 7671 million 2016 gross margin defined gross profit divided revenue increased 462 percent 2016 477 percent 2017 primarily due favorable product mix gross profit year ended december 31 2016 7671 million compared 7536 million 2015 gross margin decreased 484 percent 2015 462 percent 2016 primarily due changes product mix increased manufacturing variances period costs research development research development expenses 1707 million 95 percent revenue 2017 compared 1475 million 89 percent revenue 2016 1329 million 85 percent revenue 2015 increase research development expenses year 2017 primarily related inclusion companies acquired 2015 2016 intend continue significant research development expenses future provide continuing flow innovative highquality products maintain enhance competitive position business segments believe future cash flow generation sufficient support development new products fuel growth business selling general administrative expenses selling general administrative expenses 3739 million 208 percent revenue 2017 compared 3224 million 194 percent revenue 2016 3135 million 201 percent revenue 2015 increase selling general administrative expenses year 2017 2016 primarily due increase selling expenses support increase revenue mentioned well increased operating expenses associated acquisitions november 2016 decrease selling general administrative expenses percentage revenue 2016 compared 2015 due successful implementation cost cutting measures 2016 selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses restructuring expenses years ended december 31 2017 2016 2015 recorded net pretax restructuring expenses totaling 06 million 14 million 14 million respectively restructuring expenses recorded 2017 2016 2015 recorded operating expenses fourth quarter 2013 initiated realignment plan included closing six nottoscale sites united states europe transfer operations larger facilities also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas benefits actions reflected operating results majority actions realignment plan completed 2016 loss net assets held sale fourth quarter 2017 recorded pretax loss net assets held sale 236 million loss net assets held sale related planned divestiture consumer small mediumsized visiblespectrum security business see note 18 business acquisitions divestitures consolidated financial statements item 8 additional information interest expense interest expense totaled 168 million 181 million 141 million years ended december 31 2017 2016 2015 respectively interest expense year primarily associated 425 million aggregate principal amount 3125 percent senior unsecured notes issued june 2016 amounts drawn credit facility repaid august 2017 decrease interest expense 2017 compared 2016 primarily due 13 million loss incurred 2016 extinguishment debt increase interest expense 2016 compared 2015 primarily due increased amount interest bearing debt well 13 million loss extinguishment 250 million aggregate principal amount 375 percent senior unsecured notes repaid july 2016 income expense net income totaled 41 million year ended december 31 2017 expense totaled 31 million year ended december 31 2016 income totaled 126 million year ended december 31 2015 change income expense net 2017 2016 primarily attributed decreased losses currency exchange rate fluctuations change income expenses net 2016 compared 2015 primarily attributed 202 million gain sale costbasis investment private technology company year ended december 31 2015 income taxes income tax provision 1718 million 1093 million 638 million 2017 2016 2015 respectively effective tax rates 2017 2016 2015 616 percent 396 percent 209 percent respectively effective tax rate 2017 higher united states federal tax rate 35 percent mainly due estimate impact tax cuts jobs act tax act including 665 million deemed distributions previously unremitted foreign earnings 128 million revaluation deferred tax items 151 million estimated state foreign taxes due distribution previously unremitted foreign earnings unrecognized tax benefits intercompany pricing increased various jurisdictions 2017 partially offset excess tax benefits stock compensation mix lower foreign tax rates applied foreign earnings 2016 effective tax higher united states federal tax rate 35 percent due mainly accrual 396 million one international subsidiaries response european commission’s decision regarding certain tax legislation belgium 2015 effective tax lower united states federal tax rate 35 percent due primarily release valuation allowance previously recorded foreign deferred tax assets mix lower tax rates applied foreign earnings expect effective tax rate 2018 approximately 215 percent excluding discrete items december 31 2017 united states tax net operating loss carryforwards totaling approximately 39 million expire 2019 2031 subject annual limitation section 382 us internal revenue code addition various state net operating loss carryforwards totaling approximately 09 million expire 2023 2036 finally various foreign net operating loss carryforwards totaling approximately 1111 million portion expire 2018 2036 portion indefinite carryforward period tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2017 determined valuation allowance deferred tax assets 34 million required primarily related certain foreign deductions carried forward acquired net operating losses review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized january 11 2016 european commission announced decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid impacts one international subsidiaries belgian government announced appealed decision filed action annulment general court european union july 2016 filed separate appeal general court european union accordance financial accounting standards board accounting standards codification topic 740 “income taxes” recorded discrete tax expense 396 million 2016 related matter january 10 2017 received tax assessments belgium government similar amount classified current taxes payable consolidated balance sheet december 31 2017 filed complaint belgian tax assessments result complaint appeal general court european union new information received belgian government future events may cause income tax provision associated decision entirely partially reversed segment operating results december 31 2017 three year period ending six reportable operating segments following discusses operating results segments three year period surveillance operating results follows millions except percentages surveillance revenue increased 25 percent 2017 compared 2016 increase revenue 2017 compared 2016 predominately due addition armasight prox dynamics acquired 2016 earnings operations increased 03 percent 2017 compared 2016 slight increase earnings operations primarily due higher revenues favorable product mix partially offset increased operating expenses acquired businesses increased backlog surveillance segment largely attributed 747 million contract land surveillance systems united states army received september 2017 surveillance revenue increased 59 percent 2016 compared 2015 increase revenue primarily due acquisition armasight june 2016 earnings operations increased 13 percent 2016 compared 2015 increase earnings operations primarily due armasight acquisition instruments operating results follows millions except percentages instruments segment revenue increased 65 percent 2017 compared 2016 increase revenue 2017 predominately attributable strength premium volume handheld product lines driven new product launches supplemented growth optical gas fire products revenue growth partially offset declines test measurement product lines earnings operations increased 82 percent 2017 compared 2016 increase primarily due higher revenue base instruments revenue decreased 33 percent 2016 compared 2015 decrease revenue primarily due revenue decline europe apac regions product line basis declines building predictive maintenance science products lines partially offset increases firefighting automation products lines earnings operations decreased 142 percent 2016 compared 2015 decrease earnings operations due change product mix sold products lower gross margins 2016 compared 2015 increased manufacturing cost underabsorption security operating results follows millions except percentages security segment revenue decreased 36 percent 2017 compared 2016 decrease revenue primarily due reduction sales consumergrade security products earnings operations decreased 134 percent 2017 compared 2016 decrease earnings operations due lower revenues lower operating margins consumergrade business security segment revenue year ended december 31 2016 increased 59 percent increase revenue primarily due acquisition dvtel november 2015 inclusion associated revenues current year partially offset decrease consumergrade security products decrease earnings operations 2016 459 percent 2015 primarily due higher operating expenses associated dvtel acquisition oem emerging markets oem emerging markets operating results follows millions except percentages oem emerging markets segment revenue increased 425 percent 2017 compared 2016 increase revenue 2017 primarily due point grey acquisition 2016 growth cores traffic product lines earnings operations increased 562 percent 2017 compared 2016 increase earnings operations primarily due increase revenue increase backlog oem emerging markets segment primarily attributed orders growth integrated imaging solutions group includes point grey acquisition oem emerging markets segment revenue increased 305 percent 2016 compared 2015 primarily due higher deliveries segment product lines particularly cores components mobile accessories acquisition point grey november 2016 earnings operations increased 2016 compared 2015 primarily due increase revenue maritime operating results follows millions except percentages maritime segment revenue increased 21 percent 2017 compared 2016 increase revenue 2017 driven sales new axiom line multifunction displays began shipping second quarter 2017 partially offset decline thermal camera sales earnings operations increased 240 percent 2017 compared 2016 increase operating income 2017 driven stronger margins shipments new products introduced 2017 maritime segment revenue 2016 increased 44 percent compared 2015 primarily due increase revenue americas europe regions product basis increased shipments multifunction displays radar thermal cameras offset declines autopilot instrument shipments earnings operations increased 68 percent 2016 compared 2015 increase earnings operations due increase revenue decrease operating expenses partially offset increase warranty costs detection operating results follows millions except percentages detection segment revenue increased 35 percent 2017 compared 2016 due higher shipments cbrne threat response systems united states government customers higher sales chembio radiation products earnings operations increased 25 percent 2017 compared 2016 primarily due higher revenues 2017 detection segment revenue 2016 increased 77 percent compared 2015 increase revenue primarily due increased shipments cbrne threat response systems united states government customers earnings operations increased 166 percent 2016 compared 2015 increase earnings operations operating margin primarily due increases revenue reduced operating expenses decrease backlog primarily due significant orders cbrne threat response systems received first quarter fourth quarter 2015 delivered 2016 liquidity capital resources december 31 2017 total 5191 million cash equivalents 2289 million united states 2902 million foreign subsidiaries compared cash equivalents december 31 2016 3613 million 983 million united states 2630 million foreign subsidiaries increase cash equivalents 2017 primarily due cash provided operations 3083 million proceeds 582 million share issuances pursuant stock plans partially offset pay revolving credit facility 975 million dividend payments 826 million capital expenditures 421 million cash provided operating activities 2017 totaled 3083 million compared 3198 million 2016 2934 million 2015 decrease cash provided operations 2017 compared 2016 primarily due changes current balances increase cash provided operations 2016 compared 2015 primarily due changes current balances accrued income taxes cash used investing activities year ended december 31 2017 totaled 384 million primarily consists capital expenditures 421 million cash used investing activities year ended december 31 2016 totaled 4478 million consisting 4192 million spent primarily acquisitions innovative security designs llc armasight inc point grey research inc prox dynamics capital expenditures 359 million cash used investing activities year ended december 31 2015 totaled 1348 million consisting 923 million acquisition dvtel inc capital expenditures 682 million partially offset 256 million proceeds sale investment third party capital expenditures 2015 included 330 million building improvements new facility goleta california cash used financing activities year ended december 31 2017 totaled 1326 million primarily consisted repayment borrowings revolving credit facility payment quarterly dividends partially offset proceeds share issuances pursuant stock plans cash provided financing activities year ended december 31 2016 totaled 311 million primarily consisting net proceeds longterm debt new credit agreement partially offset repayment longterm debt repurchases common stock payment dividends cash used financing activities years ended december 31 2015 totaled 1841 million primarily consisting repurchase shares common stock payment dividends partially offset proceeds shares issued pursuant stockbased compensation plans february 8 2011 entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provided 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rates right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 200 million may 31 2021 credit agreement allows us certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined based type borrowing interest associated borrowings based either prime lending rate bank america na published eurocurrency rate ie libor borrowings applicable margin ranges 0125 percent 2125 percent depending applicable base rate consolidated total leverage ratio including respective spreads onemonth eurocurrencybased borrowing rate 2944 percent per annum prime lendingbased borrowing rate 4875 percent per annum december 31 2017 credit agreement requires us pay commitment fee amount unused revolving commitments rate based total leverage ratio ranges 0150 percent 0300 percent unused revolving commitments december 31 2017 commitment fee amount unused revolving credit 0175 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2017 credit facilities available credit agreement unsecured may 31 2016 company drew 105 million revolving credit facility repaid term loan originally issued credit agreement dated april 5 2013 interest accrued paid monthly based onemonth libor rate manage interest rate risk arising variability monthly interest expense attributable amounts drawn revolver company entered two amortizing interest rate swaps aggregate 105 million interest rate swaps designated effective cash flow hedges year ended december 31 2017 company repaid amounts outstanding revolving credit facility concurrently company exited interest rate swaps combined notional value time 863 million 184 million letters credit outstanding credit agreement december 31 2017 reduced total available revolving credit agreement june 2016 issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “notes” net proceeds issuance notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest notes payable semiannually arrears december 15 june 15 proceeds notes used repay 375 percent senior unsecured notes due september 1 2016 used general corporate purposes include working capital expenditure needs business acquisitions repurchases common stock february 5 2015 board directors authorized repurchase 150 million shares outstanding common stock aggregate 63 million shares repurchased authorization expired february 5 2017 february 8 2017 board directors authorized repurchase 150 million shares outstanding common stock authorization expire february 8 2019 december 31 2017 shares repurchased february 8 2017 authorization accordance tax act company accrued 665 million united states taxes payable previously undistributed earnings companys foreign subsidiaries estimated approximately 10 billion december 31 2017 company also recorded deferred tax liabilities 151 million state foreign taxes estimated due upon distribution accumulated earnings companys foreign subsidiaries believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2017 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2017 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include approximately 184 million standby letters credit performance bonds due unlikely event payment amounts arrangements aside 447 million related belgian tax assessment company cannot make reasonably reliable estimate period potential cash settlement remaining unrecognized tax benefits 326 million therefore included related unrecognized tax benefits table contractual obligations december 31 2017 detail unrecognized tax benefits see note 14 income taxes consolidated financial statements item 8 recent accounting pronouncements see note 1 nature business significant accounting policies consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs wide range customers sell offtheshelf products many markets also offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs august 2017 announced realignment business resulted reducing number reportable operating segments six three effective january 1 2018 managements discussion analysis financial condition results operations prepared reported based new reporting structure three operating segments detailed description segments see business segments within item 1 international revenue accounted approximately 47 percent 47 percent 46 percent revenue 2018 2017 2016 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations 2018 experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including fluctuations spending united states government agencies rate gdp growth certain geographic markets fluctuations foreign currency exchange rates continue impact financial results may render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate critical estimates ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences could material consolidated financial statements senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates significant presentation consolidated financial statements require difficult subjective complex judgments revenue recognition design market sell products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories offer revenue recognized upon transfer control promised products services customers amount reflects consideration expect receive exchange products services regularly enter contracts include various combinations products services generally capable distinct accounted separate performance obligations situations contract values allocated performance obligation based relative estimated standalone selling price vast majority revenues recognized point time goods transferred customer however certain contracts include highly customized components performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date revenue recognized time performance obligation satisfied revenue includes certain shipping handling costs stated net third party agency fees shipping handling costs associated outbound freight control product transferred customer accounted fulfillment cost included cost goods sold revenue recognized net allowances returns net taxes collected customers subsequently remitted governmental authorities products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided effective january 1 2018 adopted fasb asc 606 revenuerevenue contracts customers related amendments see note 1 nature business significant accounting policies consolidated financial statements item 8 discussion recently adopted accounting pronouncements inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2018 inventories 3521 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill represents excess purchase price acquired enterprise estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process qualitative factors may consider include limited macroeconomic conditions industry conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance indicators goodwill impaired proceed twostep impairment test whereby first step comparing fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying value goodwill impaired testing performed second step performed carrying value reporting unit exceeds fair value carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded impairment test current year indicate impairment goodwill reporting units contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals disclosures adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2018 determined valuation allowance deferred tax assets 32 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain record benefit tax position determine likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained measure tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available reporting date review tax positions circumstances warrant update liability additional taxes changes available facts arise consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2018 2017 2016 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months backlog absolute indicator future revenue portion orders backlog could canceled customers discretion backlog subject order cancellations historically experienced significant number order cancellations revenue consolidated revenue 2018 totaled 17757 million decrease 14 percent 2017 revenue 18004 million year revenue increased industrial government defense business units offset decrease commercial business unit decline commercial business unit result divestiture consumer small mediumsized smb security business announced february 2018 revenue 2017 totaled 18004 million increase 83 percent 2016 revenue 16622 million acquisitions armasight prox dynamics point grey primary drivers revenue growth year ended december 31 2017 international revenue 2018 totaled 8412 million representing 474 percent revenue compares international revenue 2017 totaled 8440 million representing 469 percent revenue 7586 million 2016 representing 456 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold years ended december 31 2018 2017 8754 million 9417 million respectively decrease primarily due decline commercial business unit result consumer smb security business divestiture cost goods sold 2017 9417 million compared cost goods sold 8950 million 2016 increase primarily due increase revenues year discussed changes product mix cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2018 9003 million compared 8588 million 2017 gross margin defined gross profit divided revenue increased 477 percent 2017 507 percent 2018 primarily due favorable product mix gross profit year ended december 31 2017 8588 million compared 7671 million 2016 gross margin increased 462 percent 2016 477 percent 2017 primarily due favorable product mix research development research development expenses 1763 million 99 percent revenue 2018 compared 1707 million 95 percent revenue 2017 1475 million 89 percent revenue 2016 increase research development expenses year 2017 primarily related inclusion companies acquired 2015 2016 intend continue significant research development expenses future provide continuing flow innovative highquality products maintain enhance competitive position business segments believe future cash flow generation sufficient support development new products fuel growth business selling general administrative expenses selling general administrative expenses 3869 million 218 percent revenue 2018 compared 3739 million 208 percent revenue 2017 3224 million 194 percent revenue 2016 increase selling general administrative expenses year 2018 compared 2017 primarily attributed 15 million recorded first quarter 2018 costs regulatory settlement described note 14 contingencies notes consolidated financial statements item 8 increase selling general administrative expenses year 2017 compared 2016 primarily due increase selling expenses support increase revenue mentioned well increased operating expenses associated acquisitions november 2016 selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses restructuring expenses years ended december 31 2018 2017 2016 recorded net pretax restructuring expenses totaling 82 million 06 million 14 million respectively restructuring expenses recorded 2018 included 33 million cost goods sold 49 million operating expenses restructuring expenses recorded 2017 2016 recorded operating expenses fourth quarter 2013 initiated realignment plan included closing six nottoscale sites united states europe transfer operations larger facilities also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas benefits actions reflected operating results 2013 realignment plan completed 2018 years ended december 31 2018 2017 2016 company also incurred restructuring charges associated cost reduction initiatives related 2013 realignment plan loss sale business fourth quarter 2017 recorded estimated pretax loss net assets reclassified held sale 236 million loss net assets held sale related planned divestiture consumer smb security business year ended december 31 2018 result combined sale planned divestiture net working capital adjustments subsequent negotiations buyer recognized additional pretax loss 137 million see note 19 business acquisitions divestitures notes consolidated financial statements item 8 additional information interest expense interest expense totaled 161 million 168 million 181 million years ended december 31 2018 2017 2016 respectively interest expense year primarily associated 425 million aggregate principal amount 3125 percent senior unsecured notes issued june 2016 decrease interest expense 2017 compared 2016 primarily due 13 million loss incurred 2016 extinguishment debt income expense net income totaled 07 million 41 million year ended december 31 2018 2017 respectively expense totaled 31 million year ended december 31 2016 change income expense net 2018 2017 primarily attributed increased losses currency exchange rate fluctuations change income expense net 2017 2016 primarily attributed decreased losses currency exchange rate fluctuations income taxes income tax provision 247 million 1718 million 1093 million 2018 2017 2016 respectively effective tax rates 2018 2017 2016 80 percent 616 percent 396 percent respectively companys effective tax rate 2018 lower united states federal tax rate 210 percent mainly due recognition previously unrecognized tax benefits relating european union state aid recovery discussed excess tax benefits stock compensation reduction accrual us transition tax offset partially state taxes higher tax rates applied income earned certain foreign jurisdictions discrete items effective tax rate 2017 higher united states federal tax rate 35 percent mainly due estimate impact tax cuts jobs act tax act including 665 million deemed distributions previously unremitted foreign earnings 128 million revaluation deferred tax items 151 million estimated state foreign taxes due distribution previously unremitted foreign earnings unrecognized tax benefits intercompany pricing increased various jurisdictions 2017 partially offset excess tax benefits stock compensation mix lower foreign tax rates applied foreign earnings 2016 effective tax higher united states federal tax rate 35 percent due mainly accrual 396 million one international subsidiaries response european commission’s decision regarding certain tax legislation belgium expect effective tax rate 2019 approximately 205 percent excluding discrete items december 31 2018 united states tax net operating loss carryforwards totaling approximately 35 million expire 2019 2031 subject annual limitation section 382 us internal revenue code addition various state net operating loss carryforwards totaling approximately 09 million expire 2023 2036 finally various foreign net operating loss carryforwards totaling approximately 1117 million portion expire 2019 2036 portion indefinite carryforward period tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2018 determined valuation allowance deferred tax assets 32 million required primarily related certain foreign deductions carried forward acquired net operating losses review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized 2016 company accordance fasb asc topic 740 income taxes recorded discrete tax charges totaling 396 million related january 11 2016 announcement european commission decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid impacts one company’s international subsidiaries belgian government announced appealed decision filed action annulment general court european union july 2016 company filed separate appeal general court european union january 10 2017 company received tax assessments belgian government approximating discrete tax charge recorded 2016 company filed complaint belgian tax assessments october 23 2018 belgian government canceled 331 million tax assessments accrued interest result company reversed similar amount previously accrued income tax plus interest associated assessments threemonth period ending december 31 2018 addition euro equivalent 357 million held restricted cash account september 30 2018 became unrestricted threemonth period ending december 31 2018 company believes matter effectively settled adverse opinion european commission regarding cancellation tax assessments could cause accrual tax future period threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3345 million swedish kroner 30 billion company believes sta’s assertions reassessment accordance swedish tax regulations plans defend companys positions sta swedish court system necessary segment operating results august 2017 announced realignment business resulted reducing number reportable operating segments six three effective january 1 2018 three reportable operating segments industrial business unit government defense business unit commercial business unit industrial business unit consists former instruments oem emerging segments excluding intelligent traffic systems business government defense business unit consists former surveillance detection segments excluding outdoor tactical systems ots business commercial business unit consists former maritime security segments along ots businesses realignment intend reduce complexity realize greater operating synergies enhance management focus segment operating results years ended december 31 2017 2016 adjusted conform new reportable operating segment structure following discusses operating results segments three year period ended december 31 2018 industrial operating results follows millions except percentages industrial revenue increased 68 percent 2018 compared 2017 earnings operations increased 85 percent 2018 compared 2017 increase revenue earnings operations predominately attributable strong growth across oem automotive cooled camera cores uas product lines decline backlog 2018 compared 2017 primarily attributed productivity initiatives executed year reduce lead times customer deliveries machine vision volume handheld product lines industrial revenue increased 216 percent 2017 compared 2016 earnings operations increased 275 percent 2017 compared 2016 increase revenue earnings operations primarily due acquisition point grey 2016 increase backlog 2017 compared 2016 primarily attributed orders growth due acquisition point grey government defense instruments operating results follows millions except percentages government defense revenue increased 55 percent 2018 compared 2017 increase revenue 2018 predominately attributable strong growth favorable product mix primarily land vertical market earnings operations increased 115 percent 2018 compared 2017 increase earnings operations primarily due revenue growth favorable product mix changes along controlled spending backlog relatively flat year 2018 compared 2017 government defense revenue increased 20 percent 2017 compared 2016 earnings operations increased 14 percent 2017 compared 2016 increase revenue earnings operations primarily due addition prox dynamics acquired 2016 increase backlog 2017 compared 2016 largely attributed large contract land surveillance systems united states army received september 2017 commercial operating results follows millions except percentages commercial revenue decreased 210 percent 2018 compared 2017 decrease revenue primarily due divestiture consumer smb security business first quarter 2018 contributed approximately 140 million revenue 2017 partially offset increased revenues maritime intelligent traffic product lines earnings operations increased 24 percent 2018 compared 2017 increase earnings operations primarily due reductions spending partially offset reductions gross margins related divestiture consumer smb security business commercial revenue increased 13 percent 2017 compared 2016 increase revenue primarily due addition armasight acquired june 2016 sales new axiom line multifunction displays began shipping second quarter 2017 partially offset declines thermal cameras consumergrade security products increase earnings operations 2017 65 percent 2016 primarily due stronger margins shipments new products introduced 2017 plus additional earnings armasight acquisition liquidity capital resources december 31 2018 total 5121 million cash equivalents 3270 million united states 1851 million foreign subsidiaries compared cash equivalents december 31 2017 5191 million 2289 million united states 2902 million foreign subsidiaries decrease cash equivalents 2018 primarily due common stock repurchases 2437 million dividend payments 881 million business acquisitions investments 423 million capital expenditures 308 million partially offset cash provided operations 3742 million proceeds 291 million share issuances pursuant stock plans cash received sale consumer smb security businesses 259 million cash provided operating activities 2018 totaled 3742 million compared 3083 million 2017 3198 million 2016 increase cash provided operations 2018 compared 2017 decrease cash provided operations 2017 compared 2016 primarily due changes current balances accrued income taxes cash used investing activities year ended december 31 2018 totaled 441 million primarily consisted business acquisitions minority interest investments capital expenditures ordinary course business partially offset 259 million generated sale consumer smb security businesses cash used investing activities year ended december 31 2017 totaled 384 million primarily consisted capital expenditures ordinary course business cash used investing activities year ended december 31 2016 totaled 4478 million consisting 4192 million spent primarily acquisitions innovative security designs llc armasight inc point grey research inc prox dynamics capital expenditures ordinary course business cash used financing activities year ended december 31 2018 totaled 3189 million primarily consisted repurchases common stock payment dividends partially offset proceeds share issuances pursuant stock plans cash used financing activities year ended december 31 2017 totaled 1326 million primarily consisted repayment borrowings revolving credit facility payment quarterly dividends partially offset proceeds share issuances pursuant stock plans cash provided financing activities years ended december 31 2016 totaled 311 million primarily consisting net proceeds longterm debt new credit agreement partially offset repayment longterm debt repurchases common stock payment dividends february 8 2011 entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provided 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rates right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 200 million may 31 2021 credit agreement allows us certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined based type borrowing interest associated borrowings based either prime lending rate bank america na published eurocurrency rate borrowings applicable margin ranges 0125 percent 2125 percent depending applicable base rate consolidated total leverage ratio including respective spreads onemonth eurocurrencybased borrowing rate 3897 percent per annum prime lendingbased borrowing rate 5875 percent per annum december 31 2018 credit agreement requires us pay commitment fee amount unused revolving commitments rate based total leverage ratio ranges 0150 percent 0300 percent unused revolving commitments december 31 2018 commitment fee amount unused revolving credit 0175 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2018 credit facilities available credit agreement unsecured may 31 2016 company drew 105 million revolving credit facility repaid term loan originally issued credit agreement dated april 5 2013 interest accrued paid monthly based onemonth libor rate manage interest rate risk arising variability monthly interest expense attributable amounts drawn revolver company entered two amortizing interest rate swaps aggregate 105 million interest rate swaps designated effective cash flow hedges year ended december 31 2017 company repaid amounts outstanding revolving credit facility concurrently company exited interest rate swaps combined notional value time 863 million 108 million letters credit outstanding credit agreement december 31 2018 reduced total available revolving credit agreement june 2016 issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “notes” net proceeds issuance notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest notes payable semiannually arrears december 15 june 15 proceeds notes used repay 375 percent senior unsecured notes due september 1 2016 used general corporate purposes include working capital expenditure needs business acquisitions repurchases common stock february 5 2015 board directors authorized repurchase 150 million shares outstanding common stock aggregate 63 million shares repurchased authorization expired february 5 2017 february 8 2017 board directors authorized repurchase 150 million shares outstanding common stock december 31 2018 approximately 50 million shares repurchased february 8 2017 authorization expired february 8 2019 february 7 2019 board directors authorized repurchase 150 million shares outstanding common stock authorization expire february 7 2021 december 31 2018 2017 accrued income tax liabilities 429 million 665 million respectively related transition tax enacted 2017 part tax legislation commonly referred tax cuts jobs act decrease liability primarily attributed transition tax payments 90 million 2017 2018 application united states internal revenue service 47 million overpayment 99 million reduction initial liability described amounts accrued none expected due within one year due overpayment discussed transition tax paid installments eightyear period accrue interest provided united states state foreign income taxes earnings generated january 1 2018 certain subsidiaries outside united states currently intend reinvest earnings operations activities outside united states indefinitely subsequently elect repatriate foreign earnings would need accrue pay state foreign income taxes thereby reducing amount cash united states taxes would generally payable due changes made tax act threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3345 million swedish kroner 30 billion company believes sta’s assertions reassessment accordance swedish tax regulations plans defend companys positions sta swedish court system necessary consequently adjustment companys unrecognized tax benefits recorded relation matter management believes companys recorded tax liabilities adequate aggregate income tax exposures believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2018 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2018 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include approximately 156 million standby letters credit performance bonds due unlikely event payment amounts arrangements company cannot make reasonably reliable estimate period potential cash settlement remaining unrecognized tax benefits 332 million therefore included related unrecognized tax benefits table contractual obligations december 31 2018 detail unrecognized tax benefits see note 15 income taxes consolidated financial statements item 8 recent accounting pronouncements see note 1 nature business significant accounting policies consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers improving personal public safety security providing advanced intelligence surveillance reconnaissance tactical defense capabilities facilitating air ground maritimebased situational awareness detecting electrical mechanical building envelope problems displaying process irregularities detecting volatile organic gas emissions enhancing advanced driverassistance systems autonomous driving solutions well variety uses thermal sensing technologies business model range solutions allow us sell products various end markets including industrial original equipment manufacturing military homeland security enterprise infrastructure environmental sell offtheshelf products configurations suit specific customer requirements efficient timely affordable manner support customers training ongoing support services centered design products lowcost manufacturing highvolume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs international revenue accounted approximately 45 percent 47 percent 47 percent revenue 2019 2018 2017 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations 2019 experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including fluctuations spending united states government agencies rate gdp growth certain geographic markets fluctuations foreign currency exchange rates continue impact financial results may render predictions regarding future performance difficult make addition 2019 successfully wrapped several large multiyear programs provided solid revenue contributions past several years successfully significant new programs new programs require investments research development compliance successful investments programs directly translate corresponding revenue late 2021 beyond also selectively pursue acquisition businesses investments attractive valuations expand complement current portfolio allow access new customers technologies also may explore divestiture businesses longer meet needs strategy could perform better outside organization pursuing business strategy routinely conduct discussions evaluate targets enter agreements regarding possible acquisitions divestitures ventures equity investments continue build upon strong market position meeting needs wide range customers investing longterm growth execution strategic priorities better position us deliver longterm growth launched strategydriven restructuring plan project ready february 2020 initiative aims simplify product portfolio better align resources higher growth opportunities reducing costs discontinued certain noncore consumer centric product lines within outdoor tactical systems business february 2020 committed plan sell raymarine nonthermal maritime electronics business subject certain conditions proposed transaction customary regulatory approvals business actively marketed intend complete sale within 2020 addition restructure business units consolidating three business units two integrating remaining businesses within commercial business unit industrial business unit beginning first quarter 2020 critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate critical estimates ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences could material consolidated financial statements senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates significant presentation consolidated financial statements require difficult subjective complex judgments revenue recognition effective january 1 2018 adopted requirements accounting standards update asu 201409 related amendments revenue contracts customers asc 606 superseded prior revenue recognition methods industryspecific guidance design market sell products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories offer revenue recognized upon transfer control promised products services customers amount reflects consideration expect receive exchange products services regularly enter contracts include various combinations products services generally capable distinct accounted separate performance obligations situations contract values allocated performance obligation based relative estimated standalone selling price vast majority revenues recognized point time goods transferred customer however certain contracts include highly customized components performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date revenue recognized time performance obligation satisfied revenue includes certain shipping handling costs stated net thirdparty agency fees shipping handling costs associated outbound freight control product transferred customer accounted fulfillment cost included cost goods sold revenue recognized net allowances returns net taxes collected customers subsequently remitted governmental authorities products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified service revenue deferred recognized contract period case extended warranty contracts recognized services provided inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2019 inventories 3888 million stated net prior inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future intangible assets allocate purchase price acquired businesses underlying tangible intangible assets acquired liabilities assumed based upon respective fair values excess recorded goodwill fair value assessments require judgments estimates affected contract performance factors time may cause final amounts differ materially original estimates adjustments fair value purchased assets liabilities initial measurement period recognized net earnings recognize purchased intangible assets connection business acquisitions fair value acquisition date significant purchased intangible assets recognized acquisitions generally identifiable intangible assets determine fair value intangible assets based estimates judgments including amount timing expected future cash flows growth rates discount rates expected future cash flows analyses based estimates revenues growth earnings gross margin considering factors general market conditions customer budgets existing firm future orders changes working capital long term business plans recent operating performance selecting appropriate growth rates requires significant judgment usually based expected longterm rate inflation real economic growth anticipated industry growth trends also use discounted cash flow analyses based significant judgments related risk adjusted discount rates terminal growth rates weighted average cost capital “wacc” developed management planning purposes based current known business market conditions macroeconomic indicators well future anticipated industry trends intangible assets amortized using method best reflects economic benefits utilized pattern economic benefits cannot reliably determined amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value see note 10 intangibles assets notes consolidated financial statements item 8 additional information discussion impairment charges 12 million recognized year ended december 31 2019 company recognize impairment charges intangible assets years ended december 31 2018 2017 goodwill effective january 1 2019 adopted requirements asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment goodwill represents excess purchase price acquired enterprise estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using onestep process result adoption asu 201704 determine goodwill impaired longer required compare implied fair value reporting unit goodwill associated carrying amount goodwill commonly referred step 2 elect first assess qualitative factors determine whether likely fair value reporting unit less carrying value performing qualitative assessment consider factors including limited current macroeconomic conditions industry market conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance events relevant entity reporting unit evaluation based review qualitative factors likely fair value reporting unit less carrying value elected bypass assessing qualitative factors would perform quantitative impairment test identify goodwill impairment measure amount goodwill impairment loss recognized comparing fair value reporting unit carrying amount impairment charge would recognized amount carrying amount exceeds reporting unit’s fair value however loss recognized exceed total amount goodwill allocated reporting unit impairment tests performed current year indicate impairment goodwill reporting units exception outdoor tactical systems ots reporting unit part commercial business unit cbu operating segment based assessment qualitative factors fourth quarter determined likely fair value less carrying value ots reporting unit quantitative impairment test performed resulted goodwill impairment 65 million recorded cbu operating segment fourth quarter refer note 9 goodwill notes consolidated financial statements item 8 discussion contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals disclosures adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2019 determined valuation allowance deferred tax assets 28 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain record benefit tax position determine likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained measure tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available balance sheet date review tax positions circumstances warrant update liability additional taxes changes available facts arise consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2019 2018 2017 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months backlog absolute indicator future revenue portion orders backlog could canceled customers discretion revenue consolidated revenue 2019 totaled 18870 million increase 63 percent 2018 revenue 17757 million year revenue increased primarily due government defense business unit partially offset decrease commercial business unit increase government defense business unit revenue primarily driven acquisitions aeryon labs inc aeryon endeavor robotics holdings inc endeavor first quarter 2019 coupled volume increases unmanned solutions surveillance systems decline commercial business unit revenue result volume declines outdoor tactical systems ots business maritime product lines fiscal 2019 contributing decline divestiture consumer small mediumsized smb security business announced first quarter 2018 revenue 2018 totaled 17757 million decrease 14 percent 2017 revenue 18004 million year revenue increased industrial government defense business units offset decrease commercial business unit decline commercial business unit result divestiture smb security business first quarter 2018 noted international revenue 2019 totaled 8498 million representing 450 percent revenue compares international revenue 2018 totaled 8412 million representing 474 percent revenue 8440 million 2017 representing 469 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold years ended december 31 2019 2018 9575 million 8754 million respectively increase primarily driven government defense business unit mainly attributed acquisitions aeryon endeavor first quarter 2019 coupled volume increases unmanned solutions surveillance systems increases partially offset declines commercial business unit result volume declines ots business including 59 million inventory write downs associated ots restructuring maritime product lines fiscal year 2019 well divestiture consumer smb security businesses first quarter 2018 cost goods sold 2018 8754 million compared cost goods sold 9417 million 2017 decrease primarily due decline commercial business unit result consumer smb security business divestiture first quarter 2018 noted cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2019 9295 million compared 9003 million 2018 gross margin defined gross profit divided revenue decreased slightly 507 percent 2018 493 percent 2019 primarily associated volume declines ots business including 59 million inventory write downs associated ots restructuring well increase intangible asset amortization expense fiscal year 2019 gross profit year ended december 31 2018 9003 million compared 8588 million 2017 gross margin increased 477 percent 2017 507 percent 2018 primarily due favorable product mix research development research development expenses 2042 million 108 percent revenue 2019 compared 1763 million 99 percent revenue 2018 1707 million 95 percent revenue 2017 increase research development expenses year 2019 primarily related inclusion companies acquired 2019 commitment research development intend continue significant research development expenses future provide continuing flow innovative highquality products maintain enhance competitive position business segments believe future cash flow generation sufficient support development new products fuel growth business selling general administrative expenses selling general administrative expenses 4419 million 234 percent revenue 2019 compared 3869 million 218 percent revenue 2018 3739 million 208 percent revenue 2017 increase selling general administrative expenses year 2019 compared 2018 primarily attributed acquisition related expenses acquisitions occurring first half 2019 consent agreement related costs goodwill intangible asset impairment charges related restructuring actions increase selling general administrative expenses year 2018 compared 2017 primarily attributed 150 million recorded first quarter 2018 costs regulatory settlement described note 15 contingencies notes consolidated financial statements item 8 restructuring various active restructuring programs focused reorganization discontinuation certain businesses targeted workforce reductions facility consolidation actions years ended december 31 2019 2018 2017 recorded net pretax restructuring charges programs totaling approximately 101 million 49 million 06 million respectively primarily represent employee termination benefits costs consolidate relocate discontinue operations addition year ended december 31 2019 incurred goodwill intangible asset impairment charges totaling approximately 65 million 12 million respectively related restructuring actions inventory writedowns associated restructuring actions also incurred totaled 59 million 33 million years ended december 31 2019 2018 respectively refer note 9 goodwill note 10 intangibles assets note 6 inventories note 22 restructuring notes consolidated financial statements item 8 discussion loss sale business fourth quarter 2017 recorded estimated pretax loss net assets reclassified held sale 236 million loss net assets held sale related planned divestiture consumer smb security business year ended december 31 2018 result divestiture net working capital adjustments subsequent negotiations buyer recognized additional pretax loss 137 million see note 20 business acquisitions divestitures notes consolidated financial statements item 8 additional information interest expense interest expense totaled 277 million 161 million 168 million years ended december 31 2019 2018 2017 respectively interest expense fiscal 2019 associated 4250 million aggregate principal amount 3125 percent senior unsecured notes issued june 2016 interest amounts drawn credit facility interest expense fiscal 2018 primarily associated 4250 million aggregate principal amount 3125 percent senior unsecured notes expense income net expense totaled 63 million year ended december 31 2019 compared income 07 million year ended december 31 2018 income totaled 41 million year ended december 31 2017 change income expense net 2019 2018 primarily attributed impairments 41 million associated equity investments well minority investments losses decrease income net 2018 2017 primarily attributed increased losses currency exchange rate fluctuations income taxes income tax provision 703 million 247 million 1718 million 2019 2018 2017 respectively effective tax rates 2019 2018 2017 291 percent 80 percent 616 percent respectively effective tax rate 2019 higher united states federal tax rate 210 percent mainly due accruals settlements various taxing authorities state taxes additional withholding tax due future distributions foreign earnings included transition tax levied tax cuts jobs act 2017 tax act higher tax rates income earned foreign jurisdictions amounts offset tax credits generated united states foreign jurisdictions well excess tax benefits stock compensation effective tax rate 2018 lower united states federal tax rate 210 percent mainly due recognition previously unrecognized tax benefits relating european union state aid recovery excess tax benefits stock compensation reduction accrual united states transition tax offset partially state taxes higher tax rates applied income earned certain foreign jurisdictions discrete items effective tax rate 2017 higher united states federal tax rate 350 percent mainly due companys estimate impact tax act unrecognized tax benefits intercompany pricing increased various jurisdictions 2017 partially offset excess tax benefits stock compensation mix lower foreign tax rates december 31 2019 united states tax net operating loss carryforwards totaling approximately 94 million expire 2032 2039 subject annual limitation section 382 us internal revenue code addition various foreign net operating loss carryforwards totaling approximately 628 million portion expire 2019 2039 portion indefinite carryforward period tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2019 determined valuation allowance deferred tax assets 28 million required primarily related foreign net operating losses capital losses carried forward review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3213 million swedish kroner 30 billion company believes sta’s assertions reassessment accordance swedish tax regulations plans defend companys positions swedish court system necessary threemonth period ended september 30 2019 european commission announced opening separate review assess whether excess profit tax ruling granted belgium one companys international subsidiaries breach european union state aid rules company believes taxes assessed belgium paid adjusted unrecognized tax benefits relation matter segment operating results three reportable operating segments industrial business unit government defense business unit commercial business unit following discusses operating results segments three year periods ended december 31 2019 2018 2017 respectively industrial business unit operating results follows millions except percentages industrial business unit revenue increased 28 percent 2019 compared 2018 earnings operations increased 111 percent 2019 compared 2018 increase revenue predominately attributable strong growth across cooled cores product lines partially offset declines integrated imaging systems iis businesses increases earnings operations corresponding operating margin predominately attributable favorable product mix led oem business productivity initiatives improve manufacturing efficiency decrease product costs across divisions increase backlog 2019 compared 2018 primarily attributed substantial award large aerospace defense customer industrial business unit revenue increased 68 percent 2018 compared 2017 earnings operations increased 85 percent 2018 compared 2017 increase revenue earnings operations predominately attributable strong growth across oem automotive cooled camera cores uas product lines decline backlog 2018 compared 2017 primarily attributed productivity initiatives executed year reduce lead times customer deliveries machine vision volume handheld product lines government defense government defense business unit operating results follows millions except percentages government defense business unit revenue increased 198 percent 2019 compared 2018 earnings operations increased 39 percent 2019 compared 2018 operating margin decreased 40 percent 2019 compared 2018 increase revenue earnings operations primarily driven aeryon endeavor acquisitions first quarter 2019 increased volumes unmanned solutions surveillance systems decline operating margin primarily due inclusion operating losses acquisitions noted increase backlog 2019 compared 2018 primarily driven first quarter 2019 acquisitions noted addition timing orders subsequent timing deployment major programs government defense business unit revenue increased 55 percent 2018 compared 2017 earnings operations increased 115 percent 2018 compared 2017 increase revenue predominately attributable strong growth favorable product mix primarily land vertical market increase earnings operations primarily due revenue growth favorable product mix changes along controlled spending backlog relatively flat year 2018 compared 2017 commercial business unit operating results follows millions except percentages commercial business unit revenue decreased 101 percent 2019 compared 2018 earnings operations decreased 204 percent 2019 compared 2018 decrease revenue earnings operations attributed volume declines ots business maritime product lines fiscal 2019 contributing decline divestiture consumer smb security business first quarter 2018 backlog relatively flat year 2019 compared 2018 commercial business unit revenue decreased 210 percent 2018 compared 2017 earnings operations increased 24 percent 2018 compared 2017 decrease revenue primarily due divestiture consumer smb security business first quarter 2018 contributed approximately 140 million revenue 2017 partially offset increased revenues maritime intelligent traffic product lines increase earnings operations primarily due reductions spending partially offset reductions gross margins related divestiture consumer smb security business liquidity capital resources december 31 2019 total 2846 million cash equivalents 778 million united states 2068 million foreign subsidiaries compared cash equivalents december 31 2018 5121 million 3270 million united states 1851 million foreign subsidiaries decrease cash equivalents 2019 primarily due cash used business acquisitions 6019 million common stock repurchases 1250 million dividend payments 917 million capital expenditures 448 million partially offset cash provided operations 3704 million net proceeds 2548 million revolving credit facility longterm debt proceeds 284 million shares issued stock compensation plans cash provided operating activities 2019 totaled 3704 million compared 3742 million 2018 3083 million 2017 slight decrease cash provided operating activities 2019 compared 2018 primarily due lower net earnings adding back noncash adjustments partially offset favorable changes working capital increase cash provided operations 2018 compared 2017 due higher net earnings adding back noncash adjustments favorable changes current balances partially offset changes accrued income taxes cash used investing activities year ended december 31 2019 totaled 6514 million primarily consisted business acquisitions capital expenditures ordinary course business cash used investing activities year ended december 31 2018 totaled 441 million primarily consisted business acquisitions capital expenditures ordinary course business partially offset 259 million generated sale consumer smb security businesses cash used investing activities year ended december 31 2017 totaled 384 million primarily consisted capital expenditures ordinary course business cash provided financing activities year ended december 31 2019 totaled 540 million primarily consisted cash provided net proceeds revolving credit facility longterm debt net proceeds shares issued stockbased compensation plans partially offset repurchases shares common stock payment quarterly dividends cash used financing activities year ended december 31 2018 totaled 3189 million primarily consisted repurchases common stock payment dividends partially offset proceeds share issuances pursuant stock plans cash used financing activities year ended december 31 2017 totaled 1326 million primarily consisted repayment borrowings revolving credit facility payment quarterly dividends partially offset proceeds share issuances pursuant stockbased compensation plans february 8 2011 entered credit agreement “original credit agreement” bank america na us bank national association jpmorgan chase bank na lenders original credit agreement provided 200 million fiveyear revolving line credit april 5 2013 original credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 original credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rates march 29 2019 entered second amended restated credit agreement “restated credit agreement” bank america na jpmorgan chase bank na us bank national association citibank na mufg union bank na lenders party thereto restated credit agreement amended restated companys original credit agreement dated may 31 2016 restated credit agreement provides 6500 million unsecured revolving credit facility 1000 million unsecured term loan facility available us dollars amortizing 5000 percent per annum 1500 million unsecured term loan facility available swedish kronor amortizing 5000 percent per annum restated credit agreement term five years matures march 29 2024 connection closing restated credit agreement made initial borrowing 1000 million revolving loans 1000 million term loans us dollars equivalent 1500 million term loans swedish kronor additionally repaid full outstanding amounts consisting revolving loans aggregate principal amount 3750 million original credit agreement right subject certain conditions including approval additional commitments qualified lenders increase availability revolving credit facility additional 2000 million march 29 2024 restated credit agreement allows us certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates restated credit agreement determined type tenor borrowing includes loans based published term eurocurrency rate eg libor loan denominated eurocurrency rate loans floor zero percent applicable margin ranges 10 percent 1375 percent depending company’s consolidated total leverage ratio december 31 2019 borrowing rate revolving loan 3049 percent per annum borrowing rate us dollar term loan 3195 percent per annum borrowing rate swedish kronor term loan 1348 percent per annum unadjusted hedging restated credit agreement requires us pay commitment fee amount unused revolving commitments rate based consolidated total leverage ratio ranges 0125 percent 0200 percent unused revolving commitments december 31 2019 commitment fee amount unused revolving credit 0175 percent per annum restated credit agreement contains one financial covenant requires maintenance consolidated total leverage ratio compliance december 31 2019 facilities available restated credit agreement unsecured restated credit agreement also contains language providing adoption libor successor rate consistent market practice engaged regular dialogue lenders derivatives counterparties keep apprised proposed successor rates jurisdictions may need execute financial transaction although progress made various working groups believe early accurately assess financial impact libor benchmark reform manage interest rate risk arising variability interest expense attributable amounts drawn swedish kronor term loan facility entered floored interest rate swap swedish kronor notional amount initially equivalent 1500 million interest rate swap designated effective cash flow hedge 108 million letters credit outstanding restated credit agreement december 31 2019 reduced total availability revolving commitments restated credit agreement june 2016 issued 4250 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “notes” net proceeds issuance notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest notes payable semiannually arrears december 15 june 15 proceeds notes used repay 375 percent senior unsecured notes due september 1 2016 used general corporate purposes include working capital expenditure needs business acquisitions repurchases common stock february 8 2017 board directors authorized repurchase 150 million shares outstanding common stock open market privately negotiated transactions authorization expired february 8 2019 february 7 2019 board directors authorized repurchase 150 million shares outstanding common stock open market privately negotiated transactions authorization expire february 7 2021 year ended december 31 2019 approximately 25 million shares repurchased february 7 2019 authorization december 31 2019 2018 accrued income tax liabilities 371 million 444 million respectively related transition tax enacted 2017 part tax legislation commonly referred tax cuts jobs act tax act amounts accrued paid installments eightyear period accrue interest due prior year payments amounts due within next twelve months december 31 2019 undistributed earnings generated january 1 2018 certain foreign subsidiaries approximately 1830 million intend indefinitely invest outside united states recognized deferred tax estimating amount potential tax practicable due complexity variety assumptions required threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3213 million swedish kroner 30 billion company believes sta’s assertions reassessment accordance swedish tax regulations plans defend companys positions swedish court system necessary consequently adjustment companys unrecognized tax benefits recorded relation matter management believes companys recorded tax liabilities adequate aggregate income tax exposures threemonth period ended september 30 2019 european commission announced opening separate review assess whether excess profit tax ruling granted belgium one companys international subsidiaries breach european union state aid rules company believes taxes assessed belgium paid adjusted unrecognized tax benefits relation matter believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2019 significant offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2019 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include approximately 2545 million standby letters credit performance bonds due unlikely event payment amounts arrangements company cannot make reasonably reliable estimate period potential cash settlement remaining unrecognized tax benefits 208 million therefore included related unrecognized tax benefits table contractual obligations december 31 2019 detail unrecognized tax benefits see note 16 income taxes consolidated financial statements item 8 recent accounting pronouncements see note 1 nature business significant accounting policies consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations acquisition teledyne january 4 2021 teledyne company announced companies entered merger agreement teledyne acquire flir cash stock transaction valued approximately 80 billion terms merger agreement flir stockholders receive 2800 per share cash 00718 shares teledyne common stock flir share implies total purchase price approximately 5600 per flir share based teledyne’s 5day volume weighted average price december 31 2020 transaction expected close middle 2021 subject receipt required regulatory approvals including expiration termination applicable waiting period hartscottrodino antitrust improvements act approvals teledyne flir stockholders customary closing conditions cannot guarantee mergers contemplated merger agreement completed exactly terms set forth merger agreement mergers completed company may receive pay breakup fee provided merger agreement impact covid19 january 30 2020 world health organization declared covid19 outbreak global health emergency march 11 2020 world health organization raised covid19 outbreak “pandemic” status transmission covid19 efforts contain spread resulted international national local border closings significant travel restrictions disruptions significant disruptions business operations supply chains customer activity event cancellations restrictions service cancellations reductions changes significant challenges healthcare service preparation delivery quarantines related government actions policies well general concern uncertainty negatively affected us global economy financial environments addition cases resurged parts us including areas maintain large facilities seen governments slow reverse efforts reopen shift later phases recovery increased risks operations health safety employees across globe remain top priority crisis enacted stringent safety protocols protect employees ensure continue service customers initiated site entry restriction policy external visitors facilities also developed contingency plans staggered work schedules designed reduce number employees working given time regularly deep cleaning facilities advising employees follow safe hygiene practices requiring employees stay home known symptoms come contact people tested positive covid19 also implemented global employee travel restrictions allowed employees work remotely able aggregate outbreak material impact consolidated financial results 2020 industrial technologies segment experienced increase demand est cameras 2020 result covid19 pandemic deployed help prevent spread virus increase partially offset lower volume certain commercial end markets defense technologies segment experienced administrative processing delays impacting timing bookings revenue trends likely affect segment’s results subsequent quarters although yet possible estimate longerterm effects pandemic continue monitor evolving situation related covid19 extent covid19 impacts operations financial results depend future developments highly uncertain cannot predicted including status state local government reopening plans resurgence illness reimposition certain restrictions connection therewith additional actions taken governments businesses individuals contain virus address impact new information may emerge concerning severity treatability virus successful rollout vaccines new strains virus extent economic downturn resulting response virus among others overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications government industrial commercial markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers improving personal public safety security providing advanced intelligence surveillance reconnaissance tactical defense capabilities facilitating air ground maritimebased situational awareness detecting electrical mechanical building envelope problems displaying process irregularities detecting volatile organic gas emissions enhancing advanced driverassistance systems autonomous driving solutions well variety uses thermal sensing technologies business model range solutions allow us sell products various end markets including industrial original equipment manufacturing military homeland security enterprise infrastructure environmental end markets sell offtheshelf products customized solutions configurations suit specific customer requirements efficient timely affordable manner support customers training ongoing support services centered design products lowcost manufacturing highvolume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs international revenue accounted approximately 46 percent 45 percent 47 percent revenue 2020 2019 2018 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar european euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations 2020 experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including fluctuations spending united states government agencies rates gdp growth certain geographic markets fluctuations foreign currency exchange rates continue impact financial results may render predictions regarding future performance difficult make addition 2019 successfully concluded large multiyear programs provided revenue contributions past several years successfully new programs new programs require investments research development compliance successful investments programs translate significant corresponding revenue 2021 beyond historically selectively pursued acquisition businesses investments attractive valuations would expand complement current portfolio allow access new customers technologies also explored divestiture businesses longer meet needs strategy could perform better outside organization pursuing business strategy routinely conducted discussions evaluated targets entered agreements regarding possible acquisitions divestitures ventures equity investments continue build upon strong market position meeting needs wide range customers investing longterm growth execution strategic priorities better position us deliver longterm growth launched strategydriven restructuring plan project ready february 2020 initiative simplified product portfolio better aligned resources higher growth opportunities reducing costs discontinued certain noncore consumer centric product lines within outdoor tactical systems business addition consolidated three business units two reportable segments industrial technologies defense technologies integrating remaining businesses within former commercial business unit industrial technologies segment beginning first quarter 2020 critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate critical estimates ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences could material consolidated financial statements senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates significant presentation consolidated financial statements require difficult subjective complex judgments revenue recognition record revenue accounting standards codification asc topic 606 revenue contracts customers design market sell products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories offer revenue recognized upon transfer control promised products services customers amount reflects consideration expect receive exchange products services regularly enter contracts include various combinations products services generally capable distinct accounted separate performance obligations situations contract values allocated performance obligation based relative estimated standalone selling price vast majority revenues recognized point time goods transferred customer however certain contracts include highly customized components performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date revenue recognized time performance obligation satisfied revenue includes certain shipping handling costs stated net thirdparty agency fees shipping handling costs associated outbound freight control product transferred customer accounted fulfillment cost included cost goods sold revenue recognized net allowances returns net taxes collected customers subsequently remitted governmental authorities products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified service revenue deferred recognized contract period case extended warranty contracts recognized services provided inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2020 inventories 4722 million stated net prior inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future intangible assets allocate purchase price acquired businesses underlying tangible intangible assets acquired liabilities assumed based upon respective fair values excess recorded goodwill fair value assessments require judgments estimates affected contract performance factors time may cause final amounts differ materially original estimates adjustments fair value purchased assets liabilities initial measurement period recognized net earnings recognize purchased intangible assets connection business acquisitions fair value acquisition date significant purchased intangible assets recognized acquisitions generally identifiable intangible assets determine fair value intangible assets based estimates judgments including limited amount timing expected future cash flows growth rates discount rates intangible assets amortized using method best reflects economic benefits utilized pattern economic benefits cannot reliably determined amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges intangible assets year ended december 31 2020 goodwill effective january 1 2019 adopted requirements asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment goodwill represents excess purchase price acquired enterprise estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value elect first assess qualitative factors determine whether likely fair value reporting unit less carrying value performing qualitative assessment consider factors including limited current macroeconomic conditions industry market conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance events relevant entity reporting unit evaluation based review qualitative factors likely fair value reporting unit less carrying value elected bypass assessing qualitative factors would perform quantitative impairment test identify goodwill impairment measure amount goodwill impairment loss recognized comparing fair value reporting unit carrying amount impairment charge would recognized amount carrying amount exceeds reporting unit’s fair value however loss recognized exceed total amount goodwill allocated reporting unit first quarter 2020 result deterioration macroeconomic conditions driven covid19 well companyspecific events combined resulted declines stock price market capitalization company determined likely factors significant adverse impact reporting units interim quantitative goodwill impairment analysis performed march 31 2020 company determined fair values reporting units greater carrying values third quarter 2020 company performed annual goodwill impairment analysis company performed qualitative analysis reporting units determined likely fair values reporting units excess individual reporting units carrying values result quantitative step one analysis necessary company recognize impairment charges goodwill year ended december 31 2020 contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals disclosures adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2020 determined valuation allowance deferred tax assets 44 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain record benefit tax position determine likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained measure tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available balance sheet date review tax positions circumstances warrant update liability additional taxes changes available facts arise consolidated operating results following discussion provides overview operating results addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2020 2019 2018 given nature business believe revenue earnings operations operating income including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place revenue recognized backlog absolute indicator future revenue portion orders backlog could delayed canceled customers discretion due covid19 pandemic described within “impact covid19” unsure future results compare historic trends conversion backlog revenue following table summarizes consolidated operating results periods presented thousands except percentages nm meaningful revenue increase year ended december 31 2020 compared year ended december 31 2019 primarily associated increased demand est solutions industrial technologies result covid19 pandemic contributions unmanned revenues aeryon labs inc aeryon endeavor robotics holdings inc endeavor acquisitions defense technologies increase partially offset lower volume certain commercial end markets industrial technologies completion certain contracts contributed revenue prior year defense technologies increase year ended december 31 2019 compared year ended december 31 2018 primarily due acquisitions aeryon endeavor first quarter 2019 coupled volume increases unmanned solutions surveillance systems defense technologies partially offset volume declines outdoor tactical systems ots business maritime product lines 2019 industrial technologies contributing decline divestiture consumer small mediumsized smb security business announced first quarter 2018 international revenue 2020 totaled 8944 million representing 464 percent revenue compares international revenue 2019 totaled 8498 million representing 450 percent revenue 8412 million 2018 representing 474 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold increase year ended december 31 2020 compared year ended december 31 2019 primarily attributable increased revenue volume partially offset favorable product mix industrial technologies inventory write downs associated ots restructuring taken 2019 repeat 2020 increase year ended december 31 2019 compared year ended december 31 2018 primarily attributable acquisitions aeryon endeavor first quarter 2019 coupled volume increases unmanned solutions surveillance systems defense technologies increase partially offset volume declines ots business including 59 million inventory write downs associated ots restructuring maritime product lines 2019 well divestiture consumer smb security businesses first quarter 2018 industrial technologies cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs research development research development expenses represented 109 percent revenue 2020 compared 108 percent revenue 2019 99 percent revenue 2018 change research development expenses 2020 compared 2019 relatively flat increase research development expenses 2019 compared 2018 primarily related inclusion companies acquired 2019 commitment research development intend continue significant research development expenses future provide continuing flow innovative highquality products maintain enhance competitive position business segments believe future cash flow generation sufficient support development new products fuel growth business selling general administrative expenses decrease year ended december 31 2020 compared year ended december 31 2019 primarily due operating expense reductions project ready decreases travel marketing costs reduced intangible asset amortization lower asset impairment charges related restructuring actions decrease separation transaction integration costs increase year ended december 31 2019 compared year ended december 31 2018 primarily attributed acquisition related expenses acquisitions occurring first half 2019 consent agreement related costs goodwill intangible asset impairment charges related restructuring actions restructuring expenses various active restructuring programs focused reorganization discontinuation certain businesses targeted workforce reductions facility consolidation actions first quarter 2020 initiated strategydriven restructuring plan project ready simplify product portfolio better align resources higher growth opportunities reducing costs project ready included organizational realignment targeted workforce reductions facility optimization initiatives previously approved ongoing restructuring activities process january 1 2020 consolidated project ready net pretax restructuring charges recorded programs year ended december 31 2020 primarily represent employee separation costs third party costs years ended december 31 2019 2018 also recorded net pretax restructuring charges connection restructuring activities refer note 21 restructuring notes consolidated financial statements item 8 discussion loss sale business year ended december 31 2018 result divestiture consumer smb security business net working capital adjustments subsequent negotiations buyer recognized additional pretax loss 137 million interest expense interest expense year ended december 31 2020 associated previous 3125 percent senior unsecured notes “2021 notes” aggregate principal amount 4250 million 2500 percent senior unsecured notes “2030 notes” aggregate principal amount 5000 million issued sold august 3 2020 well interest amounts drawn credit facility 2021 notes redeemed full connection august 2020 issuance 2030 notes public offering interest expense year ended december 31 2019 associated 2021 notes well interest amounts drawn credit facility interest expense year ended december 31 2018 primarily associated 2021 notes loss debt extinguishment year ended december 31 2020 recorded 91 million loss debt extinguishment due redemption 2021 notes consisted 85 million payment redemption premium 06 million unamortized portion original issue discount previously incurred issuance costs income expense net change income expense net year ended december 31 2020 compared year ended december 31 2019 primarily attributable increased gains currency exchange rate fluctuations increased gains certain deferred compensation arrangements change income expense net year ended december 31 2019 compared year ended december 31 2018 primarily attributable impairments associated equity investments well minority investments losses income taxes income tax provisions years ended december 31 2020 2019 2018 represented effective tax rates 254 percent 291 percent 80 percent respectively effective tax rate 2020 higher united states federal tax rate 210 percent mainly due state taxes nondeductible expenses accruals unrecognized tax benefits settlements taxing authorities higher tax rates income earned foreign jurisdictions amounts partially offset tax credits generated united states foreign jurisdictions effective tax rate 2019 higher united states federal tax rate 210 percent mainly due accruals settlements various taxing authorities state taxes additional withholding tax due future distributions foreign earnings included transition tax levied tax act higher tax rates income earned foreign jurisdictions amounts offset tax credits generated united states foreign jurisdictions well excess tax benefits stock compensation effective tax rate 2018 lower united states federal tax rate 210 percent mainly due recognition previously unrecognized tax benefits relating european union state aid recovery excess tax benefits stock compensation reduction accrual united states transition tax offset partially state taxes higher tax rates applied income earned certain foreign jurisdictions discrete items december 31 2020 united states tax net operating loss carryforwards totaling approximately 420 million expire 2032 2040 subject annual limitation section 382 us internal revenue code addition various foreign net operating loss carryforwards totaling approximately 293 million portion expire 2021 2040 portion indefinite carryforward period tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2020 determined valuation allowance deferred tax assets 44 million required primarily related foreign net operating losses capital losses carried forward review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized fourth quarter 2018 sta issued reassessment tax year ending december 31 2012 one nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3657 million swedish kroner 30 billion march 26 2020 received adverse judgment first instance court sweden “court” regarding stas reassessment agree court’s ruling continue believe stas arguments reassessment accordance swedish tax regulations treaty avoidance double taxation sweden belgium appealed decision administrative court appeal stockholm consequently adjustment unrecognized tax benefits recorded relation matter received respite paying reassessment decision administrative court appeal putting place bank guarantee secure possible future payment tax interest assurance appeal successful third quarter 2019 european commission announced opening separate review assess whether excess profit tax ruling granted belgium one international subsidiaries breach european union state aid rules believe taxes assessed belgium paid adjusted unrecognized tax benefits relation matter march 27 2020 president signed coronavirus aid relief economic security act cares act bipartisan 20 trillion economic relief package aimed helping american workers businesses impacted coronavirus pandemic december 31 2020 cares act materially affected income tax provision deferred tax assets liabilities continue monitor effect cares act ongoing government guidance related covid19 may issued segment operating results first quarter 2020 completed business reorganization part project ready restructuring program resulted identification two reportable segments industrial technologies defense technologies commenced operating reporting new organization structure effective january 1 2020 see note 19 “operating segments related information” notes consolidated financial statements item 8 description operating segment including types products services operating segment derives revenues see note 21 restructuring notes consolidated financial statements item 8 information project ready industrial technologies segment industrial technologies operating results follows thousands except percentages increase revenue year ended december 31 2020 compared year ended december 31 2019 primarily attributable increased demand est solutions result covid19 pandemic partially offset lower volume commercial end markets increase segment operating margin year ended december 31 2020 compared year ended december 31 2019 primarily attributable aforementioned higher revenue associated gross profit favorable product mix operating expense reductions project ready decreases marketing travel costs increase total backlog december 31 2020 compared year ended december 31 2019 primarily result award timing longterm orders increased volume orders maritime products fourth quarter 2020 decrease revenue year ended december 31 2019 compared year ended december 31 2018 predominantly attributable declines integrated imaging systems iis businesses volume declines ots business maritime product lines 2019 partially offset strong growth across cooled cores product lines increase segment operating margin year ended december 31 2019 compared year ended december 31 2018 predominantly attributable favorable product mix led oem business productivity initiatives improve manufacturing efficiency decrease product costs across businesses increase total backlog december 31 2019 compared year ended december 31 2018 primarily attributable substantial award large aerospace defense customer defense technologies segment defense technologies operating results follows thousands except percentages decrease revenue year ended december 31 2020 compared year ended december 31 2019 primarily attributable completion certain contracts contributed revenue prior year period partially offset increased volumes unmanned revenues aeryon endeavor acquisitions decrease segment operating margin year ended december 31 2020 compared year ended december 31 2019 primarily attributable lower revenue associated gross profit ramp lower margin programs partially offset decreases marketing travel costs decrease total backlog december 31 2020 compared year ended december 31 2019 primarily result order volume subsequent deployment timing increase revenue segment operating income year ended december 31 2019 compared year ended december 31 2018 primarily driven aeryon endeavor acquisitions first quarter 2019 increased volumes unmanned solutions surveillance systems decrease segment operating margin year ended december 31 2019 compared year ended december 31 2018 primarily due inclusion operating losses acquisitions noted increase total backlog december 31 2019 compared year ended december 31 2018 primarily driven first quarter 2019 acquisitions noted addition timing orders subsequent timing deployment major programs liquidity capital resources overview december 31 2020 total 2978 million cash equivalents 888 million united states 2090 million foreign subsidiaries december 31 2020 december 31 2019 outstanding debt 7384 million 6769 million respectively consists unsecured term loans borrowings revolving credit facility entered 2019 collectively referred credit agreement senior unsecured notes august 3 2020 issued sold 2030 notes underwritten public offering aggregate net proceeds offering approximately 4942 million deducting underwriting fees debt discount transaction issuance costs interest 2030 notes payable semiannually arrears february 1 august 1 year beginning february 1 2021 net proceeds sale 2030 notes used redeem 2021 notes general corporate purposes may include funding working capital investments subsidiaries capital expenditures acquisitions stock repurchases connection redemption 2021 notes third quarter 2020 recorded 91 million loss debt extinguishment consolidated statements income credit agreement contains one financial covenant requires maintenance consolidated total leverage ratio complied december 31 2020 141 million letters credit outstanding credit agreement december 31 2020 reduced total availability revolving commitments credit agreement see note 11 debt notes consolidated financial statements item 8 details january 11 2019 standby letter credit exceed swedish kronor 22 billion issued new bilateral letter credit reimbursement agreement lc agreement secure payment guarantee required swedish tax authority order grant original respite paying tax reassessment described note 15 income taxes notes consolidated financial statements item 8 outstanding amount lc agreement equivalent approximately 2705 million december 31 2020 outstanding amounts lc agreement reduce available revolving credit agreement considered indebtedness influence incremental debt capacity governed credit agreement covenants standby letter credit amended april 24 2020 reflect new respite repurchased shares common stock time considering market conditions accordance repurchase limits authorized board directors recent repurchases conducted open market transactions authorization board directors february 7 2019 repurchase 150 million shares companys outstanding common stock authorization expired february 7 2021 year ended december 31 2020 approximately 46 million shares repurchased total cash payments approximately 1663 million year ended december 31 2020 retired 41 million shares classified 05 million shares treasury stock paid dividends 895 million 917 million 881 million years ended december 31 2020 2019 2018 respectively entered merger agreement teledyne agreed pay termination fee 2500 million teledyne merger agreement terminated following circumstances •the company’s board makes change recommendation •the company enters definitive agreement effect superior proposal •the company’s stockholders approve proposed transaction alternative proposal company publicly disclosed withdrawn company materially breaches merger agreement alternative proposal company publicly disclosed withdrawn company willfully materially breaches nonsolicitation covenant case within twelve months termination company enters definitive agreement respect alternative proposal subsequently consummated pursuant terms merger agreement teledyne would required pay company termination fee 2500 million merger agreement terminated following circumstances •teledyne’s board makes change recommendation •teledyne’s stockholders approve proposed transaction alternative proposal teledyne publicly disclosed withdrawn teledyne materially breaches merger agreement alternative proposal teledyne publicly disclosed withdrawn case within twelve months termination teledyne enters definitive agreement respect alternative proposal subsequently consummated addition company incurred expects continue incur significant costs expenses fees professional services transaction costs connection mergers substantial majority costs nonrecurring expenses relating mergers many costs payable regardless whether mergers consummated next 12 months anticipate able meet liquidity needs including servicing debt existing cash hand cash generated operations needed amounts available existing credit facilities financing available sources however impact covid19 pandemic global economy operations evolve continue assess liquidity needs extended period global supply chain economic disruption could materially affect business results operations access sources liquidity financial condition could materially adversely impact customers suppliers event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate actions summary cash flows following table summarizes cash flow information periods presented thousands net cash provided operating activities decreased 580 million year ended december 31 2020 compared year ended december 31 2019 primarily due less favorable timing working capital changes net cash provided operating activities decreased 38 million year ended december 31 2019 compared year ended december 31 2018 primarily due lower net earnings adding back noncash adjustments partially offset favorable changes working capital net cash used investing activities decreased 5679 million year ended december 31 2020 compared year ended december 31 2019 primarily due cash paid business acquisitions 2019 net cash used investing activities increased 6073 million year ended december 31 2019 compared year ended december 31 2018 primarily due cash paid business acquisitions 2019 partially offset 259 million generated sale consumer smb security businesses 2018 net cash used provided financing activities change 2771 million year ended december 31 2020 compared year ended december 31 2019 primarily due lower net proceeds 2228 million credit agreement senior unsecured notes included 2030 notes proceeds issued sold august 3 2020 increase 413 million repurchases common stock lower proceeds 164 million shares issued net cash used provided financing activities change 3730 million year ended december 31 2019 compared year ended december 31 2018 primarily due 2548 million additional net proceeds revolving credit facility longterm debt credit agreement decrease 1187 million repurchases common stock offbalance sheet arrangements december 31 2020 offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2020 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include approximately 2886 million standby letters credit performance bonds due unlikely event payment amounts arrangements company cannot make reasonably reliable estimate period potential cash settlement remaining unrecognized tax benefits 257 million therefore included related unrecognized tax benefits table contractual obligations december 31 2020 detail unrecognized tax benefits see note 15 income taxes consolidated financial statements item 8 recent accounting pronouncements see note 1 nature business significant accounting policies consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 managements discussion analysis financial condition results operations overview flir systems inc founded 1978 world leader design manufacture marketing thermal imaging broadcast camera systems wide variety commercial government applications including condition monitoring research development manufacturing process control airborne observation broadcast search rescue federal drug interdiction surveillance reconnaissance navigation safety border maritime patrol environmental monitoring groundbased security companys business organized around two principal markets commercial government historically majority companys revenue derived primarily government sales accounted 395 528 respectively companys revenue years ended december 31 1998 1997 however company shifting product mix favor commercial applications accounted 605 472 respectively companys revenue years ended december 31 1998 1997 company continues enhance stateoftheart products within existing commercial government markets well develop products new market applications use advanced thermal imaging technology new uncooled detector technology operates room temperature allowing systems less expensive smaller lighter require less power operate additionally company developed highermargin image analysis software tools enhance capability customization companys products hardware prices decline sophistication image analysis software incremental functionality provided analysis tools expected become critical component companys products march 30 1999 company consummated merger inframetrics inc privately held infrared imaging company headquartered billerica massachusetts issuing approximately 23 million shares companys stock outstanding stock inframetrics acquisition increases companys worldwide commercial thermal imaging market share enables company expand product development efforts elimination duplicative research development programs creates extensive sales marketing organization allows company efficiently focus manufacturing efforts inframetrics 1998 sales 550 million one major suppliers commercial thermal imaging systems world transaction expected accounted pooling interests effective december 1 1997 company acquired agema headquartered stockholm sweden agema world leader design manufacture marketing handheld infrared cameras detecting measuring temperature differences wide variety commercial research applications agema reported revenue 524 million year ended december 31 1997 however acquisition accounted purchase companys consolidated statement operations includes agemas results month december 1997 acquisition agema accomplished issuance 4162000 shares common stock valued 541 million spectraphysics ab agemas parent company exchange outstanding shares agema stock conjunction acquisition quarter ended december 31 1997 company recognized onetime charge 525 million writeoff consisted 364 million inprocess research development acquisitionrelated costs included separate line item operating expenses 161 million inventories due creation duplicative product lines included cost goods sold addition company expects amortize total approximately 206 million intangible assets periods ranging 15 17 years company divided production responsibilities primary facilities handheld groundbased products manufactured stockholm government airborne observation broadcast products manufactured portland sales customers outside united states accounted approximately 55 47 32 companys revenue 1998 1997 1996 respectively company anticipates international sales continue account significant portion revenue historically currency fluctuations little impact revenue realization however since company seeks reduce exposure currency fluctuations denominating majority international sales us dollars decrease value foreign currencies relative us dollar could make companys products less pricecompetitive acquisition agema contributing significant volume sales denominated foreign currencies company increased exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value us dollar relative currencies company typically experiences longer payment cycles international sales adverse impact upon companys liquidity addition substantial portion companys operations conducted outside united states particularly sweden international sales operations may subject risks imposition governmental controls export license requirements restrictions export critical technology political economic instability trade restrictions labor union activities changes tariffs taxes difficulties staffing managing international operations general economic conditions company experiences fluctuations orders sales due seasonal fluctuations customer sales cycles revenue fourth quarter year generally significantly higher quarter year first cases second quarter following year due seasonal pattern contracting us certain foreign governments frequent requirement international customers take delivery equipment prior end december due funding considerations tendency commercial enterprises fully utilize yearly capital budgets prior expiration addition significant portion companys quarterly sales historically occurred last month quarter sales frequently concentrated last week days quarter events likely continue result substantial fluctuations quarterly results future result quarterly fluctuations operating results company believes quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance results operations following table sets forth indicated periods certain items percentage revenue 1 excluding onetime charge 525 million connection acquisition agema costs goods sold gross profit earnings operations net earnings 1997 would 462 538 120 75 respectively years ended december 31 1998 1997 1996 revenue increased 677 918 million 1997 1539 million 1998 commercial revenue increased 1152 433 million 1997 932 million 1998 improvement principally attributable inclusion full year agemas operations 1998 compared one month 1997 increased deliveries companys handheld products particularly agema 570 revenue aggregating 311 million compared 63 million 1997 continued strong demand full line broadcast camera systems including ultramedia rs revenue sale thermal imaging systems government market increased 253 485 million 1997 608 million 1998 increase primarily attributable continued robust sales safire thermal imaging system inclusion revenue sales star safire introduced 1998 increased deliveries international customers typically higher sales prices domestic orders increased sales companys groundbased surveillance products revenue increased 390 660 million 1996 918 million 1997 commercial revenue increased 877 231 million 1996 433 million 1997 improvement principally attributable increased sales ultramedia companys airborne camera system airborne observation broadcast market segment aggregated 122 million 1997 compared 63 million 1996 production deliveries companys handheld imaging systems aggregated 109 million 1997 compared 47 million 1996 higher international sales one month contribution agemas operations aggregated 94 million revenue 1997 sale thermal imaging systems government market increased 129 430 million 1996 485 million 1997 increase primarily due increased sales safire thermal imaging system principally us marine corps us air force company continued benefit significant investment developing worldwide sales distribution channel majority companys revenue outside united states derived europe japan south america international revenue increased 433 million 1997 852 million 1998 accounted approximately 553 companys revenue 1998 increase 472 experienced 1997 320 experienced 1996 increase absolute dollars percentage revenue 1998 primarily due increased shipments international government customers increased commercial international sales result inclusion full year agema revenue 1998 primarily international gross profit percentage revenue gross profit increased 362 1997 577 1998 primarily due 161 million writeoff duplicative inventories related agema acquisition included cost goods sold 1997 exclusive writeoff gross margin increased 538 1997 577 1998 gross margin increase primarily due increase higher margin international sales higher proportion total revenue derived sale commercial products result favorable cost structure uncooled products generally exceed margins experienced sale imaging systems government market increase mitigated part increase sales us government aggregated 272 million 1998 compared 190 million 1997 typically lower margins sales government market gross profit exclusive agemarelated writeoff 1997 remained relatively consistent percentage revenue 537 1997 compared 539 1996 research development research development expense increased 873 118 million 1997 221 million 1998 increased 246 95 million 1996 118 million 1997 percentage revenue research development expense increased 129 1997 144 1998 decreased 144 1996 129 1997 increase research development expense absolute dollar terms attributable inclusion full year agemas operations 1998 compared one month 1997 increased research development activities related introduction star safire ultramedia le fireflir well ongoing product enhancements affecting research development expense reclassification development costs directly associated engineering revenue cost goods sold rather research development expenses costs amounted 0 800000 200000 1998 1997 1996 respectively without reclassifications research development expense percentage revenue would 144 137 147 1998 1997 1996 respectively selling operating costs selling operating costs increased 570 266 million 1997 417 million 1998 increased 397 190 million 1996 266 million 1997 selling operating costs percentage revenue decreased 289 1997 271 1998 remained relatively consistent 289 1997 288 1996 increase absolute dollar terms primarily due inclusion full year agemas operations 1998 compared one month 1997 costs associated increased revenue particularly increase international sales expenses related expanded operations companys international operations increased personnel company continued expand strengthen direct sales marketing staff interest expense interest expense includes costs related shortterm longterm debt capital lease obligations miscellaneous bank charges expenses foreign currency transaction gains losses increase 21 million 1997 32 million 1998 819000 1996 21 million 1997 primarily due increased shortterm debt result increased working capital needs year income taxes companys effective income tax rates 1998 1997 1996 268 296 197 respectively effective tax rates substantially statutory rate company able realize benefits portion net operating loss carryforwards existing tax credits additionally company recognized net deferred tax benefit 147 million 400000 1997 1996 respectively recognition criteria statement financial accounting standards 109 sfas 109 accounting income taxes 147 million deferred tax benefit recognized 1997 relates primarily 525 million writeoff conjunction agema acquisition current portion income tax expense consists state federal foreign income taxes utilization net operating loss carryforwards existing tax credits limited december 31 1998 company net operating loss carryforwards aggregating 38 million expire years 2005 2010 utilization companys acquired net operating loss carryforwards fsi automation formerly known optimas corporation limited future earnings fsi automation limited approximately 350000 per year fsi automation experienced cumulative change ownership 50 within threeyear period additionally company various tax credits available aggregating 27 million expire years 2007 2013 finally company 118 million deferred tax asset related acquired inprocess research development realization deferred tax asset dependent upon ability foreign subsidiaries remit earnings us parent limited realization 15 year period liquidity capital resources december 31 1998 company notes payable net cash hand 347 million compared 207 million december 31 1997 increase notes payable principally caused increased inventories receivables payment accrued payroll liabilities accounts receivable increased 555 million december 31 1997 810 million december 31 1998 increase receivables primarily due exceptionally large volume shipments late year fact much revenue fourth quarter 1998 related amounts due aircraft integrators oems many cases company accepted payment terms require company wait customers paid prior company receiving funds company grant rights return company anticipates receivable levels days sales outstanding decline 1999 higher proportion revenue derived commercial customers tend shorter collection cycle inventories increased 347 million december 31 1997 530 million december 31 1998 increase inventories primarily attributable buildup inventories support companys new products including star safire ultramedia le fireflir build finished goods inventories anticipation sales products 1999 part companys plan reduce component inventories buildup finished goods certain contracts delayed 1999 finished goods inventories aggregated 175 million december 31 1998 compared 894000 december 31 1997 companys investing activities consisted primarily expenditures fixed assets totaled 122 million 1998 compared 108 million 1997 large percentage 1998 expenditures related replacement companys enterprise resource planning erp system year 2000 compliance issues expenditures aggregated approximately 40 million december 31 1998 company available 420 million line credit bears interest libor plus 175 70 december 31 1998 secured companys assets loan agreement governing line credit requires company maintain certain financial ratios restricts company taking certain significant actions including incurring additional debt making acquisitions without consent bank additionally company one subsidiaries 400 million swedish kroner approximately 50 million line credit bears interest 47 december 31 1998 company 374 million outstanding lines credit december 31 1998 march 30 1999 company expanded 420 million credit facility 700 million approximately 240 million borrowings new line credit utilized pay existing debt inframetrics inc time merger use cash operating activities primarily due increases inventories receivables decrease accrued liabilities discussed company believes existing cash available credit facilities together continuing efforts expedite collection accounts receivable management inventory levels sufficient meet cash requirements foreseeable future impact year 2000 year 2000 issue result computer programs written using two digits rather four define applicable year software may recognize date using 00 year 1900 rather year 2000 could result system failures miscalculations leading disruptions companys activities operations company significant suppliers customers fail make necessary modifications conversions contingency plans timely basis year 2000 issue could material adverse effect companys business operations cash flows financial conditions year 2000 issue affects companys internal systems well companys products include datesensitive software company currently conducting comprehensive review computer systems identify systems could affected year 2000 issue company identified internal manufacturing system acquired company connection acquisition agema year 2000 compliant begun installation new enterprise resource planning system hardware software correct deficiency companys existing product line tested reviewed ensure year 2000 compliance companys products development designed year 2000 compliant additionally company evaluating year 2000 compliance products suppliers partners internal external resources employed identify correct reprogram test systems year 2000 compliance total cost project estimated approximately 65 million funded existing cash resources contingency plan developed dealing reasonably likely worstcase scenario yet clearly identified company currently plans complete analysis contingency planning december 31 1999 assurance however systems products companies companys systems also rely timely converted failure convert vendor customer another company would adverse effect companys systems additionally cannot completely ensure companys computer systems software products contain undetected problems associated year 2000 compliance problems occur may result adverse effects future operating results forwardlooking statements managements discussion analysis financial condition results operations contain forwardlooking statements within meaning securities litigation reform act 1995 based current expectations estimates projections companys business managements beliefs assumptions made management words expects anticipates intends plans believes sees estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance involve risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecasted forwardlooking statements due numerous factors including limited discussed managements discussion analysis financial condition results operations well discussed time companys securities exchange commission fillings reports addition statements could affected general industry market conditions growth rates general domestic international economic conditions forwardlooking statements speak date made company undertake obligation update forwardlooking statement reflect events circumstances date report company update correct one forwardlooking statement investors others conclude company make additional updates corrections respect thereto respect forwardlooking statements item 8item 7 management’s discussion analysis financial condition results operations overview flir systems inc “flir” “company” “we” “us” “our” world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs multitude customers sell offtheshelf products wide variety markets efficient timely affordable manner well offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs business organized two divisions commercial systems government systems within divisions five reporting segments thermal vision measurement raymarine comprise commercial systems division surveillance detection integrated systems make government systems division detailed description segments see “business segments” within item 1 international revenue accounted approximately 48 percent 47 percent 41 percent revenue 2011 2010 2009 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kroner british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2011 accounts receivable balance 3254 million reported net allowances doubtful accounts 56 million believe reported allowances december 31 2011 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2011 inventories 3361 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value goodwill may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable business segments company current review indicates adjustments necessary goodwill assets carrying value 4983 million december 31 2011 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 160 million december 31 2011 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits likely recognized valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2011 determined valuation allowance net deferred tax assets 67 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding 2 amounts adjusted reclassification certain discontinued operations continuing operations following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2011 2010 2009 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months revenue 2011 totaled 15441 million increase 112 percent 2010 revenue 13884 million increase primarily due increased revenue thermal vision measurement segment revenues reported raymarine holdings ltd “raymarine” acquired may 14 2010 icx technologies inc “icx” acquired october 4 2010 excluding revenue raymarine icx revenue year ended december 31 2011 flat compared period 2010 revenue thermal vision measurement segment increased 149 percent 2011 compared period 2010 revenue surveillance segment declined 140 percent 2011 compared period 2010 revenue 2010 totaled 13884 million increase 210 percent 2009 revenue 11471 million increase primarily due 169 percent increase thermal vision measurement revenue reported raymarine icx revenues dates acquisition businesses totaled 1502 million excluding raymarine icx revenue 2010 increased 79 percent 2009 international revenue 2011 totaled 7406 million representing 480 percent revenue compares international revenue 2010 totaled 6537 million representing 471 percent revenue 4748 million 2009 representing 414 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis gross profit gross profit year ended december 31 2011 8286 million compared 7636 million 2010 gross margin defined gross profit divided revenue decreased slightly 550 percent 2010 537 percent 2011 decrease gross margin 2011 primarily due lower gross margins raymarine icx business units historically lower gross margins business segments product mix surveillance division partially offset continued production efficiencies realized increased volumes thermal vision measurement segment excluding raymarine icx business units gross margins 574 percent 568 percent 2011 2010 respectively gross profit year ended december 31 2010 7636 million compared 6585 million 2009 gross margin decreased 574 percent 2009 550 percent 2010 decrease gross margin primarily due gross margins raymarine icx product mix surveillance division partially offset production efficiencies related increased volumes lower production costs thermal vision measurement manufacturing facilities excluding raymarine icx gross margin 568 percent revenue 2010 cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs research development research development expenses 1472 million 95 percent revenue 2011 compared 1166 million 84 percent revenue 2010 913 million 80 percent revenue 2009 increase research development expenses percentage revenue 2011 2010 2009 due increased investment new product development well research development activity conducted acquired companies believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 3682 million 238 percent revenue 2011 compared 2867 million 206 percent revenue 2010 2199 million 192 percent revenue 2009 increase selling general administrative expenses 2010 2011 primarily due operating expenses related businesses acquired 2010 represented 461 million increase payment 39 million litigation settlement second quarter 2011 increased spending business segments drive future growth increase selling general administrative expenses 2009 2010 primarily due increased spending business segments support future growth well operating expenses businesses acquired 2009 2010 acquisition related costs incurred 2010 92 million 30 million litigation settlement recorded third quarter 2010 anticipate selling general administrative expenses future increase slower rate revenue interest expense interest expense totaled 55 million 29 million 69 million years ended december 31 2011 2010 2009 respectively interest expense 2011 primarily attributable interest expense associated 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 issued august 2011 amortization costs related issuance notes interest expense 2010 primarily attributable interest convertible notes issued june 2003 amortization discounts recorded notes costs related issuance notes convertible notes fully converted june 2010 interest income interest income 13 million 13 million 17 million years ended december 31 2011 2010 2009 respectively decrease interest income 2011 2010 compared 2009 primarily due lower interest rates less invested cash income net reported income 21 million 2011 40 million 2010 expense 18 million 2009 income 2011 2010 primarily currency transaction gain rental income expense 2009 primarily currency transaction losses offset investment gains income taxes income tax provision 884 million 1143 million 1102 million 2011 2010 2009 respectively effective tax rates 2011 2010 2009 284 percent 315 percent 324 percent respectively mix taxable income united states international operations impacted income tax provisions years effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign tax credits federal state tax credits december 31 2011 company united states tax net operating loss carryforwards totaling approximately 777 million expire 2025 2030 addition company various state net operating loss carryforwards totaling approximately 675 million expire 2012 2030 federal state net operating losses generated icx technologies inc prior acquired us 2010 tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded believe net deferred tax assets 418 million reflected december 31 2011 consolidated balance sheet materially realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 67 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets discontinued operations certain operations included acquisition icx identified available sale results reported discontinued operations december 2011 sold two icx business units reported discontinued operations addition written net assets estimated market value two remaining business units classified discontinued operations net loss 07 million sale write 30 million operating losses 13 million year included loss discontinued operations net cumulative tax benefits 38 million consolidated statement income year ended december 31 2011 segment operating results january 1 2011 merged thermography commercial vision systems operating segments thermal vision measurement operating segment raymarine acquired may 14 2010 creating raymarine operating segment finally icx acquired october 4 2010 icx operating segment reported december 31 2010 since separated surveillance detection integrated systems operating segments january 1 2011 former government systems operating segment also included surveillance operating segment thermal vision measurement thermal vision measurement operating results follows millions revenue increased 149 percent 2011 compared 2010 primarily due increased unit deliveries several segment’s product lines including thermography cores components maritime product lines earnings operations increased 189 percent due increase revenue manufacturing efficiencies resulting higher production volumes lower material costs new products revenue increased 169 percent 2010 compared 2009 primarily due increased unit sales security transportation maritime product lines introduction 2010 personal night vision systems products earnings operations increased 339 percent due increase revenue manufacturing efficiencies resulting higher production volumes lower material costs new products raymarine operating results follows millions raymarine acquired may 14 2010 operating results period since acquisition earnings operations include impact amortization intangible assets 38 million 2011 21 million 2010 surveillance operating results follows millions revenue decreased 140 percent 2011 compared 2010 primarily due decreases revenue us government agencies partially offset revenue 88 million icx business units acquired october 4 2010 lower revenue increased segment operating expenses caused decline earnings operations operating margin 2010 2011 earnings operations include impact amortization intangible assets 24 million 06 million fair value adjustments inventory 26 million 13 million 2011 2010 respectively fair value adjustment inventory related purchase price accounting adjustment fully amortized 2011 decline backlog 2010 2011 primarily due continued reduction procurement activity us government customers 2011 revenue increased 24 percent 2010 compared 2009 higher deliveries groundbased products revenue business acquired october 2009 offset decreases revenue airborne maritime products spending us government agencies declined 2010 change product mix increased operating expenses segment resulted decline earnings operations operating margin 2009 2010 decline backlog 2009 2010 primarily due deliveries us government programs booked prior years reduced procurement activity us government customers 2010 detection operating results follows millions icx acquired october 4 2010 operating results period since acquisition earnings operations include impact amortization intangible assets 26 million 06 million fair value adjustments inventory 42 million 21 million 2011 2010 respectively fair value adjustment inventory related purchase price accounting adjustment fully amortized 2011 integrated systems integrated systems operating results follows millions icx acquired october 4 2010 operating results period since acquisition earnings operations include impact amortization intangible assets 16 million 04 million fair value adjustments inventory 05 million 02 million 2011 2010 respectively fair value adjustment inventory related purchase price accounting adjustment fully amortized 2011 liquidity capital resources december 31 2011 total 4409 million cash equivalents 2636 million united states 1773 million foreign subsidiaries compared 779 million united states 1153 million foreign subsidiaries december 31 2010 increase cash equivalents 2011was primarily due net proceeds 2477 million issuance 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” cash provided operations cash proceeds stockbased compensation programs partially offset capital expenditures repurchases common stock dividends paid period business acquisitions cash provided operating activities 2011 totaled 2439 million compared 2553 million 2010 2718 million 2009 decrease cash provided operating activities 2011 primarily due decrease net earnings partially offset noncash income charges depreciation amortization decrease cash provided operating activities 2010 primarily due increase accounts receivable inventories deferred tax assets offset increase net earnings compared 2009 cash used investing activities year ended december 31 2011 totaled 671 million primarily consisting acquisition aerius photonics llc 270 million capital expenditures 420 million capital expenditures 2011 included purchase building fareham united kingdom building improvements facilities nashua new hampshire arninge sweden cash used investing activities year ended december 31 2010 totaled 4654 million primarily consisting acquisitions raymarine 1747 million icx 2280 million capital expenditures 660 million capital expenditures 2010 included purchase two buildings 362 million cash used investing activities year ended december 31 2009 totaled 1077 million primarily consisting acquisitions salvador omnitech directed perception capital expenditures 419 million include purchase building 97 million cash provided financing activities year ended december 31 2011 totaled 754 million primarily consisting net proceeds 2477 million issuance notes cash provided stockbased compensation plans partially offset payment dividends repurchase approximately 61 million shares common stock cash used financing activities year ended december 31 2010 totaled 65 million primarily consisting repurchase approximately 13 million shares common stock offset proceeds shares issued tax benefits recognized stockbased compensation plans cash provided financing activities year ended december 31 2009 totaled 435 million primarily consisting repurchase approximately 32 million shares common stock offset proceeds shares issued tax benefits recognized stockbased compensation plans october 6 2006 signed credit agreement “2006 credit agreement” bank america na union bank california na us bank national association lenders 2006 credit agreement provided 300 million fiveyear revolving line credit december 31 2010 amounts outstanding 2006 credit agreement 65 million letters credit outstanding reduced total available credit facility terminated february 8 2011 july 7 2010 entered uncommitted letter credit agreement bank america support letters credit whose expiration would extend beyond 2006 credit agreement december 31 2011 2010 total value letters credit outstanding facility 06 million 86 million respectively february 8 2011 signed new credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million february 8 2016 credit agreement allows us certain designated subsidiaries borrow united states dollars euro kroner pound sterling agreed upon currencies credit agreement requires us pay commitment fee amount unused credit rate based company’s leverage ratio ranges 025 percent 040 percent credit agreement contains two financial covenants require maintenance certain leverage ratios compliance december 31 2011 fiveyear revolving line credit available credit agreement unsecured december 31 2011 amounts outstanding credit agreement commitment fee amount unused credit 025 percent 158 million letters credit outstanding december 31 2011 reduced total available credit agreement august 19 2011 company issued 250 million aggregate principal amount notes net proceeds issuance notes approximately 2477 million deducting underwriting discounts offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 commencing march 1 2012 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases common stock sweden subsidiary 30 million swedish kroner approximately 43 million line credit interest rate 281 percent december 31 2011 december 31 2011 amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2011 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2011 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts company cannot make reasonably reliable estimate period potential cash settlement unrecognized tax benefits 292 million therefore included unrecognized tax benefits table significant contractual obligations december 31 2011 detail unrecognized tax benefits see note 14 consolidated financial statements included report include approximately 158 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview flir systems inc “flir” “company” “we” “us” “our” world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs multitude customers sell offtheshelf products wide variety markets efficient timely affordable manner well offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs business organized two divisions commercial systems government systems within divisions five reporting segments thermal vision measurement raymarine comprise commercial systems division surveillance detection integrated systems make government systems division detailed description segments see “business segments” within item 1 international revenue accounted approximately 49 percent 48 percent 47 percent revenue 2012 2011 2010 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kroner british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect challenging worldwide economic conditions impacted revenue performance 2012 continue impact business going forward specifically reduced spending united states middle east government agencies continuing eurozone crisis impact united states yearend 2012 expiration income payroll tax cuts absence action united states congress contrary potential material reductions federal spending resulting budget control act 2011 among global economic developments present challenges us render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2012 accounts receivable balance 3352 million reported net allowances doubtful accounts 66 million believe reported allowances december 31 2012 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2012 inventories 3814 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value goodwill may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable business segments company current review indicates adjustments necessary goodwill assets carrying value 5031 million december 31 2012 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 162 million december 31 2012 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits likely recognized valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2012 determined valuation allowance net deferred tax assets 93 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2012 2011 2010 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months operating results 2012 include amounts either lorex traficon amounts significant revenue 2012 totaled 14054 million decrease 90 percent 2011 revenue 15441 million operating segments except integrated systems reported decreases year revenues due continued reductions demand products united states government middle east government agencies weaker worldwide economic conditions resulting lower demand many commercial product lines decline 1387 million year revenue included decline 713 million united states government customers revenue 2011 totaled 15441 million increase 112 percent 2010 revenue 13884 million increase primarily due increased revenue thermal vision measurement segment full year revenues reported raymarine holdings ltd “raymarine” acquired may 14 2010 icx technologies inc “icx” acquired october 4 2010 excluding revenue raymarine icx revenue year ended december 31 2011 flat compared period 2010 revenue thermal vision measurement segment increased 149 percent 2011 compared period 2010 revenue surveillance segment declined 140 percent 2011 compared period 2010 international revenue 2012 totaled 6875 million representing 489 percent revenue compares international revenue 2011 totaled 7406 million representing 480 percent revenue 6537 million 2010 representing 471 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold year ended december 31 2012 2011was 6740 million 7155 million respectively year decrease cost goods sold primarily relate lower year revenues changes product mix year ended december 31 2012 costs goods sold included restructuring charges 38 million primarily work force reductions thermal vision measurement detection segments year ended december 31 2011 costs goods sold included restructuring charges 09 million year ended december 31 2011 costs goods sold included charges 73 million amortization fair value adjustments inventory acquired acquisition icx 2010 cost goods sold 2011 7155 million increase 907 million 145 percent cost goods sold 6248 million 2010 increase primarily due increase revenues year discussed year ended december 31 2010 cost goods sold included charges 36 million amortization fair value adjustments inventory icx cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2012 7314 million compared 8286 million 2011 gross margin defined gross profit divided revenue decreased 537 percent 2011 520 percent 2012 decrease gross profit 2012 primarily due lower revenue year lower consolidated gross margin gross margin decreased 2012 2011 primarily due shift product mix thermal vision measurement surveillance segments reduced absorption fixed costs due lower revenues partially offset elimination 2011 amortization expenses related fair value adjustments inventory icx gross profit year ended december 31 2011 8286 million compared 7636 million 2010 gross margin decreased 550 percent 2010 537 percent 2011 decrease gross margin primarily due higher percentage revenue raymarine icx business units historically lower gross margins business segments well change product mix surveillance segment effects partially offset continued production efficiencies realized increased volumes thermal vision measurement segment excluding raymarine icx business units gross margins 574 percent 2011 slightly 568 percent 2010 research development research development expenses 1378 million 98 percent revenue 2012 compared 1472 million 95 percent revenue 2011 1166 million 84 percent revenue 2010 decrease research development expenses 2012 2011 primarily due cost containment efforts light decrease revenue increase research development expenses 2011 2010 due increased investment new product development well research development activity conducted newly acquired companies believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 2903 million 207 percent revenue 2012 compared 3682 million 238 percent revenue 2011 2867 million 206 percent revenue 2010 decrease selling general administrative expenses 2011 2012 primarily due payment 390 million litigation settlement 2011 cost control efforts taken 2012 light revenue decline lower annual incentive expenses increase selling general administrative expenses 2010 2011 primarily due operating expenses related businesses acquired 2010 represented 461 million increase 390 million litigation settlement 2011 selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses interest expense interest expense totaled 117 million 55 million 29 million years ended december 31 2012 2011 2010 respectively interest expense 2012 2011 primarily attributable interest expense associated 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 issued august 2011 amortization costs related issuance notes interest expense 2010 primarily attributable interest convertible notes issued june 2003 amortization discounts recorded notes costs related issuance notes convertible notes fully converted june 2010 income taxes income tax provision 666 million 884 million 1143 million 2012 2011 2010 respectively effective tax rates 2012 2011 2010 228 percent 284 percent 315 percent respectively mix taxable income united states international operations significant impact annual income tax provision effective tax rates effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign federal state tax credits onetime items amended tax filings business dispositions 2012 effective tax rate decrease primarily due impact multiyear agreement effective august 1 2012 european jurisdiction effect amended state tax filings impact revaluations deferred tax assets liabilities due changes certain foreign statutory tax rates expect effective tax rate 2013 approximately 25 percent excluding discrete items december 31 2012 company united states tax net operating loss carryforwards totaling approximately 579 million expire 2018 2031 addition company various state net operating loss carryforwards totaling approximately 795 million expire 2018 2031 federal state net operating losses generated icx technologies inc prior acquired us 2010 finally company various foreign net operating loss carryforwards totaling approximately 935 million expire 2018 2033 tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded believe net deferred tax assets 552 million reflected december 31 2012 consolidated balance sheet materially realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 93 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized discontinued operations 2010 connection acquisition icx began pursue sale certain business units icx results operations business units reported discontinued operations respective dispositions second quarter 2012 sold remaining two business units reported discontinued operations operating losses operations including insignificant associated losses recognized subsequent disposal net losses sales units net tax reflected consolidated statements income year ended december 31 2012 segment operating results january 1 2011 merged thermography commercial vision systems operating segments thermal vision measurement operating segment raymarine acquired may 14 2010 creating raymarine operating segment finally icx acquired october 4 2010 icx operating results period acquisition december 31 2010 reported separate segment effective january 1 2011 icx results reported detection integrated system segments portion reported surveillance segment beginning january 1 2011 former government systems operating segment also included surveillance operating segment thermal vision measurement thermal vision measurement operating results follows millions thermal vision measurement revenue decreased 49 percent 2012 compared 2011 primarily due lower revenues cores components product line premium thermography product lines revenue declined geographies due worldwide economic weaknesses particularly significant europe middle east africa regions united states revenue adversely impacted lower revenue cores components customers earnings operations decreased 120 percent due flow lower revenues lower absorption factory costs partially offset 55 percent reduction operating expenses revenue increased 149 percent 2011 compared 2010 primarily due increased unit deliveries several segment’s product lines including thermography cores components maritime earnings operations increased 189 percent due increase revenue manufacturing efficiencies resulting higher production volumes lower material costs new products raymarine operating results follows millions raymarine segment revenue year ended december 31 2012 decreased 78 percent compared 2011 primarily due weak market conditions europe earnings operations 2012 decreased 59 percent compared 2011 primarily due lower revenue resulting lower gross profit largely offset 99 percent reduction operating expenses operating results 2010 period may 14 2010 december 31 2010 raymarine earnings operations include impact amortization intangible assets 35 million 2012 38 million 2011 21 million 2010 surveillance operating results follows millions surveillance segment revenue decreased 158 percent 2012 compared 2011 primarily due 266 percent decrease revenue us government customers earnings operations declined 232 percent due lower revenues lower gross margins resulting change segment product mix partially offset 105 percent decrease operating expenses revenue decreased 140 percent 2011 compared 2010 primarily due decreases revenue us government agencies partially offset revenue 88 million icx business units acquired october 4 2010 lower revenue increased segment operating expenses caused decline earnings operations operating margin 2010 2011 decline backlog 2010 2011 primarily due reduction procurement activity us government customers detection operating results follows millions detection segment revenue year ended december 31 2012 decreased 208 percent compared period 2011 primarily due two significant program deliveries 2011 lower research development contract revenues pursuant segments strategy reduce customerpaid research development activity loss operations 2011included amortization fair value adjustments inventory 42 million elimination fair value inventory adjustment 279 percent reduction operating expenses partially offset lower revenues main factors contributing improvement operating results 2012 compared 2011 operating results 2010 period october 4 2010 december 31 2010 earnings operations include impact amortization fair value adjustments inventory 42 million 21 million 2011 2010 respectively fair value adjustment inventory related purchase price accounting adjustment fully amortized 2011 integrated systems integrated systems operating results follows millions integrated systems segment revenue year ended december 31 2012 increased 267 percent 2011 primarily due increase large program revenue recognized year backlog december 31 2012 reflects increase due several large program contracts booked 2012 operating results 2010 period october 4 2010 december 31 2010 earnings operations include impact amortization fair value adjustments inventory 05 million 02 million 2011 2010 respectively fair value adjustment inventory related purchase price accounting adjustment fully amortized 2011 liquidity capital resources december 31 2012 total 3217 million cash equivalents 1503 million united states 1714 million foreign subsidiaries compared cash equivalents december 31 2011 4408 million 2636 million united states 1773 million foreign subsidiaries decrease cash equivalents 2012 primarily due repurchase 105 million shares common stock 2142 million business acquisitions 1059 million capital expenditures 581 million dividends paid 425 million partially offset cash provided operations cash provided operating activities 2012 totaled 2855 million compared 2439 million 2011 2553 million 2010 increase cash provided operating activities 2012 compared 2011 primarily due year reduction cash used certain working capital components particularly inventories income tax related assets liabilities decrease cash provided operating activities 2011 compared 2010 primarily due decrease net earnings partially offset year reduction cash used certain working capital components cash used investing activities year ended december 31 2012 totaled 1670 million primarily consisting acquisition lorex technology inc 612 million traficon international nv 463 million capital expenditures 582 million capital expenditures 2012 included building improvements facilities nashua new hampshire taby sweden croissybeaubourg france equipment requirements existing future product lines cash used investing activities year ended december 31 2011 totaled 671 million primarily consisting acquisition aerius photonics llc 270 million capital expenditures 420 million capital expenditures 2011 included purchase building fareham united kingdom building improvements facilities nashua new hampshire taby sweden cash used investing activities year ended december 31 2010 totaled 4654 million primarily consisting acquisitions raymarine 1747 million icx 2280 million capital expenditures 657 million capital expenditures 2010 included purchase two buildings 362 million cash used financing activities year ended december 31 2012 totaled 2443 million primarily consisting repurchase shares common stock payment dividends cash provided financing activities year ended december 31 2011 totaled 754 million primarily consisting net proceeds 2477 million issuance 375 percent senior unsecured notes due september 1 2016 notes cash provided stockbased compensation plans partially offset payment dividends repurchase approximately 60 million shares common stock cash provided financing activities year ended december 31 2010 totaled 65 million primarily consisting repurchase approximately 13 million shares common stock offset proceeds shares issued tax benefits recognized stockbased compensation plans february 8 2011 entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million february 8 2016 credit agreement allows us certain designated subsidiaries borrow united states dollars euro kroner pound sterling agreed upon currencies credit agreement requires us pay commitment fee amount unused credit rate based company’s leverage ratio ranges 025 percent 040 percent credit agreement contains two financial covenants require maintenance certain leverage ratios compliance december 31 2012 fiveyear revolving line credit available credit agreement unsecured december 31 2012 amounts outstanding credit agreement commitment fee amount unused credit 025 percent 106 million 158 million letters credit outstanding december 31 2012 2011 respectively reduced total available credit agreement august 19 2011 company issued 250 million aggregate principal amount notes net proceeds issuance notes approximately 2477 million deducting underwriting discounts offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases common stock believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2012 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2012 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts company cannot make reasonably reliable estimate period potential cash settlement unrecognized tax benefits 351 million therefore included unrecognized tax benefits table significant contractual obligations december 31 2012 detail unrecognized tax benefits see note 14 consolidated financial statements included report include approximately 106 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations overview world leader sensor systems enhance perception awareness founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs wide range customers sell offtheshelf products many markets also offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs managements discussion analysis financial condition results operations prepared reported based reporting structure six operating segments detailed description segments see business segments within item 1 international revenue accounted approximately 47 percent 49 percent 50 percent revenue 2015 2014 2013 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kronor british pound sterling impact fluctuations reflected throughout consolidated financial statements primarily due united states dollar strengthening 2015 meaningful impact results operations 2015 including reduction approximately 63 million revenue reductions carrying values foreign net assets translated foreign currencies united states dollars experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance expect macroeconomic factors including reduced spending united states government agencies economic weaknesses certain geographic markets continue present challenges us render predictions regarding future performance difficult make critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance united states generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition allowance doubtful accounts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition revenue recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated contractual terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc allocate revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2015 accounts receivable balance 3261 million reported net allowances doubtful accounts 69 million believe reported allowances december 31 2015 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usages evaluated within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2015 inventories 3931 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill represents excess purchase price acquired enterprise assets estimated fair value identifiable net assets acquired assess goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process qualitative factors may consider include limited macroeconomic conditions industry conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance indicators goodwill impaired proceed twostep impairment test whereby first step comparing fair value reporting unit carrying amount including goodwill fair value reporting unit exceeds carrying value goodwill impaired testing performed second step performed carrying value reporting unit exceeds fair value carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded impairment test current year indicate impairment goodwill reporting units product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy record warranty liabilities levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 165 million december 31 2015 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals disclosures adjusted income taxes account income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2015 determined valuation allowance deferred tax assets 26 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain believe positions taken appropriate reserves taxes address potential exposures involving tax positions challenged could challenged tax authorities record benefit tax position determine likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained measure tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available reporting date review tax reserves circumstances warrant adjust reserves changes available facts arise affect potential liability additional taxes consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2015 2014 2013 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months revenue 2015 totaled 15571 million increase 17 percent 2014 revenue 15307 million year revenue growth primarily due increases security detection segments partially offset declines surveillance instruments oem emerging markets maritime segments revenue increase negatively impacted year changes foreign currency rates particularly instruments maritime segments constant currency basis revenue 2015 would increase approximately 58 percent 2014 revenue 2014 totaled 15307 million increase 23 percent 2013 revenue 14964 million operating segments reported increases year revenues revenue united states government customers declined 445 million 2013 2014 international revenue 2015 totaled 7342 million representing 472 percent revenue compares international revenue 2014 totaled 7470 million representing 488 percent revenue 7407 million 2013 representing 495 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis cost goods sold cost goods sold years ended december 31 2015 2014 8035 million 7803 million respectively increase primarily due increase revenues year discussed changes product mix cost goods sold 2014 7803 million compared cost goods sold 7594 million 2013 year increase cost goods sold primarily relates higher year revenues changes product mix years ended december 31 2014 2013 cost goods sold included 06 million 17 million respectively inventory write downs related restructuring activities cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs gross profit gross profit year ended december 31 2015 7536 million compared 7504 million 2014 gross margin defined gross profit divided revenue decreased slightly 490 percent 2014 484 percent 2015 primarily due changes product mix negative impact year changes foreign currency rates gross profit year ended december 31 2014 7504 million compared 7370 million 2013 gross margin decreased 493 percent 2013 490 percent 2014 research development research development expenses 1329 million 85 percent revenue 2015 compared 1428 million 93 percent revenue 2014 1477 million 99 percent revenue 2013 believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 3135 million 201 percent revenue 2015 compared 3320 million 217 percent revenue 2014 3227 million 216 percent revenue 2013 decrease selling general administrative expenses 2015 compared 2014 primarily due 156 million decrease corporate expenses primarily related 2014 legal expenses incurred litigation matters costs regulatory settlement increase selling general administrative expenses 2014 compared 2013 primarily due increases marketing spending 138 million increase corporate expenses due 2014 factors previously mentioned selling general administrative expenses may affected future acquisitions different cost structures anticipate selling general administrative expenses increase slower rate revenue existing businesses restructuring expenses years ended december 31 2015 2014 2013 recorded net pretax restructuring expenses totaling 14 million 170 million 275 million respectively restructuring expenses recorded 2014 164 million recorded operating expenses 06 million recorded costs goods sold restructuring expenses recorded 2013 258 million recorded operating expenses 17 million included costs goods sold fourth quarter 2013 initiated realignment plan included closing six nottoscale sites united states europe transfer operations larger facilities also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas benefits actions reflected operating results december 31 2015 completed majority actions realignment plan interest expense interest expense totaled 141 million 146 million 141 million years ended december 31 2015 2014 2013 respectively interest expense primarily attributable 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 amortization costs related issuance notes 150 million term loan drawn april 5 2013 income expense net income totaled 126 million 35 million 13 million years ended december 31 2015 2014 2013 respectively increase income year ended december 31 2015 primarily attributed gain sale cost basis investment private technology company income taxes income tax provision 638 million 493 million 520 million 2015 2014 2013 respectively effective tax rates 2015 2014 2013 209 percent 197 percent 227 percent respectively mix taxable income united states international operations significant impact annual income tax provision effective tax rates effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign federal state tax credits discrete items 2015 discrete items included 121 million release previously recorded tax valuation allowance 2014 discrete items included 94 million release previously recorded unrecognized tax benefits longer required due closure applicable statute expect effective tax rate 2016 approximately 26 percent excluding discrete items december 31 2015 united states tax net operating loss carryforwards totaling approximately 46 million expire 2019 2031 addition various state net operating loss carryforwards totaling approximately 392 million expire 2016 2033 federal state net operating losses primarily generated icx technologies inc prior acquired us 2010 finally various foreign net operating loss carryforwards totaling approximately 711 million portion expire 2018 2033 portion indefinite carryforward period tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded december 31 2015 determined valuation allowance deferred tax assets 26 million required primarily related certain acquired net operating losses review available positive negative evidence considered including past future performance market environment operate utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating whether deferred tax assets realized january 11 2016 european commission announced decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid company expects impact one subsidiaries covering threeyear period concluded expiration agreement july 2015 negotiations ongoing belgian government european commission agree methodology calculate applicable amounts company impacted decision although company received request payment official notice company evaluated potential impact european commissions decision accordance fasb asc topic 740 income taxes noting recent decision could significantly increase companys unrecognized tax benefits within next twelve months however due ongoing negotiations uncertainty surrounding calculation methodology litigation process company currently unable estimate range potential increase company unable estimate range potential impact unrecognized tax benefits impact could material 2016 tax provision segment operating results six operating segments effective january 1 2015 personal vision systems product line transferred oem emerging markets segment surveillance segment results two segments years ended december 31 2014 2013 reclassified conform presentation year ended december 31 2015 following discusses operating results segments three year period surveillance operating results follows millions except percentages surveillance revenue decreased 33 percent 2015 compared 2014 primarily due continued reductions demand united states government funded customers decreases airborne integrated systems product line revenues partially offset increase revenues land product line earnings operations increased 145 percent primarily due lower operating expenses higher gross margins partially offset decrease revenues year ended december 31 2015 surveillance restructuring charges 02 million compared 52 million 2014 revenue decreased 62 percent 2014 compared 2013 primarily due reductions demand united states government funded customers earnings operations decreased 61 percent primarily due lower revenues partially offset cost savings generated result restructuring activities 2013 surveillance restructuring charges 54 million instruments operating results follows millions except percentages instruments segment revenue year ended december 31 2015 decreased 19 percent compared year ended december 31 2014 year decrease revenue primarily due revenue decline americas region partially offset increase asia pacific region product line basis declines higher end thermography optical gas imaging product lines partially offset increases science test measurement fire product lines revenues year ended december 31 2015 also negatively impacted year changes currency exchange rates constant currency basis instruments revenues 2015 increased 49 percent compared 2014 increase earnings operations year ended december 31 2015 compared year ended december 31 2014 primarily due lower restructuring expenses costs savings associated restructuring activities large portion segment expenses incurred europe segment experienced favorable impact operating expenses changes foreign currency rates largely offset associated decline revenues region year ended december 31 2015 instrument restructuring charges 12 million compared 110 million year ended december 31 2014 instruments segment revenue year ended december 31 2014 increased 49 percent compared year ended december 31 2013 year increase revenue primarily due increased deliveries geographic regions across product lines particularly products introduced late 2013 2014 increase earnings operations year ended december 31 2014 compared 2013 primarily due higher revenues lower restructuring expenses cost savings generated restructuring activities 2013 segment incurred restructuring charges 155 million security operating results follows millions except percentages security segment revenue year ended december 31 2015 increased 265 percent year ended december 31 2014 increase primarily due increased deliveries across product families americas europe geographic regions increase earnings operations 131 percent primarily due increase revenues partially offset increases sales marketing support operating expenses security segment revenue year ended december 31 2014 increased 270 percent compared prior year primarily due increased deliveries product families expanded distribution increase earnings operations 2014 434 percent 2013 primarily due increase year revenues partially offset increased marketing customer technical support product development expenses increase backlog primarily due increase orders international customers often longer delivery times oem emerging markets oem emerging markets operating results follows millions except percentages oem emerging markets segment revenue decreased 62 percent 2015 compared 2014 primarily due loss approximately 88 million 2014 revenue former optical components group sold august 2014 negative impacts changes currency exchange rates earnings operations declined 2015 compared 2014 primarily due decrease revenue lower gross margins partially offset lower operating expenses revenue increased 82 percent 2014 compared 2013 primarily due increased deliveries customers united states particularly uncooled camera cores newly introduced mobile accessories earnings operations increased 280 percent due increase revenues cost savings restructuring activities maritime operating results follows millions except percentages maritime segment revenue year ended december 31 2015 decreased 76 percent compared 2014 primarily due negative impact year changes currency exchange rates europe asia pacific regions constant currency basis 2015 revenue increased 22 percent compared 2014 since majority segments costs goods sold incurred united states dollars costs receive favorable impact changes currency exchange rates consequently decrease earnings operations 2015 compared 2014 primarily due revenue decline maritime segment revenue year ended december 31 2014 increased 19 percent compared period 2013 primarily due higher deliveries europe year unit volume increases raymarinebranded product lines detection operating results follows millions except percentages detection segment revenue year ended december 31 2015 increased 345 percent compared prior year increase revenue primarily due increased deliveries cbrne threat response systems related spare parts services orders received second half 2014 large program united states government increase earnings operations operating margin primarily due increases revenues higher gross margins increase backlog primarily due additional orders cbrne threat response systems received first fourth quarters 2015 detection segment revenue year ended december 31 2014 decreased 50 percent compared 2013 decline year revenue 2014 compared 2013 primarily due reduced deliveries united states customers across product lines increase earnings operations 2014 primarily due realizing benefit 2014 restructuring measures taken 2013 increase backlog due large contract united states government deliveries 2015 liquidity capital resources december 31 2015 total 4728 million cash equivalents 1296 million united states 3432 million foreign subsidiaries compared cash equivalents december 31 2014 5314 million 1641 million united states 3673 million foreign subsidiaries intend indefinitely reinvest cash foreign subsidiaries operations activities outside united states decrease cash equivalents 2015 primarily due 1232 million spent repurchase common stock 923 million spent acquisition dvtel inc 682 million spent capital expenditures dividends paid 614 million partially offset cash provided operations 2758 million cash provided operating activities 2015 totaled 2758 million compared 2262 million 2014 3550 million 2013 increase cash provided operations 2015 compared 2014 primarily due increase net earnings decrease cash provided operations 2014 compared 2013 primarily related lower net collections accounts receivable cash used investing activities year ended december 31 2015 totaled 1348 million consisting 923 million net cash acquired acquisition dvtel inc capital expenditures 682 million partially offset 256 million proceeds sale investment third party cash used investing activities year ended december 31 2014 totaled 493 million consisting capital expenditures 613 million offset 120 million proceeds sale certain tangible assets intellectual property related design manufacturing nonthermal microoptics capital expenditures 2015 2014 included 330 million 191 million respectively building improvements new facility goleta california cash used investing activities year ended december 31 2013 totaled 721 million primarily consisting capital expenditures 521 million 201 million business acquisitions capital expenditures 2013 included equipment purchases oem emerging markets segment related development new lepton camera core cash used financing activities years ended december 31 2015 2014 totaled 1665 million 1520 million respectively primarily consisting repurchase shares common stock payment dividends partially offset proceeds shares issued pursuant stockbased compensation plans cash used financing activities year ended december 31 2013 totaled 661 million primarily consisting payment dividends repurchases common stock offset net borrowings 1388 million term loan facility february 8 2011 signed credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility february 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 150 million time prior april 5 2018 credit agreement allows us borrow united states dollars euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies credit agreement requires us pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio ranges 025 percent 040 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio compliance december 31 2015 fiveyear revolving line credit available credit agreement term loan facility thereunder secured assets noted credit agreement amendment april 5 2013 incorporated 150 million term loan facility matures april 5 2019 april 5 2013 drew 150 million term loan facility electing onemonth libor basis interest rate interest accrued libor plus scheduled spread paid monthly entering interest rate swap agreements effectively fixed basis calculating interest rate term loan effective interest rate paid equal fixed rate swap agreements plus credit spread effect december 31 2015 effective interest rate term loan 249 percent per annum principal payments term loan 375 million made quarterly installments commenced june 30 2013 continue december 31 2018 final maturity payment term loan including accrued interest due april 5 2019 december 31 2015 revolving loans outstanding credit agreement commitment fee amount unused revolving credit 030 percent per annum 301 million 440 million letters credit outstanding credit agreement december 31 2015 2014 respectively reduced total available revolving credit agreement august 19 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 notes net proceeds issuance notes approximately 2477 million deducting underwriting discounts offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes including working capital expenditure needs business acquisitions repurchases common stock expect refinance notes 2016 united states income taxes provided accumulated earnings certain subsidiaries outside united states currently intend reinvest earnings operations outside united states indefinitely subsequently elect repatriate foreign earnings would need accrue pay united states income taxes thereby reducing amount cash believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources including expected refinancing notes sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2015 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2015 contractual obligations follows thousands principal interest longterm debt operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts company cannot make reasonably reliable estimate period potential cash settlement unrecognized tax benefits 150 million therefore included unrecognized tax benefits table significant contractual obligations december 31 2015 detail unrecognized tax benefits see note 14 consolidated financial statements item 8 include approximately 301 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7aitem 7 managements discussion analysis financial condition results operations overview flir systems inc fsi company founded 1978 designs manufactures markets thermal imaging broadcast camera systems worldwide wide variety applications commercial government markets thermal imaging systems detect infrared radiation heat emitted directly objects materials enable operator see objects total darkness adverse weather conditions obscurants smoke haze government applications include public safety law enforcement drug interdiction search rescue border patrol maritime patrol environmental protection defense surveillance reconnaissance navigation assistance commercial applications include electronic news gathering nondestructive testing evaluation research development manufacturing process control condition monitoring image analysis company profitable year ended december 31 1988 reported profitable results succeeding year except 1997 company reported loss 306 million due inclusion onetime 525 million acquisition related writeoff june 1993 company completed initial public offering stock traded nasdaq national market system symbol flir december 1997 company continued expand market potential growing commercial market well government market acquiring agema infrared systems ab corporation organized laws sweden agema sweden agema infrared systems limited corporation organized laws united kingdom agema uk agema infrared systems ltd corporation organized laws canada agema canada agema infrared systems inc delaware corporation agema usa collectively agema entities agema one world leaders design manufacture marketing handheld infrared cameras detecting mapping temperature differences noncontact temperature measurements wide variety industrial research applications agemas principal executive offices located outside stockholm sweden agema sweden three subsidiaries operate sales service offices france germany italy additionally agema canada agema uk agema usa operate sales service offices canada great britain united states respectively acquisition effective december 1 1997 accomplished issuance 4162000 shares companys common stock agemas parent company spectraphysics ab also headquartered stockholm exchange outstanding shares agema stock transaction accounted purchase accordingly results operations agema entities period december 1 1997 december 31 1997 included consolidated results operations acquisition significantly diversifies companys product offerings adding agemas wellregarded commercial handheld thermal imaging products company government commercial product lines acquisition allow company reduce production costs focusing commercial handheld product manufacturing agemas facilities stockholm government commercial broadcast product manufacturing companys facilities portland combined entity benefit combining agemas product design packaging thermographic experience companys image analysis software stabilized gimbal experience finally two organizations highly complementary sales marketing capabilities advanced development programs including next generation low cost uncooled infrared technologies year ended december 31 1997 also highlighted new product introductions including introduction extremely lightweight ultramediarstm compact camera system gives small weight restricted aircraft ability gather highquality video long distances tracertm first industrial imager capable recording analyzing long sequences thermal activity realtime basis ultra 6000tm gyrostabilized dual sensor system combines stateoftheart infrared technology color video camera deliver high resolution images extreme conditions day night agema 570tm worlds first handheld uncooled radiometric thermal imaging system results operations following table sets forth indicated periods certain items percentage revenue years ended december 31 1997 1996 1995 overall companys revenue increased 390 660 million 1996 918 million 1997 net earnings nonrecurring charges associated agema acquisition increased 346 51 million 091 per diluted share 1996 69 million 110 per diluted share 1997 recording onetime charge 525 million costs associated agema acquisition net loss 1997 306 million 523 per diluted share increase overall revenue net income prior acquisition related writeoffs primarily due continued sales growth ultramediatm electronic newsgathering market continued strong sales safiretm night vision system government market continued production deliveries handheld thermal imaging systems higher international sales partialmonth contribution agema operations increases offset part increase interest expense related increased short longterm borrowings increase effective tax rate increase shares outstanding due agema acquisition 1996 companys overall revenue increased 317 501 million 1995 660 million 1996 net earnings increased 317 39 million 070 per diluted share 1995 51 million 091 per diluted share 1996 increase overall revenue net income primarily due inclusion revenue sale companys commercial broadcast products principally ultramediatm introduced april 1996 well increased deliveries safiretm night vision system federal government particularly us marine corps us air force increase revenue net income due fact 1995 government revenue constrained due delays finalization several international domestic contracts inclusion 1995 significant onetime transaction costs associated acquisition optimas corporation optimas early 1996 revenue sale night vision systems government market increased 129 430 million 1996 485 million 1997 increase primarily attributable continued robust sales safiretm night vision system increased deliveries international customers typically higher sales price domestic orders additionally revenue sale products manufactured companys united kingdom subsidiary increased 1997 commercial revenue increased 877 231 million 1996 433 million 1997 improvement principally attributable increased sales ultramediatm companys airborne camera system electronic newsgathering market aggregated 122 million 1997 compared 63 million 1996 production deliveries companys handheld imaging systems aggregated 109 million 1997 compared 47 million 1996 higher international sales partialmonth contribution agemas operations aggregated 94 million revenue 1996 sale night vision systems government market increased 279 336 million 1995 430 million 1996 increase primarily due increased sales safiretm night vision system principally us marine corps us air force commercial revenue increased 393 166 million 1995 231 million 1996 improvement principally attributable inclusion revenue sales companys commercial broadcast products primarily ultramediatm introduced april 1996 company continued benefit significant investment developing worldwide sales distribution channels majority companys revenue outside united states europe international revenue increased 212 million 1996 433 million 1997 accounted approximately 472 companys revenue 1997 represents increase 320 experienced 1996 460 experienced 1995 increase absolute dollars percentage revenue 1997 primarily due increased shipments terms existing international contracts decreased shipments us government customers principally us marine corps inclusion partial month agema revenue primarily international company anticipates revenue international sales percentage total revenue continue comprise significant percentage revenue may vary modestly year gross profit percentage revenue gross profit decreased 539 1996 362 1997 primarily due 161 million write duplicative inventories related agema acquisition included cost goods sold 1997 exclusive writeoff gross margin remained relatively consistent 538 1997 compared 539 1996 gross margin remained relatively consistent due increase higher margin international sales decrease sales us government aggregated 190 million 1997 compared 265 million 1996 typically lower margins sales government market increase mitigated increased proportion sales companys commercial products typically slightly lower margins government products gross profit decreased percentage revenue 547 1995 539 1996 primarily due lower percentage higher margin international sales 1996 increased sales us government gross profit percentages affected variety factors including mix domestic international government commercial sales competitive nature commercial market impact competitive bids significant government contracts research development research development expense increased 246 95 million 1996 118 million 1997 increased 218 78 million 1995 95 million 1996 percentage revenue research development expense decreased 144 1996 129 1997 decreased 155 1995 144 1996 increase research development expense absolute dollar terms attributable increased research development activities related introduction ultramediarstm ultra 6000tm tracertm well ongoing product enhancements impacting research development expense reclassification development costs directly associated engineering revenue cost goods sold rather research development expenses costs amounted 800000 200000 425000 1997 1996 1995 respectively without reclassifications research development expense percentage revenue would 137 147 164 1997 1996 1995 respectively reflecting fact large percentage research development expense fixed nature general trend research development expense reflects companys continuing emphasis product development new product introductions acquisition agema engineering efforts handheld thermographic products concentrated agemas stockholm facility engineering efforts government products airborne broadcast cameras concentrated companys facilities portland company expects research development expense absolute dollars increase 1998 result inclusion full year agema operations however companys revenues increase given large percentage research development expense fixed nature expenses continue decline slightly percentage revenue selling operating costs selling operating costs increased 397 1997 compared 1996 increased 296 1996 compared 1995 primarily due costs associated increased revenue particularly increase international sales expenses related expanded operations companys united kingdom facility increased personnel company continued expand strengthen direct sales marketing staff selling operating costs percentage revenue remained relatively consistent 288 1996 289 1997 decreased slightly 293 1995 288 1996 company expects selling operating costs continue grow absolute dollar terms 1998 result inclusion full year agema operations planned sales force increases anticipated increased marketing efforts related expenses interest expense interest expense includes costs related shortterm longterm debt capital lease obligations miscellaneous bank charges expenses increase 819000 1996 21 million 1997 primarily due increased shortterm longterm debt result increased working capital needs discussed increase 795000 1995 195000 exclusive onetime costs associated acquisition optimas 819000 1996 due onetime costs associated acquisition optimas acquisition expenses aggregated approximately 600000 income taxes companys effective income tax rates 1997 1996 1995 296 197 119 respectively effective tax rates substantially statutory rate company able realize benefits portion net operating loss carryforwards existing tax credits additionally company recognized net deferred tax asset 147 million 400000 950000 1997 1996 1995 respectively recognition criteria statement financial accounting standards 109 sfas 109 accounting income taxes 147 million deferred tax asset recognized 1997 relates primarily 525 million writeoff conjunction agema acquisition current portion income tax expense consists state federal foreign income taxes utilization net operating loss carryforwards existing tax credits limited december 31 1997 company net operating loss carryforwards aggregating 93 million expire years 1998 2012 utilization companys acquired net operating loss carryforwards optimas limited future earnings optimas limited approximately 350000 per year optimas experienced cumulative change ownership 50 within threeyear period additionally company various tax credits available aggregating 13 million expire years 1999 2012 agema acquisition effective december 1 1997 company acquired outstanding shares agema exchange 4162000 shares companys common stock value 541 million additional 16 million direct acquisition costs agema designs manufactures markets handheld infrared imaging systems commercial market results agemas operations combined company since date acquisition conjunction acquisition quarter ended december 31 1997 company recognized onetime charge 525 million writeoff consisted 364 million inprocess research development acquisitionrelated costs included separate line operating expenses 161 million inventories due creation duplicative product lines included cost goods sold liquidity capital resources december 31 1997 company cash equivalents hand 59 million compared 775000 december 31 1996 additionally december 31 1997 company 266 million drawn lines credit working capital decreased 266 million december 31 1997 442 million december 31 1996 decrease working capital primarily due increased utilization lines credit due increases accounts receivable discussed increase liabilities assumed related agema acquisition cash required expanded operations december 31 1997 company 555 million accounts receivable outstanding compared 283 million december 31 1996 increase accounts receivable primarily due addition receivables related agema operations 390 increase revenue days sales outstanding increased 157 days december 31 1996 221 days december 31 1997 increase primarily result acquisition agema company acquired receivables agema included operations december 1 1997 december 31 1997 company included operations agema 1997 days sales outstanding would decreased 150 days company generally experiences long collection cycles due variety factors including payment terms required foreign governmental customers well payment terms companies integrate companys products aircraft sale ultimate users company believes inclusion agemas operations ongoing collection efforts days sales outstanding continue decline revenue increases commercial revenue generally shorter collection cycle continues become larger percentage overall revenue december 31 1997 company inventories hand aggregating 347 million compared 335 million december 31 1996 slight increase inventory level principally due inclusion inventory agema increase components related anticipated deliveries safiretm systems us government international customers increase inventories support deliveries new products including ultramediatm ultramedia rstm tracertm increases somewhat offset result 161 million writeoff duplicative inventories discussed additionally inventory levels companys united kingdom manufacturing operation continue increase anticipation future deliveries existing contracts extremely long lead times many companys expensive components necessary inventory hand meet required delivery schedule company maintains levels inventory sufficient satisfy backlog company considers firm respond short term delivery requirements majority products management believes ability provide prompt deliveries gives company competitive advantage certain sales expected current inventory levels maintained decrease slightly company available approximately 351 million lines credit bear interest rates 470 775 collateralized assets company december 31 1997 company balance 266 million drawn lines credit compared 64 million balance lines december 31 1996 company believes existing cash generated operations available credit facilities together scheduled collections existing receivable balances sufficient meet cash requirements foreseeable future forwardlooking statements managements discussion analysis financial condition results operations sections annual report contain forwardlooking statements within meaning securities litigation reform act 1995 based current expectations estimates projections companys business managements beliefs assumptions made management words expect anticipates intends plans believes seeks estimates variations words similar expressions intended identify forwardlooking statements guarantees future performance involve certain risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecasted forwardlooking statements due numerous factors including limited discussed managements discussion analysis financial condition results operations well discussed elsewhere annual report time companys securities exchange commission filings reports addition statements could affected general industry market conditions growth rates general domestic international economic conditions year 2000 issues year 2000 approaches company recognizes need ensure operations products adversely impacted year 2000 software issues company addressing via use internal external resources conduct comprehensive review computer systems code internal company products company expects complete project timely basis assure availability integrity financial system reliability operational systems end 1999 work anticipated material effect consolidated financial position company item 8item 7 management’s discussion analysis financial condition results operations overview flir systems inc “flir” “company” “we” “us” “our” world leader sensor systems enhance perception awareness founded 1978 empower people ability see night using infrared technology since become premier designer manufacturer marketer thermal imaging systems advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders create value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications business model meets needs multitude customers sell offtheshelf products wide variety markets efficient timely affordable manner well offer variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution commercial operating model developed time provides us unique ability adapt market changes meet customers’ needs business organized two divisions commercial systems government systems within divisions five reporting segments 2010 thermography commercial vision systems raymarine comprise commercial systems division government systems icx make government systems division detailed description segments see “business segments” within item 1 2011 due reorganizations integrations within divisions intend report segments follows commercial raymarine within commercial systems division surveillance detection integrated systems within government systems division international revenue accounted approximately 47 percent 41 percent 38 percent revenue 2010 2009 2008 respectively anticipate international sales continue account significant percentage revenue future exposure foreign exchange fluctuations changing dynamics foreign competitiveness based variations value united states dollar relative currencies factors contributing variability include significant manufacturing activity europe significant sales denominated currencies united states dollar cross currency fluctuations currencies united states dollar euro swedish kroner british pound sterling impact fluctuations reflected throughout consolidated financial statements aggregate material impact results operations experience fluctuations orders sales due seasonal variations customer sales cycles seasonal pattern contracting united states certain foreign governments desire customers take delivery equipment prior fiscal year ends due funding considerations tendency commercial enterprises fully utilize annual capital budgets prior expiration events resulted could continue result fluctuations quarterly results future result quarterly fluctuations operating results believe quartertoquarter comparisons results operations necessarily meaningful relied upon indicators future performance critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities evaluate estimates including related revenue recognition bad debts inventories goodwill warranty obligations contingencies income taxes ongoing basis base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying value assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions senior management discussed development selection disclosure estimates audit committee board directors believe following critical accounting policies related judgments estimates affect preparation consolidated financial statements revenue recognition majority revenue recognized upon shipment product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations design market sell products primarily commercial offtheshelf products certain customers request different system configurations generally based standard options accessories offer general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc undelivered end reporting period recognize revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value addition judgments required evaluating credit worthiness customers credit extended customers revenue recognized determined collectability reasonably assured allowance doubtful accounts policy maintain allowances estimated losses resulting inability customers make required payments credit limits established process reviewing financial history stability customer appropriate obtain credit rating reports financial statements customer determining modifying credit limits regularly evaluate collectability trade receivable balances based combination factors customer’s account balance becomes past due initiate dialogue customer determine cause determined customer unable meet financial obligation us case bankruptcy filing deterioration customer’s operating results financial position material events impacting business record specific allowance reduce related receivable amount expect recover given information presently available actual writeoffs past three years material results operations also record allowance customers based certain factors including length time receivables past due historical collection experience individual customers december 31 2010 accounts receivable balance 3397 million reported net allowances doubtful accounts 51 million believe reported allowances december 31 2010 adequate financial conditions customers deteriorate however resulting inability make payments may need record additional allowances would result additional selling general administrative expenses recorded period determination made inventory policy record inventory writedowns conditions exist indicate inventories likely excess anticipated demand obsolete based upon assumptions future demand products market conditions regularly evaluate ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions purchasing requirements alternative usage avenues explored within processes mitigate inventory exposure recorded writedowns intended reduce carrying value inventories net realizable value establish new cost basis december 31 2010 inventories 3032 million stated net inventory writedowns actual demand products deteriorates market conditions less favorable project additional inventory writedowns may required future goodwill recorded goodwill connection business acquisitions review goodwill june year interim basis required impairment determine events changes business conditions indicate carrying value goodwill may recoverable reviews assess fair value assets based upon estimates future cash flows expect assets generate within boundaries applicable business divisions company current review indicates adjustments necessary goodwill assets carrying value 4820 million december 31 2010 product warranties products sold warranty provisions require us remedy deficiencies quality performance products specified period time generally twelve twentyfour months cost customers policy establish warranty reserves levels represent estimate costs incurred fulfill warranty requirements time revenue recognized believe recorded liability 187 million december 31 2010 adequate cover future cost materials labor overhead servicing products sold date actual product failures material service delivery costs differ estimates warranty liability would need revised accordingly contingencies subject possibility loss contingencies arising normal course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss accrued probable asset impaired liability incurred amount reasonably estimated regularly evaluate current information available us determine whether accruals adjusted income taxes record deferred tax assets benefits likely recognized valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis estimate future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control december 31 2010 determined valuation allowance net deferred tax assets 73 million required determine may unable realize deferred tax assets extent reported adjustment deferred tax assets would recorded period determination made consolidated operating results following table sets forth indicated periods certain items percentage revenue 1 totals may recompute due rounding following discussion operating results provides overview operations addressing key elements consolidated statements income “segment operating results” section follows describes contributions business segments consolidated revenue earnings operations 2010 2009 2008 given nature business believe revenue earnings operations including operating margin percentage relevant understanding performance segment level additionally segment level disclose backlog represents orders received products services sales agreement place delivery expected within twelve months revenue 2010 totaled 13853 million increase 208 percent 2009 revenue 11471 million increase primarily due 114 percent increase thermography revenue 241 percent increase commercial vision systems revenue reported raymarine icx acquired may 14 2010 october 4 2010 respectively revenues dates acquisition businesses totaled 1502 million excluding raymarine icx revenue 2010 increased 77 percent 2009 revenue 2009 totaled 11471 million increase 65 percent 2008 revenue 10770 million increase primarily due 152 percent increase government systems 142 percent increase commercial vision systems partially offset 128 percent decrease thermography international revenue 2010 totaled 6523 million representing 471 percent revenue compares international revenue 2009 totaled 4748 million representing 414 percent revenue 4078 million 2008 representing 379 percent revenue sales mix united states international sales may fluctuate year expect revenue customers outside united states continue comprise significant portion total revenue longterm basis gross profit gross profit 2010 551 percent revenue compared 574 percent revenue 2009 decrease gross profit percentage revenue primarily due gross margins raymarine icx historically lower gross margins three business segments product mix government systems division partially offset production efficiencies related increased volumes lower production costs thermography commercial vision systems manufacturing facilities excluding raymarine icx gross profit 568 percent revenue 2010 gross profit 2009 574 percent revenue compared 563 percent 2008 increase gross profit percentage revenue primarily due cost production efficiencies related increased volume product mix lower production costs thermography manufacturing facilities cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation amortization occupancy costs purchasing receiving inspection costs research development research development expenses 1164 million 84 percent revenue 2010 compared 913 million 80 percent revenue 2009 900 million 84 percent revenue 2008 increase research development expenses percentage revenue 2010 due higher expenditures new product development business segments including acquisitions made 2009 2010 decrease research development expenses percentage revenue 2009 primarily due cost containment efforts salary freezes reduction consultant expenses response weak economic conditions due currency translation believe spending levels sufficient support development new products continued growth business expect research development expenses approximately 8 10 percent revenue longterm basis selling general administrative expenses selling general administrative expenses 2857 million 206 percent revenue 2010 compared 2199 million 192 percent revenue 2009 2317 million 215 percent revenue 2008 increase selling general administrative expenses 2009 2010 primarily due increased spending business segments support future growth well operating expenses businesses acquired 2009 2010 acquisition related costs incurred 2010 92 million 30 million litigation settlement recorded third quarter 2010 decrease selling general administrative expenses 2008 2009 primarily due cost containment efforts response economic conditions currency translation lower annual incentive compensation costs 2009 2008 incurred significant legal costs related raytheon legal matter described note 13 “contingencies” notes consolidated financial statements anticipate selling general administrative expenses future increase slower rate revenue interest expense interest expense totaled 29 million 69 million 143 million years ended december 31 2010 2009 2008 respectively interest expense primarily attributable interest convertible notes issued june 2003 amortization discounts recorded notes costs related issuance notes decrease interest expense 2010 compared 2009 primarily due conversions outstanding convertible notes 2009 2010 fully converted june 2010 decrease interest expense 2009 primarily due conversion outstanding convertible notes fourth quarter 2008 third fourth quarters 2009 exchange portion convertible notes pursuant company’s exchange offer first quarter 2009 interest income interest income 13 million 17 million 74 million years ended december 31 2010 2009 2008 respectively decrease interest income 2010 2009 compared 2008 primarily due lower interest rates less invested cash income net reported income 40 million 2010 expense 18 million 2009 income 128 million 2008 income 2010 primarily currency gain rental income expense 2009 primarily currency losses offset investment gains income 2008 primarily currency gains income taxes income tax provision 1143 million 1102 million 894 million 2010 2009 2008 respectively effective tax rates 2010 2009 2008 315 percent 324 percent 308 percent respectively mix taxable income united states international operations impacted income tax provisions years effective tax rate lower united states federal tax rate 35 percent lower foreign tax rates effect foreign tax credits federal state tax credits december 31 2010 company united states tax net operating loss carryforwards totaling approximately 1095 million expire 2025 2030 addition company various state net operating loss carryforwards totaling approximately 909 million expire 2011 2030 federal state net operating losses generated icx technologies inc acquired flir systems inc 2010 tax benefits described recorded assets benefits likely recognized extent assess realization assets likely valuation allowance required recorded believe net deferred tax assets 327 million reflected december 31 2010 consolidated balance sheet materially realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 73 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets discontinued operations certain operations included acquisition icx identified available sale results reported discontinued operations segment operating results thermography operating results follows thousands revenue increased 114 percent 2010 compared 2009 primarily due increased revenue united states asia pacific region across segment’s product lines improvement united states partially attributable improved economic conditions commercial markets improvement asia pacific region partially due market country penetration improvement operating margins 2009 2010 primarily due production efficiencies manufacturing facilities ability increase operating expenses lower rate increase revenue decreased 128 percent 2009 compared 2008 primarily due worldwide economic conditions experienced 2009 lower demand high value products revenue declined 2008 2009 operating margin improved due operating efficiencies manufacturing facilities cost containment efforts response worsened economic conditions commercial vision systems commercial vision systems operating results follows thousands revenue increased 241 percent 2010 compared 2009 primarily due increased unit sales security transportation maritime product lines introduction 2010 personal night vision systems products earnings operations increased 502 due increase revenue manufacturing efficiencies resulting higher production volumes lower material costs new products revenue increased 142 percent 2009 compared 2008 primarily due increased units deliveries across segment’s product lines production efficiencies resulted increase unit volumes primary reason increase operating margin 2008 2009 raymarine operating results follows thousands raymarine acquired may 14 2010 operating results period since acquisition earnings operations include impact amortization intangible assets 21 million government systems government systems operating results follows thousands revenue increased 09 percent 2010 compared 2009 higher deliveries groundbased products revenue business acquired october 2009 offset decreases revenue airborne maritime products spending us government agencies declined 2010 change product mix increased operating expenses segment resulted decline earnings operations operating margin 2009 2010 decline backlog 2009 2010 primarily due deliveries us government programs booked prior years reduced procurement activity us government customers 2010 revenue increased 152 percent 2009 compared 2008 increase primarily due increase unit deliveries airborne products certain us government agency programs increase earnings operations 2008 2009 attributable increase revenue decline backlog 2008 2009 primarily due deliveries large us government programs booked 2008 icx operating results follows thousands icx acquired october 4 2010 operating results period since acquisition earnings operations include impact amortization intangible assets 15 million fair value adjustments inventory 36 million reporting period liquidity capital resources december 31 2010 1931 million cash equivalents compared 4220 million december 31 2009 decrease cash equivalents primarily due cash used business acquisitions capital expenditures repurchases common stock partially offset cash provided operations cash proceeds tax benefits generated stockbased compensation programs cash provided operating activities 2010 totaled 2554 million compared 2718 million 2009 2183 million 2008 decrease cash provided operating activities 2010 primarily due increase accounts receivable inventories deferred tax assets offset increase net earnings compared 2009 increase cash provided operating activities 2009 compared 2008 primarily due increase net earnings lower level net cash used 2009 operating assets liabilities cash used investing activities year ended december 31 2010 totaled 4654 million primarily consisting acquisitions raymarine 1747 million icx 2280 million capital expenditures 660 million capital expenditures 2010 included purchase two buildings 362 million cash used investing activities year ended december 31 2009 totaled 1077 million primarily consisting acquisitions salvador omnitech directed perception capital expenditures 419 million include purchase building 97 million cash used investing activities year ended december 31 2008 totaled 1140 million primarily consisting acquisitions cedip ifara technologias capital expenditures cash used financing activities year ended december 31 2010 totaled 65 million primarily consisting repurchase approximately 13 million shares common stock offset proceeds shares issued tax benefits recognized stockbased compensation plans cash used financing activities year ended december 31 2009 totaled 435 million primarily consisting repurchase approximately 32 million shares common stock offset proceeds shares issued tax benefits recognized stockbased compensation plans cash provided financing activities year ended december 31 2008 totaled 26 million primarily consisting proceeds shares issued tax benefits recognized stockbased compensation plans offset repurchase approximately 12 million shares common stock repayments shortterm debt october 6 2006 signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provided 300 million fiveyear revolving line credit december 31 2010 2009 amounts outstanding credit agreement 65 million 78 million letters credit outstanding credit agreement december 31 2010 2009 respectively reduced total available credit facility terminated february 8 2011 july 7 2010 entered uncommitted letter credit agreement bank america support letters credit whose expiration would extend beyond credit agreement december 31 2010 total value letters credit outstanding facility 86 million february 8 2011 signed new credit agreement “new credit agreement” bank america na us bank national association jpmorgan chase bank na lenders new credit agreement provides 200 million fiveyear revolving line credit right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 8 2016 new credit agreement allows us certain designated subsidiaries borrow us dollars euro kroner pound sterling agreed upon currencies new credit agreement requires us pay commitment fee amount unused credit rate based company’s leverage ratio ranges 025 percent 040 percent new credit agreement contains two financial covenants require maintenance certain leverage ratios fiveyear revolving line credit available new credit agreement secured assets sweden subsidiary 30 million swedish kroner approximately 44 million line credit interest rate 2158 percent december 31 2010 december 31 2010 amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories sweden subsidiary subject automatic renewal annual basis believe existing cash combined cash anticipate generating operating activities available credit facilities financing available sources sufficient meet cash requirements next twelve months significant commitments aware significant events conditions likely material impact liquidity capital resources offbalance sheet arrangements december 31 2010 leased nonowned facilities operating lease agreements also leased certain operating machinery equipment office equipment operating lease agreements except operating lease agreements offbalance sheet arrangements likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations december 31 2010 contractual obligations follows thousands operating leases licensing rights obligations based upon contractual terms actual payments may differ terms timing amounts include 309 million unrecognized tax benefits due uncertainty respect timing future cash flows december 31 2010 unable make reasonably reliable estimates period cash settlement respective taxing authorities total amounts income tax payable timing tax payments may depend resolution current future tax examinations cannot estimated include approximately 151 million standby letters credit performance bonds due unlikely event payment amounts arrangements recent accounting pronouncements see note 1 consolidated financial statements item 8 discussion recent accounting pronouncements item 7a nanitem 7a quantitative qualitative disclosure market risk companys exposure market risk changes interest rates relates primarily shortterm longterm debt obligations company currently hedges interest rate exposure use longterm interest rate swaps company believes net income cash flow exposure relating rate changes shortterm longterm debt obligations immaterial interest expense affected general level us interest rates andor libor foreign subsidiaries company generally use local currency functional currency company currently enter foreign exchange forward contracts hedge certain balance sheet exposures intercompany balances future movements foreign exchange rates date exposure immaterial company maintain small cash balances denominated currencies us dollar foreign exchange rates weaken us dollar company believes fair value foreign currency amounts would decline immaterial amount item 8item 7a quantitative qualitative disclosure market risk companys exposure market risk changes interest rates relates primarily shortterm longterm debt obligations debt obligations variable rates company historically utilized interest rate swap similar hedging arrangements fix interest rates march 2000 company entered interest rate swap agreements one lender banks notional amount 400 million change interest rates debt obligations impacts interest incurred cash flows change interest rates related swap agreements impacts interest incurred cash flows fair value instrument sensitivity analysis related companys debt obligation assumes change 10 variable interest rates levels december 31 2000 variables held constant 10 increase market interest rates would result increase interest expense 09 million year ended december 31 2000 10 decrease market interest rates would result decrease interest expense 09 million year ended december 31 2000 sensitivity analysis related companys swap agreements assumes change 10 variable interest rates levels december 31 2000 variables held constant 10 increase market interest rates would result decrease interest expense 09 million year ended december 31 2000 decrease fair value obligations 06 million 10 decrease market interest rates would result increase interest expense 09 million year ended december 31 2000 increase fair value obligation 06 million foreign subsidiaries company generally use local currency functional currency company currently enter foreign exchange forward contracts hedge certain balance sheet exposures intercompany balances future movements foreign exchange rates date exposure immaterial company maintain cash balances denominated currencies us dollar item 8item 7a quantitative qualitative disclosure market risk company’s exposure market risk changes interest rates relates primarily shortterm longterm debt obligations debt obligations variable rates company historically utilized interest rate swap similar hedging arrangements fix interest rates march 2000 company entered interest rate swap agreements one lender banks notional amount 400 million change interest rates debt obligations impacts interest incurred cash flows change interest rates related swap agreements impacts interest incurred cash flows fair value instrument sensitivity analysis related company’s debt obligation assumes change 10 variable interest rates levels december 31 2001 variables held constant 10 increase market interest rates would result increase interest expense 01 million year ended december 31 2001 10 decrease market interest rates would result decrease interest expense 01 million year ended december 31 2001 sensitivity analysis related company’s swap agreements assumes change 10 variable interest rates levels december 31 2001 variables held constant 10 increase market interest rates would result decrease interest expense 03 million year ended december 31 2001 decrease fair value obligations 02 million 10 decrease market interest rates would result increase interest expense 03 million year ended december 31 2001 increase fair value obligation 02 million company assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly revenues products sold foreign countries sold foreign currencies assets liabilities located outside united states primarily located sweden united kingdom company’s investment foreign subsidiaries functional currency us dollar generally considered longterm accordingly company hedge net investments company engage forward currency exchange contracts reduce economic exposure changes exchange rates company markets sells licenses products throughout world could significantly affected weak economic conditions foreign markets could reduce demand products item 8item 7a quantitative qualitative disclosures market risk company’s exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incurred cash flows december 31 2002 amounts outstanding company’s credit agreements consequently sensitivity analysis presented company assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries sold foreign currencies assets liabilities located outside united states primarily located sweden united kingdom company’s investment foreign subsidiaries functional currency us dollar generally considered longterm company engage forward currency exchange contracts reduce economic exposure changes exchange rates company markets sells licenses products throughout world could significantly affected weak economic conditions foreign markets could reduce demand products net investment foreign subsidiaries translated us dollars using periodend exchange rates december 31 2002 approximately 384 million potential loss fair value resulting hypothetical 10 adverse change foreign exchange rates would approximately 38 million december 31 2002 company plans liquidating foreign subsidiaries therefore foreign exchange rate gains losses foreign investments reflected cumulative translation adjustment reduce reported net earnings item 8item 7a quantitative qualitative disclosures market risk company’s exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incurred cash flows december 31 2003 amounts outstanding company’s credit agreements consequently sensitivity analysis presented company’s convertible notes carry interest fixed rate 30 fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2003 approximately 231 million compared carrying value 2044 million company assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries sold foreign currencies assets liabilities located outside united states primarily located sweden united kingdom company’s investments foreign subsidiaries functional currencies us dollar generally considered longterm company engage forward currency exchange contracts reduce economic exposure changes exchange rates company markets sells licenses products throughout world could significantly affected weak economic conditions foreign markets could reduce demand products net investment foreign subsidiaries translated us dollars using periodend exchange rates december 31 2003 approximately 866 million potential loss fair value resulting hypothetical 10 adverse change foreign exchange rates would approximately 87 million december 31 2003 company plans liquidating foreign subsidiaries therefore foreign exchange rate gains losses foreign investments reflected cumulative translation adjustment reduce reported net earnings item 8item 7a quantitative qualitative disclosures market risk company’s exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incurred cash flows december 31 2004 amounts outstanding company’s credit agreements consequently sensitivity analysis presented company’s convertible notes carry interest fixed rate 30 fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2004 approximately 343 million compared carrying value 2053 million company assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries sold foreign currencies assets liabilities located outside united states primarily located sweden united kingdom company’s investments foreign subsidiaries functional currencies us dollar considered longterm company engage forward currency exchange contracts reduce economic exposure changes exchange rates company markets sells licenses products throughout world could significantly affected weak economic conditions foreign markets could reduce demand products net investment foreign subsidiaries translated us dollars using periodend exchange rates december 31 2004 approximately 1424 million potential loss fair value resulting hypothetical 10 adverse change foreign exchange rates would approximately 142 million december 31 2004 net investment foreign subsidiaries december 31 2003 866 million potential loss fair value hypothetical 10 adverse change foreign exchange rates 87 million increase potential loss fair value primarily due increase net investment foreign subsidiaries company plans liquidating foreign subsidiaries therefore foreign exchange rate gains losses foreign investments reflected cumulative translation adjustment reduce reported net earnings item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incurred cash flows december 31 2005 amounts outstanding credit agreements consequently sensitivity analysis presented convertible notes carry interest fixed rate 30 fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2005 approximately 2468 million compared carrying value 2062 million assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries sold foreign currencies assets liabilities located outside united states primarily located sweden united kingdom investments foreign subsidiaries functional currencies us dollar considered longterm currently engage forward currency exchange contracts similar hedging activities reduce economic exposure changes exchange rates market sell license products throughout world could significantly affected weak economic conditions foreign markets could reduce demand products net investment foreign subsidiaries translated us dollars using periodend exchange rates december 31 2005 approximately 1318 million potential loss fair value resulting hypothetical 10 adverse change foreign exchange rates would approximately 132 million december 31 2005 increase potential loss fair value primarily due increase net investment foreign subsidiaries company plans liquidating foreign subsidiaries therefore foreign exchange rate gains losses foreign investments reflected cumulative translation adjustment reduce reported net earnings item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incurred cash flows december 31 2006 455 million outstanding credit agreement intent repay 455 million outstanding full end third quarter 2007 determined change interest rates first six months 2007 materially impact financial statements convertible notes carry interest fixed rate 30 percent fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2006 approximately 3220 million compared carrying value 2070 million assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries denominated foreign currencies assets liabilities located outside united states primarily located sweden united kingdom investments foreign subsidiaries functional currencies us dollar considered longterm currently engage forward currency exchange contracts similar hedging activities reduce economic exposure changes exchange rates market sell license products throughout world could adversely affected weak economic conditions foreign markets could reduce demand products net investment foreign subsidiaries translated us dollars using periodend exchange rates december 31 2006 approximately 2116 million potential loss fair value resulting hypothetical 10 percent adverse change foreign exchange rates would approximately 212 million december 31 2006 increase potential loss fair value primarily due increase net investment foreign subsidiaries company plans liquidating foreign subsidiaries therefore foreign exchange rate gains losses foreign investments reflected cumulative translation adjustment reduce reported net earnings item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incurred cash flows december 31 2007 190 million outstanding credit agreement currently intention repay 190 million outstanding full end first quarter 2008 determined change interest rates first three months 2008 materially impact financial condition results operations convertible notes carry interest fixed rate 30 percent fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2007 approximately 6030 million compared carrying value 2079 million assets liabilities inventory purchase commitments outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries denominated foreign currencies assets liabilities located outside united states primarily located sweden united kingdom investments foreign subsidiaries functional currencies us dollar considered longterm currently engage forward currency exchange contracts similar hedging activities reduce economic exposure changes exchange rates market sell license products throughout world could adversely affected weak economic conditions foreign markets could reduce demand products net investment foreign subsidiaries translated us dollars using periodend exchange rates december 31 approximately 2907 million 2116 million december 31 2007 2006 respectively potential loss fair value resulting hypothetical 10 percent adverse change foreign exchange rates would approximately 291 million 212 million december 31 2007 2006 respectively increase potential loss fair value primarily due increase net investment foreign subsidiaries company plans liquidating foreign subsidiaries therefore foreign exchange rate gains losses foreign investments reflected cumulative translation adjustment reduce reported net earnings item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incur cash flows december 31 2008 amounts outstanding credit agreement consequently sensitivity analysis presented convertible notes carry interest fixed rate 30 percent fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2008 approximately 5074 million compared carrying value 1903 million potential loss fair value resulting hypothetical 10 percent adverse change fair value would approximately 507 million assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold foreign countries denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incur cash flows december 31 2009 amounts outstanding credit agreements consequently sensitivity analysis presented convertible notes carry interest fixed rate 30 percent fixed rate debt interest rate changes impact fair value notes impact earnings cash flows fair value notes december 31 2009 approximately 1734 million compared carrying value 580 million potential loss fair value resulting hypothetical 10 percent adverse change fair value would approximately 173 million assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonus operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 nature business significant accounting policies consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 nature business significant accounting policies consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 nature business significant accounting policies consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 nature business significant accounting policies consolidated financial statements item 8nanitem 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incur cash flows december 31 2011 amounts outstanding credit agreements consequently sensitivity analysis presented assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonus operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incur cash flows december 31 2012 amounts outstanding credit agreements consequently sensitivity analysis presented assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonus operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange rate risk assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonunited states operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8nanitem 7a quantitative qualitative disclosures market risk exposure market risk changes interest rates relates primarily credit agreements credit agreements variable rates change interest rates credit agreements impacts interest incur cash flows december 31 2010 amounts outstanding credit agreements consequently sensitivity analysis presented assets liabilities outside united states subject fluctuations foreign currency exchange rates similarly certain revenues products sold countries outside united states costs associated nonus operations denominated foreign currencies information foreign currency translation see note 1 consolidated financial statements item 8 item 8 financial statements supplementary data item includes following financial information report independent accountants board directors shareholders flir systems inc opinion accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position flir systems inc subsidiaries december 31 1996 1995 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed price waterhouse llp portland oregon february 25 1997 flir systems inc consolidated statement operations thousands except per share amounts accompanying notes integral part financial statements flir systems inc consolidated balance sheet thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement shareholders equity thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement cash flows thousands accompanying notes integral part financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies company designs manufactures markets imaging systems worldwide wide variety applications government commercial markets thermal imaging systems detect infrared radiation heat emitted directly objects materials enable operator see objects total darkness adverse weather conditions obscurants smoke haze government applications include public safety law enforcement drug interdiction search rescue border patrol maritime patrol environmental protection defense surveillance reconnaissance navigation assistance commercial applications include commercial broadcast imaging predictive preventive maintenance nondestructive testing evaluation research development manufacturing process control monitoring machine vision image analysis principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation recognition revenues revenue recognized products shipped services performed except certain longterm contracts recorded percentageof completion method percentageofcompletion method used research development contracts production contracts require significant amounts initial engineering development costs percentageof completion determined relating actual costs incurred date total costs complete respective contract cash equivalents company considers short term investments highly liquid readily convertible cash original maturities less three months cash equivalents purposes statement cash flows company generally invests excess cash investment grade shortterm commercial paper held maturity 1994 company adopted statement financial accounting standard 115 accounting certain investments debt equity securities adoption material effect financial statements december 31 1996 company hold short term investments inventories stated lower cost market company uses firstin firstout fifo method determine cost property equipment property equipment stated cost depreciated using straight line methodology estimated useful lives range two five years repairs maintenance charged operations incurred note 1 nature business significant accounting policies continued software development costs company capitalizes software development costs project reaches technological feasibility ceases related product ready release research development costs related software development reached technological feasibility expensed incurred software development costs amortized greater ratio number units shipped current anticipated future units shipped b straightline method remaining estimated economic life product generally estimated economic life three years income taxes company utilizes liability method set forth statement financial accounting standard 109 sfas 109 accounting income taxes see note 3 earnings per share earnings per share based weighted average number shares common stock common stock equivalents outstanding periods computed using treasury stock method stock options reclassifications certain reclassifications made prior years data conform current years presentation reclassifications impact previously reported results operations shareholders equity statement cash flows cash paid interest income taxes amounted following thousands fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon existing interest rates related assets liabilities compared current market rates interest instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximate fair value december 31 1996 except patent note described note 9 interest imputed patent note 14 exceeds current market rate type note therefore fair value note estimated approximately 30000 excess recorded value december 31 1996 note 1 nature business significant accounting policies continued stockbased compensation company adopted disclosure provisions statement financial accounting standards number 123 sfas 123 accounting stockbased compensation effective january 1 1996 sfas 123 issued financial accounting standards board october 1995 allows companies choose whether account stockbased compensation current method prescribed accounting principles board opinion number 25 apb 25 use fair value method described sfas 123 company elected continue follow provisions apb 25 see note 12 concentration credit risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make companys customer base thus spreading trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs indepth credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary certain risks uncertainties preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates note 2 operating costs selling operating costs consist following thousands note 3 income taxes sfas 109 requires company recognize deferred tax liabilities assets expected future tax consequences events basis differences recognized companys financial statements tax returns method deferred tax liabilities assets determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse provision income taxes follows thousands deferred tax assets comprised following components thousands note 3 income taxes continued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 1996 companys acquired net operating loss carryforwards aggregating 5500000 expire years 1997 2010 utilization carryforwards limited future earnings optimas limited approximately 350000 per year optimas experienced cumulative change ownership 50 within threeyear period addition company various tax credits available aggregating 771000 december 31 1996 expire years 1999 2011 note 4 accounts receivable accounts receivable net allowance doubtful accounts 1671000 743000 december 31 1996 1995 respectively note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands property equipment include cost equipment held company capital lease agreements cost related accumulated depreciation aggregated 2724000 1336000 respectively december 31 1996 2419000 1377000 respectively december 31 1995 note 7 software development costs software development costs summarized follows thousands amortization capitalized software costs aggregated 300000 393000 41000 years ended december 31 1996 1995 1994 respectively note 8 notes payable company 100 million line credit bearing interest prime rate 825 december 31 1996 collateralized receivables inventories requires company maintain working capital excess 400 million net tangible worth 400 million additionally company one subsidiaries 250000 line credit prime plus 20 1025 december 31 1996 secured inventories furniture equipment subsidiary december 31 1996 1995 company 6365000 2056000 respectively outstanding lines note 9 longterm debt longterm debt december 31 summarized follows thousands patent note calls annual payments 1999 70000 plus adjustment changes consumer price index note include stated interest rate interest imputed rate 14 consumer price index estimated average increase 5 per year payments 115000 112000 108000 made years ended december 31 1996 1995 1994 respectively related patent capitalized based present value inception patent note 683000 patent fully amortized december 31 1990 note 10 commitments company leases primary facilities operating leases expiring 19972000 total rent expense years ended december 31 1996 1995 1994 amounted 1417000 871000 838000 respectively minimum rental payments required noncancelable leases equipment facilities december 31 1996 follows thousands company 401k savings retirement plan provide voluntary salary deferral contributions pretax basis accordance section 401k internal revenue code 1986 amended plan allows contributions company recorded matching contributions 533000 0 355000 years ended december 31 1996 1995 1994 respectively note 11 capital stock 1996 company increased number shares common stock reserved future issuance pursuant incentive stock plans 2769400 plans restricted stock incentive stock options nonqualified stock options may granted employees consultants nonemployee directors company exercise price less fair market value stock date grant options granted pursuant plans expire ten years date grant plan terminates 2003 1992 incentive stock plan 430000 shares common stock reserved restricted stock awards shares awarded earned ratably term restricted stock agreement based upon achievement specified performance goals shares granted 1996 aggregated 100000 shares granted 33330 shares earned 1996 based upon achievement specified performance goals shares granted issued lapse cease subject award compensation expense related awards amount 398000 recorded 1996 included selling operating costs december 31 1996 330000 shares available future awards note 12 stock options company elected account stock based compensation accounting principles board opinion 25 however required sfas 123 company computed proforma disclosure purposes value options granted 1995 1996 using blackscholes option pricing model weighted average assumptions used stock option grants 1995 1996 risk free interest rate 77 52 respectively expected dividend yield 0 respectively expected life 3 years 3 years respectively expected volatility 239 227 respectively options assumed exercised upon vesting purposes valuation adjustments made options forfeited prior vesting years ended december 31 1995 1996 total value options granted computed 1200000 819000 respectively would amortized straight line basis vesting period options company accounted plans accordance sfas 123 companys net earnings proforma net earnings per share would reported follows effects applying sfas 123 providing proforma disclosure 1995 1996 likely representative effects reported net earnings per share future years since options vest several years additional awards may made note 12 stock options continued table summarizes companys stock option activity following table sets forth exercise price range number shares weighted average exercise price remaining contractual lives group similar price grant dates options exercisable december 31 1996 totaled 569177 shares weighted average exercise price 849 options available grant december 31 1996 totaled 2439985 shares note 13 long term contracts 1994 company entered longterm research development contract consortium companies develop autonomous landing guidance system commercial military aircraft part us governments technology reinvestment program companys portion contract aggregates 650000 april 1995 company awarded additional 900000 contract second phase development revenues contract aggregated 416000 896000 300000 years ended december 31 1996 1995 1994 respectively included revenues costs associated contract aggregated 200000 425000 173000 1996 1995 1994 respectively included cost goods sold outstanding billings december 31 1996 1995 aggregated 35000 786000 respectively included accounts receivable note 14 related party transactions company hughes aircraft company related parties resulting hughes stock interest company purchases inventory parts hughes subsidiaries years ended december 31 1996 1995 1994 company purchased parts aggregating 1670000 1320000 2300000 respectively hughes subsidiaries december 31 1996 1995 company owed hughes 128000 265000 respectively sales companys products hughes affiliates amounted 103000 320000 90000 years ended december 31 1996 1995 1994 respectively also included accounts payable related parties december 31 1995 note payable shareholder aggregating 8000 payable demand stated interest rate 120 note 15 export sales major customers export sales major customers follows thousands item 9item 8 financial statements supplementary data item includes following financial information report independent accountants board directors shareholders flir systems inc opinion based audits report auditors accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position flir systems inc subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states financial statements responsibility companys management responsibility express opinion financial statements based audits audit financial statements inframetrics inc whollyowned subsidiary statements reflect total assets 34160000 december 31 1998 total revenues 54690000 53163000 two years period ended december 31 1998 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included inframetrics inc based solely report auditors conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion expressed described note 17 financial statements year ended december 31 1998 restated pricewaterhousecoopers llp portland oregon april 14 2000 flir systems inc consolidated statement operations accompanying notes integral part financial statements flir systems inc consolidated balance sheet thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement shareholders equity thousands except share data par value accompanying notes integral part financial statements flir systems inc consolidated statement cash flows thousands accompanying notes integral part financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader design manufacture marketing thermal imaging broadcast camera systems wide variety applications commercial government markets companys thermal imaging systems use advanced infrared technologies detect infrared radiation heat enabling operator measure minute temperature differences see objects daylight total darkness obscurants smoke haze types fog companys products also incorporate visible light cameras proprietary image analysis software gyrostabilized gimbal technology companys products come variety configurations handheld groundbased systems mounted ships helicopters fixedwing aircraft companys products provide stateoftheart imaging technology coupled competitive price performance characteristics existing commercial government applications including condition monitoring research development manufacturing process control airborne observation broadcast search rescue federal drug interdiction surveillance reconnaissance navigation safety border maritime patrol environmental monitoring groundbased security company also developed innovative new products utilizing advanced uncooled thermal imaging technology allows less expensive smaller lighter solidstate systems require less power operate addition companys product configurations image analysis software tools increase companys ability provide products tailored meet individual customer requirements principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation recognition revenue recognized upon shipment product end customer revenues development contracts recognized percentage completion basis provisions estimated losses sales related receivables recorded identified cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months cash equivalents purposes statement cash flows company generally invests excess cash investment grade shortterm commercial paper held maturity december 31 1999 company hold shortterm investments inventories stated lower average cost market property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives range three ten years repairs maintenance charged operations incurred flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per share earnings per share based weighted average number shares common stock common stock equivalents outstanding periods computed using treasury stock method stock options following table sets forth reconciliation denominator utilized computation basic diluted earnings loss per share thousands effect stock options years ended december 31 1999 1997 aggregated 269000 604000 shares respectively excluded purposes diluted earnings per share since effect would antidilutive reclassifications certain reclassifications made prior years data conform current years presentation reclassifications impact previously reported results operations shareholders equity restatement companys consolidated financial statements december 31 1998 1997 years ended restated see notes 15 17 consolidated financial statements description restatements statement cash flows cash paid interest income taxes amounted following thousands noncash portion agema acquisition december 1997 excluded 1997 statement cash flows see note 16 fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon comparison assets liabilities current market values instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximates fair value december 31 1999 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company adopted disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 allows companies choose whether account stockbased compensation method prescribed accounting principles board opinion 25 apb 25 use fair value method described sfas 123 company follows provisions apb 25 see note 13 concentration credit risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make companys customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary certain risks uncertainties preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories recoverability deferred tax assets actual results could differ estimates comprehensive income cumulative translation adjustment represents companys comprehensive income item translation adjustment represents unrealized gainslosses resulting translation financial statements companys subsidiaries accordance sfas 52 foreign currency translation company intention liquidating assets foreign subsidiaries foreseeable future recent accounting pronouncements 1998 financial accounting standards board issued statement financial accounting standards 133 accounting derivative investments hedging activities company plans adopt sfas 133 2001 however management believes impact adoption significant effect companys financial position results operations note 2 operating costs selling operating costs consist following thousands flir systems inc notes consolidated financial statementscontinued note 3 income taxes sfas 109 accounting income taxes requires company recognize deferred tax liabilities assets expected future tax consequences events basis differences recognized companys financial statements tax returns method deferred tax liabilities assets determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse provision benefit income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 3 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 1999 company net operating loss carryforwards aggregated approximately 63200000 expire years 2005 2014 utilization companys acquired net operating loss carryforwards fsi automation formerly known optimas corporation limited future earnings fsi automation limited approximately 350000 per year addition company various tax credits available aggregating 3367000 december 31 1999 expire years 2007 2013 us foreign withholding taxes provided earnings foreign subsidiaries company required remit earnings foreign subsidiaries order realize benefit acquired inprocess research development deferred tax assets realizable 15year period valuation allowance related longterm deferred tax assets decreased 1998 due effects foreign subsidiaries profitability managements assessment amount deferred tax asset likely realized future valuation allowance increased 1999 due reduced profitability reduced managements assessment amount deferred tax asset likely realized future note 4 accounts receivable accounts receivable net allowance doubtful accounts 4772000 3216000 december 31 1999 1998 respectively note 5 inventories consist following thousands flir systems inc notes consolidated financial statementscontinued note 6 property equipment property equipment summarized follows thousands property equipment includes cost equipment held company capital lease agreements cost related accumulated depreciation aggregated 2923000 2441000 respectively december 31 1999 2938000 2078000 respectively december 31 1998 note 7 notes payable company entered credit agreement number banks december 16 1999 credit agreement provides company 100 million revolving line credit interest fluctuating rate generally equal higher federal funds rate plus 050 prime rate primary lender domestic borrowings libor offshore borrowings interest rates borrowings agreement increase companys consolidated debt level increases weighted average interest rate borrowings december 31 1999 786 credit agreement allows company elect time prior december 1 2002 convert entire principal balance credit agreement term loan would payable 24 subsequent equal monthly payments plus interest credit agreement includes several negative covenants among things restrict companys ability incur new indebtedness credit agreement collateralized substantially assets company includes certain financial covenants consolidated tangible net worth interest coverage ratio leverage ratio maximum accounts payable days december 31 1999 year ended company violation certain covenants lenders waived covenant violations december 31 1999 2000 modified covenants 2000 including addition covenants respect minimum levels revenue ebitda lenders also increased interest rates applicable offshore borrowings agreement 035 december 31 1999 company 81 million outstanding facility additionally company one subsidiaries 50000000 swedish krona approximately 5882000 line credit 365 december 31 1999 december 31 1999 company 247000 outstanding line standby letters credit outstanding december 31 1999 totaling 1393000 flir systems inc notes consolidated financial statementscontinued note 8 longterm debt longterm debt summarized follows thousands company subordinated promissory note 11 million elbit ltd note bears interest 8 paid full march 30 1999 conjunction closing inframetrics merger december 31 1998 accrued interest 2087000 note included longterm debt accompanying balance sheet 1996 company one subsidiaries entered term loan agreement commercial bank consisting note payable 85 million interest rate note payable ranged 71 74 december 31 1998 note payable paidoff closed connection completion inframetrics transaction december 31 1998 note payable balance 6837000 included longterm debt note 9 pension plans company offers employees outside united states participation defined benefit pension plans summary components net periodic pension expense defined benefit plans substantially employees outside united states follows thousands flir systems inc notes consolidated financial statementscontinued note 9 pension planscontinued assumptions used defined benefit pension plans follows components net periodic benefit cost follows thousands note 10 commitments contingencies company leases primary facilities various operating leases expire 2000 2005 total rent expense years ended december 31 1999 1998 1997 amounted 4224000 3629000 2379000 respectively minimum rental payments required noncancelable leases equipment facilities december 31 1999 follows thousands company 401k savings retirement plan provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 1142000 1120000 933000 years ended december 31 1999 1998 1997 respectively note 11 litigation beginning march 13 2000 four complaints alleging violations federal securities laws filed company j kenneth stringer iii j mark samper united states district court district oregon complaint filed purported class action individuals allege purchased companys common stock purported class periods flir systems inc notes consolidated financial statementscontinued note 11 litigationcontinued vary extend april 22 1999 earliest march 6 2000 latest complaints allege defendants violated securities exchange act 1934 rule 10b5 promulgated thereunder intentionally issuing false andor misleading statements regarding companys financial results companys sec filings press releases public statements complaints specify amount damages plaintiffs seek company currently expects lawsuits described consolidated one action within next several months company intends contest litigation vigorously company involved litigation investigations routine nature various legal matters 1999 defended handled ordinary course business ultimate results matters described cannot presently determined management expect material adverse effect companys results operations financial position therefore adjustments made accompanying financial statements relative matters note 12 capital stock 1998 company increased number shares common stock reserved future issuance pursuant incentive stock plans 4269400 plans restricted stock incentive stock options nonqualified stock options may granted employees consultants nonemployee directors company exercise price less fair market value stock date grant options granted pursuant plans expire ten years date grant plan terminates 2003 1992 incentive stock plan 430000 shares common stock reserved restricted stock awards shares awarded earned ratably term restricted stock agreement based upon achievement specified performance goals shares granted 1999 1998 aggregated 26500 133500 shares respectively shares granted 17668 53630 shares earned 1999 1998 respectively based upon achievement specified performance goals shares granted issued lapse cease subject award compensation expense related awards amounts 358000 1050000 1747000 recorded 1999 1998 1997 respectively included selling operating costs december 31 1999 55000 shares available future awards july 6 1998 company completed secondary public offering 2399130 shares common stock including 1638630 shares common stock issued sold company additionally july 24 1998 underwriters exercised overallotment option related secondary offering company issued sold additional 359870 shares common stock net proceeds 32049000 utilized repay full payable related party aggregated approximately 4985000 reduce amounts outstanding companys lines credit june 2 1999 board directors approved shareholder rights plan provides issuance one right share outstanding common stock rights become exercisable event acquiring party acquires beneficial ownership 15 companys outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 companys outstanding common stock right entitles holder purchase one onehundredth share companys junior participating preferred stock economic terms similar one share companys common stock purchase price 6500 subject adjustment company generally entitled redeem rights 001 per right flir systems inc notes consolidated financial statementscontinued note 12 capital stockcontinued time prior tenth day acquiring person acquired beneficial ownership 15 companys common stock acquiring person group acquires beneficial ownership 15 companys outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 13 stock options company elected account stockbased compensation apb 25 however required sfas 123 company computed pro forma disclosure purposes value options granted 1999 1998 1997 using blackscholes option pricing model weighted average assumptions used stock option grants 1999 1998 1997 risk free interest rate 55 57 60 respectively expected dividend yield 0 expected life three years expected volatility 495 484 402 respectively options assumed exercised upon vesting purposes valuation adjustments made options forfeited prior vesting years ended december 31 1999 1998 1997 total value options granted computed 3383000 2440000 1879000 respectively would amortized straightline basis vesting period options company accounted plans accordance sfas 123 companys net earnings pro forma net earnings per share would follows thousands except per share data effects applying sfas 123 providing pro forma disclosure 1999 1998 1997 likely representative effects reported net earnings per share future years since options vest several years additional awards may made flir systems inc notes consolidated financial statementscontinued note 13 stock optionscontinued table summarizes companys stock option activity following table sets forth exercise price range number shares weighted average exercise price remaining contractual lives group similar price grant dates options exercisable december 31 1999 totaled 800891 shares weighted average exercise price 1179 options available grant december 31 1999 totaled 1571958 shares note 14 segment information company determined operating segments commercial government market segments commercial segment comprises thermal imaging applications including condition monitoring research development manufacturing process control airborne observation broadcast government segment comprises thermal imaging applications including search rescue federal drug interdiction surveillance reconnaissance navigation safety border maritime patrol environment monitoring groundbased security accounting policies segments described note 1 company evaluates performance based upon revenue gross profit segment evaluate segment performance income measurement flir systems inc notes consolidated financial statementscontinued note 14 segment informationcontinued operating segment information including revenue gross profit follows thousands information related revenue significant geographical location follows thousands longedlived assets generally located united states exception property equipment december 31 property equipment located following geographic areas thousands note 15 inframetrics merger pursuant terms agreement plan merger agreement dated march 19 1999 among company irabu acquisition corporation delaware corporation whollyowned subsidiary company merger sub inframetrics inc delaware corporation inframetrics stockholders inframetrics merger sub merged inframetrics march 30 1999 effective time shares capital stock inframetrics outstanding immediately prior effective time converted exchanged total 2107552 shares companys common stock including 210755 shares companys common stock held escrow secure indemnification obligations stockholders inframetrics september 261999 addition employee stock options purchase inframetrics common stock outstanding immediately prior effective time assumed company total 192439 shares companys common stock issuable upon exercise stock options assumed company merger flir systems inc notes consolidated financial statementscontinued note 15 inframetrics mergercontinued transaction accounted pooling interests therefore financial statements periods presented restated reflect combined operations financial position periods restatement effect previously reported separate results operations shareholders equity conjunction merger march 31 1999 company recorded onetime charge 238 million consisting reserve duplicative inventories 201 million transaction related costs 32 million cost exit activities 05 million course year company recorded additional costs related merger including increase reserve duplicative inventories 52 million increase costs exit activities 56 million inventory reserve relates duplicative product lines created merger included cost goods sold company wroteoff disposed 150 million related inventories december 31 1999 transaction related costs consisted investment advisor fees legal accounting fees direct transaction costs included combination costs separate line item operating expenses cost exit activities amount relates estimated shut costs related duplicative sales offices united kingdom germany france december 31 1999 company paid 81 million transaction related costs cost exit activities following reconciles revenue net earnings loss previously reported restated information presented consolidated financial statements note 16 agema acquisition effective december 1 1997 company acquired outstanding shares agema infrared systems ab corporation organized laws sweden agema infrared systems limited corporation organized laws united kingdom agema infrared systems ltd corporation organized laws canada agema infrared systems inc delaware corporation agema exchange 4162000 shares companys common stock value 54106000 additional 1559000 direct acquisition costs also incurred included purchase price agema designs manufactures markets handheld infrared imaging systems commercial market results agemas operations combined company since date acquisition flir systems inc notes consolidated financial statementscontinued note 16 agema acquisitioncontinued acquisition accounted using purchase method accounting accordingly purchase price allocated net assets acquired based upon estimated fair values follows thousands included current liabilities acquired 2000000 estimated costs shut certain identified agema facilities estimated costs included cost involuntarily terminate relocate employees sell relocate certain assets terminate operating leases otherwise wind operations collectively shutdown certain facilities formerly operated agema shutdown substantially completed prior december 1 1998 actual costs accomplish shutdown exceeded costs originally estimated approximately 2880000 excess shutdown costs recorded adjustment purchase price agema resulted increase excess purchase price net assets acquired total shutdown costs incurred summarized follows thousands intangible assets acquired excess purchase price net assets acquired amortized straightline basis 15 years related amortization expense aggregated 1406000 1179000 79000 1999 1998 1997 respectively included selling operating costs consolidated unaudited results operations pro forma basis presented though acquisition agema occurred january 1 1997 excluding onetime charges acquired inprocess research development acquisition related costs duplicative inventories thousands except per share data flir systems inc notes consolidated financial statementscontinued note 16 agema acquisitioncontinued unaudited pro forma results prepared comparative purposes include certain adjustments additional amortization expense excess purchase price net assets acquired intangible assets purport indicative results operations actually would resulted combination effect january 1 1997 future results operations consolidated entities purposes proforma presentation amounts translated average rate 760 swedish kronor us dollar 1997 conjunction acquisition quarter ended december 31 1997 company recognized onetime charge 52549000 writeoff consisted 36450000 acquired inprocess research development acquisitionrelated costs included separate line operating expense 16099000 inventories due creation duplicative product lines included cost goods sold note 17 restatement march 2000 company determined necessary revise 1998 financial statements interim 1999 financial statements restatement required incorrect consolidation companys subsidiary information inaccurate inventory valuation insufficient accruals commission expense inadequate accumulation misclassification certain subsidiary costs result matters certain costs allowances either accrued recorded correctly appropriate periods addition december 1999 securities exchange commission issued staff accounting bulletin 101 revenue recognition financial statements sab 101 among guidance clarifies certain conditions met order recognize revenue april 2000 connection audit companys financial statements light focus revenue recognition issues resulting issuance sab 101 company reexamined historical application generally accepted accounting principles relating revenue recognition terms underlying certain transactions title risks ownership transferred buyer physical delivery buyer occurred bill hold transactions result review company modified historical revenue recognition policy respect bill hold transactions view cumulative effect unrecorded adjustments costs allowances bill hold revenue matters company restated beginning retained earnings 1997 result revenue recognition matters annual fourth quarter consolidated financial statements 1998 quarterly consolidated financial statements first three quarters 1999 financial statements related notes set forth annual report reflect restatements including changes tax provision periods presented flir systems inc notes consolidated financial statementscontinued note 17 restatementcontinued annual consolidated financial statements restated follows flir systems inc notes consolidated financial statementscontinued note 17 restatementcontinued addition restatement 1998 beginning retained earnings 1997 restated result revenue recognition matters previously reported accumulated deficit 1843000 increased 2922000 4765000 quarterly financial data unaudited flir systems inc see note 17 consolidated financial statements regarding cause restatement sum quarterly earnings loss per share equal annual loss per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent public accountants board directors shareholders flir systems inc audited accompanying consolidated balance sheet flir systems inc oregon corporation subsidiaries december 31 2000 related consolidated statements operations shareholders equity cash flows year ended financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2000 results operations cash flows year ended conformity accounting principles generally accepted united states arthur andersen llp portland oregon march 2 2001 report independent accountants board directors shareholders flir systems inc opinion based audits report auditors consolidated balance sheet december 31 1999 related consolidated statements operations shareholders equity cash flows two years period ended december 31 1999 present fairly material respects financial position results operations cash flows flir systems inc subsidiaries december 31 1999 two years period ended december 31 1999 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits audit financial statements inframetrics inc whollyowned subsidiary statements reflect total revenues 53785000 year ended december 31 1998 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included inframetrics inc based solely report auditors conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion audited consolidated financial statements flir systems inc period subsequent december 31 1999 described note 15 financial statements years ended december 31 1998 1999 restated pricewaterhousecoopers llp portland oregon april 14 2000 except note 15 march 23 2001 flir systems inc consolidated statement operations thousands except per share amounts accompanying notes integral part financial statements flir systems inc consolidated balance sheet thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement shareholders equity thousands except share data par value accompanying notes integral part financial statements flir systems inc consolidated statement cash flows thousands accompanying notes integral part financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader design manufacture marketing thermal imaging stabilized camera systems wide variety commercial industrial government applications companys thermal imaging systems use advanced infrared imaging technology detects infrared radiation heat enabling operator measure minute temperature differences see objects daylight total darkness obscurants smoke haze types fog companys products also incorporate visible light cameras proprietary image analysis software gyro stabilized gimbal technology companys products come variety configurations handheld groundbased systems mounted ships helicopters fixedwing aircraft companys products provide stateoftheart imaging technology coupled competitive price performance characteristics existing thermography imaging applications including condition monitoring research development manufacturing process control airborne observation broadcast search rescue federal drug interdiction surveillance reconnaissance navigation safety border maritime patrol environmental monitoring groundbased security company also developed innovative new products utilizing advanced uncooled thermal imaging technology allows lessexpensive smaller lighter solidstate systems require less power operate addition companys product configurations image analysis software tools increase companys ability provide products tailored meet individual customer requirements principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation foreign currency translation assets liabilities companys foreign operations translated us dollars current exchange rates revenues expenses translated average exchange rates year resulting translation adjustments reflected comprehensive earnings loss within shareholders equity transaction gains losses arise exchange rate fluctuations transactions denominated currency functional currency included results operations incurred recognition revenue generally recognized upon delivery product customer passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 101 revenue recognition financial statements sab 101 issued securities exchange commission provision estimated cost warranty recorded revenue recognized provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months cash equivalents flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories stated lower average cost market include materials labor manufacturing overhead cost determined based currentlyadjusted standard basis approximates actual cost firstin firstout basis company periodically reviews inventories obsolete slowmoving items property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives range three ten years repairs maintenance charged operations incurred longlived assets longlived assets reviewed impairment circumstances indicate carrying amount may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value earnings per share earnings per share based weighted average number shares common stock common stock equivalents outstanding periods computed using treasury stock method stock options following table sets forth reconciliation denominator utilized computation basic diluted earnings loss per share thousands dilutive effect stock options years ended december 31 2000 1999 aggregated 2131966 1494490 respectively excluded purposes diluted earnings per share since effect would antidilutive restatements companys consolidated financial statements december 31 1999 1998 years ended restated see note 15 consolidated financial statements description restatements reclassifications certain reclassifications including described note 16 consolidated financial statements made prior years data conform current years presentation reclassifications impact previously reported results operations shareholders equity flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued statement cash flows cash paid interest income taxes amounted following thousands fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon comparison assets liabilities current market values instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximates fair value december 31 2000 company interest rate swap agreements accounted fair value basis stockbased compensation company adopted disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation sfas 123 allows companies choose whether account stockbased compensation method prescribed accounting principles board opinion 25 apb 25 use fair value method described sfas 123 company follows provisions apb 25 related interpretations accounting employee stock option plans see note 12 concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make companys customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary company purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories recoverability deferred tax assets actual results could differ estimates company believes estimates used reasonable comprehensive loss earnings cumulative translation adjustment represents companys comprehensive income item translation adjustment represents unrealized gainslosses resulting translation financial statements companys subsidiaries accordance sfas 52 foreign currency translation recent accounting pronouncements june 2000 fasb issued statement financial accounting standards 138 accounting certain derivative instruments certain hedging activitiesan amendment fasb statement 133 sfas 138 june 1999 fasb issued statement financial accounting standards 137 accounting derivative instruments hedging activities sfas 137 sfas 137 amendment statement financial accounting standards 133 accounting derivative instruments hedging activities sfas 137 138 establish accounting reporting standards derivative instruments sfas 137 138 effective fiscal years beginning june 15 2000 company adopted pronouncements first quarter 2001 material impact financial position results operations note 2 accounts receivable accounts receivable net allowance doubtful accounts 26 million 48 million december 31 2000 1999 respectively note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 4 property equipmentcontinued property equipment includes cost equipment held company capital lease agreements cost related accumulated depreciation aggregated 29 million 26 million respectively december 31 2000 29 million 24 million respectively december 31 1999 note 5 notes payable company entered credit agreement number lender banks december 16 1999 credit agreement amended effective january 23 2001 credit agreement amended provides company borrowing facility maximum 934 million december 31 2000 company 899 million borrowings addition 08 million standby letters credit 27 million financing available company december 31 2000 interest rate amended credit agreement 1225 amended credit agreement provides maximum borrowing facility permanently reduced 50 first 50 million principal payment time financing availability fixed amount exceed 52 million principal payments exceeding 50 million permanently reduce maximum borrowing facility dollarfordollar basis interest rate borrowings amended credit agreement december 31 2000 january 23 2001 prime rate primary lender domestic borrowings plus 275 interest rates borrowings decline certain principal payments made reduction 25 basis points provided payment 75 million additional 25 basis point reduction 50 million principal reduction thereafter subject total reduction 100 basis points amended credit agreement requires minimum cumulative principal payments totaling less 25 million march 31 2001 50 million june 30 2001 90 million september 30 2001 150 million december 31 2001 200 million march 31 2002 250 million june 30 2002 amended credit agreement expires july 15 2002 amended credit agreement includes one financial covenant related company achieving certain levels profitability beginning quarter ending march 31 2001 credit agreement collateralized substantially assets company december 31 2000 company 899 million outstanding amended credit agreement 150 million classified short term standby letters credit totaling 08 million outstanding december 31 2000 march 2000 company entered interest rate swap agreements minimize exposure fluctuations interest rates original credit agreement december 31 2000 fair value agreements 13 million included longterm liabilities change fair value agreements interest rate differential paid received agreements notional amount totaling 400 million recognized incurred included interest expense additionally company one subsidiaries 40000000 swedish kronar approximately 42 million line credit 43 december 31 2000 december 31 2000 company 27 million outstanding line credit secured primarily accounts receivable inventories subsidiary subject automatic renewal annual basis flir systems inc notes consolidated financial statementscontinued note 6 longterm debt longterm debt summarized follows thousands note 7 pension plans company previously offered employees outside united states participation defined benefit pension plan summary components net periodic pension expense benefit obligation fund assets plan follows thousands assumptions used defined benefit pension plans follows components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 7 pension planscontinued company 401k savings retirement plan provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 12 million 11 million 11 million years ended december 31 2000 1999 1998 respectively company also unfunded retirement obligation former executive officer recorded reported long term liabilities note 8 commitments company leases primary facilities various operating leases expire 2001 2006 total rent expense years ended december 31 2000 1999 1998 amounted 42 million 42 million 36 million respectively minimum rental payments required noncancelable leases equipment facilities december 31 2000 follows thousands note 9 litigation july 24 2000 complaint consolidating five previously filed complaints alleging violations securities exchange act 1934 rule 10b5 promulgated thereunder filed company robert p daltry j kenneth stringer iii j mark samper united states district court district oregon behalf class purchasers companys common stock march 3 1999 march 6 2000 january 8 2001 defendants action reached agreement settle litigation amount 60 million 55 million paid companys insurance carrier 05 million company accrued december 31 2000 settlement received preliminary court approval hearing final court approval held april 3 2001 securities exchange commission sec conducting investigation relating company investigation nonpublic fact finding inquiry determine whether violations federal securities laws company cooperating fully sec investigation company involved litigation various legal matters defended handled ordinary course business flir systems inc notes consolidated financial statementscontinued note 9 litigationcontinued ultimate results matters described cannot presently determined management expect material adverse effect companys results operations financial position therefore adjustments made accompanying financial statements relative matters note 10 income taxes sfas 109 accounting income taxes requires company recognize deferred tax liabilities assets expected future tax consequences events basis differences recognized companys financial statements tax returns method deferred tax liabilities assets determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse us foreign withholding taxes provided unremitted earnings foreign subsidiaries pretax loss income significant geographical location follows thousands provision income taxes follows thousands flir systems inc notes consolidated financial statementscontinued note 10 income taxescontinued deferred tax assets liabilities composed following components thousands provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2000 company us united kingdom tax net operating loss carryforwards nols totaling approximately 808 million 06 million respectively expire years 2005 2020 additionally company various us tax credits available aggregating 32 million expire years 2007 2019 company also 101 million deferred tax asset related acquired inprocess research development recorded connection agema acquisition realization deferred tax asset dependent upon ability foreign subsidiaries remit earnings us parent statement financial accounting standards 109 accounting income taxes flir systems inc notes consolidated financial statementscontinued note 10 income taxescontinued sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets likely otherwise valuation allowance required recorded based guidance management recorded substantial valuation allowance amounting 241 million 222 million december 31 2000 1999 respectively deferred tax assets management believes primarily result significant operational restructuring third quarter 2000 net deferred tax asset 237 million reflected december 31 2000 consolidated balance sheet realizable based future forecasts taxable income addition company planning implement various tax planning strategies assist utilization unreserved deferred tax assets future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins successful implementation tax planning strategies factors beyond companys control assurance given sufficient taxable income generated full utilization deferred tax assets accordingly company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income andor tax planning strategies achieved note 11 capital stock july 6 1998 company completed secondary public offering 2399130 shares common stock including 1638630 shares common stock issued sold company additionally july 24 1998 underwriters exercised overallotment option related secondary offering company issued sold additional 359870 shares common stock net proceeds 320 million utilized repay full payable related party aggregated approximately 50 million reduce amounts outstanding companys lines credit june 2 1999 board directors approved shareholder rights plan provides issuance one right share outstanding common stock rights become exercisable event acquiring party acquires beneficial ownership 15 companys outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 companys outstanding common stock right entitles holder purchase one onehundredth share companys junior participating preferred stock economic terms similar one share companys common stock purchase price 6500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 companys common stock acquiring person group acquires beneficial ownership 15 companys outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 12 stock options company stock incentive plans employees consultants directors company plans incentive stock options non qualified stock options may granted employees consultants non employee directors company exercise price less fair market value flir systems inc notes consolidated financial statementscontinued note 12 stock optionscontinued stock date grant options generally become exercisable 3 year period beginning 1 year date grant expire 10 years date grant plans terminate 2003 1998 company increased number shares common stock reserved future issuance pursuant incentive stock plans 4269400 company elected account employee stockbased compensation apb 25 however required sfas 123 company computed pro forma disclosure purposes value options granted 2000 1999 1998 using blackscholes option pricing model weighted average assumptions used stock option grants 2000 1999 1998 riskfree interest rate 61 55 57 respectively expected dividend yield 0 expected life three years expected volatility 779 495 484 respectively options assumed exercised upon vesting purposes valuation adjustments made options forfeited prior vesting years ended december 31 2000 1999 1998 total value options granted computed 94 million 34 million 24 million respectively would amortized straightline basis vesting period options company accounted plans accordance sfas 123 companys net earnings pro forma net earnings per share would follows thousands except per share data effects applying sfas 123 providing pro forma disclosure 2000 1999 1998 likely representative effects reported net earnings per share future years since options vest several years additional awards may made flir systems inc notes consolidated financial statementscontinued note 12 stock optionscontinued table summarizes companys stock option activity following table sets forth exercise price range number shares weighted average exercise price remaining contractual lives group similar price grant dates options outstanding exercisable december 31 2000 options available grant december 31 2000 totaled 1115427 shares note 13 segment information company determined operating segments thermography imaging market segments thermography market comprised broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement imaging market comprised broad range applications focused providing enhanced vision capabilities temperature measurement required although differences temperature used create image imaging market also includes high performance daylight imaging applications flir systems inc notes consolidated financial statementscontinued note 13 segment informationcontinued accounting policies segments described note 1 company evaluates performance based upon net revenue segment evaluate segment performance income measurement previously company reported operating segments commercial government market segments information 1999 1998 reclassified consistent reporting thermography imaging market segments 2000 operating segment information revenue follows thousands information related revenue significant geographical location follows thousands longlived assets significant geographical location follows thousands note 14 inframetrics merger pursuant terms agreement plan merger agreement dated march 19 1999 among company irabu acquisition corporation delaware corporation whollyowned subsidiary company merger sub inframetrics inc delaware corporation inframetrics stockholders inframetrics merger sub merged inframetrics march 30 1999 effective time shares capital stock inframetrics outstanding immediately prior effective time converted exchanged total 2107552 shares companys common stock including flir systems inc notes consolidated financial statementscontinued note 14 inframetrics mergercontinued 210755 shares companys common stock held escrow secure indemnification obligations stockholders inframetrics september 261999 addition employee stock options purchase inframetrics common stock outstanding immediately prior effective time assumed company total 192439 shares companys common stock issuable upon exercise stock options assumed company merger transaction accounted pooling interests therefore financial statements periods presented restated reflect combined operations financial position periods restatement effect previously reported separate results operations shareholders equity conjunction merger company recorded 1999 onetime charge 346 million consisting reserve duplicative inventories 253 million transaction related costs 32 million cost exit activities 61 million inventory reserve relates duplicative product lines created merger included cost goods sold transaction related costs consisted investment advisor fees legal accounting fees direct transaction costs included combination costs separate line item operating expenses cost exit activities amount relates estimated shut costs related duplicative sales offices united kingdom germany france december 31 2000 company written disposed substantially inventory paid transaction related costs cost exit activities following reconciles revenue net earnings impacts merger information presented consolidated financial statements note 15 restatements march 2001 company determined necessary restate 1999 1998 consolidated financial statements interim 2000 1999 consolidated financial statements restatements effected company determined based review specific terms conditions underlying certain sales transactions recorded 1999 1998 revenue recognized respect transactions periods amounts consistent companys revenue recognition policy accordingly restatements include deferral revenue reporting period revenue originally recorded reporting period revenue would properly recorded companys revenue recognition policy related cost sales certain operating costs also restated appropriate restatements also include revision accounting certain assets recorded connection merger inframetrics inc 1999 consolidated financial statements related notes set forth annual report reflect restatements periods presented flir systems inc notes consolidated financial statementscontinued note 15 restatementcontinued additional information regarding impact restatements reclassifications set forth table thousands except per share amounts results operations flir systems inc notes consolidated financial statementscontinued note 16 reclassifications made consolidated statement operations reporting representative commissions incurred company commissions previously recorded portion selling operating costs reclassified reduction revenue consistent current reporting presentations consolidated statement operations modified follows thousands quarterly financial data unaudited flir systems inc thousands except per share data includes reclassifications see note 15 note 16 consolidated financial statements regarding basis restatement reclassifications sum quarterly earnings loss per share equal annual loss per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent public accountants board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2001 2000 related consolidated statements operations shareholders’ equity cash flows two years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2001 2000 results operations cash flows two years ended conformity accounting principles generally accepted united states arthur andersen llp portland oregon february 8 2002 except respect matter discussed note 10 date february 19 2002 report independent accountants board directors shareholders flir systems inc opinion consolidated statements operations shareholders’ equity cash flows year ended december 31 1999 present fairly material respects results operations cash flows flir systems inc subsidiaries year ended december 31 1999 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion audited consolidated financial statements flir systems inc period subsequent december 31 1999 pricewaterhousecoopers llp portland oregon april 14 2000 flir systems inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets company’s products produced variety configurations suit specific customer needs include compact handheld systems surveillance inspection applications sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates revenues expenses translated average rates year resulting translation adjustments reflected comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currency functional currency reported directly consolidated statement operations recognition revenue recognized upon delivery product customer passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 101 revenue recognition financial statements sab 101 issued securities exchange commission provision estimated cost warranty recorded revenue recognized provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months purchased cash equivalents included cash equivalents december 31 2001 16 million restricted collateral certain outstanding letters credit flir systems inc notes consolidated financial statementcontinued note 1 nature business significant accounting policiescontinued inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard basis approximates actual cost firstin firstout basis company periodically reviews inventories obsolete excess items property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives range three ten years repairs maintenance charged expense incurred longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive number additional shares calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period following table sets forth reconciliation denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2001 2000 1999 aggregated 805700 2131966 1494490 respectively excluded purposes diluted earnings per share since effect would antidilutive flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued supplemental cash flow disclosure thousands fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon comparison assets liabilities current market values instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximates fair value december 31 2001 company interest rate swap agreements accounted fair value basis stockbased compensation company adopted disclosure provisions statement financial accounting standards sfas 123 “accounting stockbased compensation” sfas 123 allows companies choose whether account stockbased compensation method prescribed accounting principles board opinion 25 apb 25 use fair value method described sfas 123 company follows provisions apb 25 related interpretations accounting employee stock option plans see note 13 concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary company purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal use estimates preparation financial statements conformity generally accepted accounting principles united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories recoverability deferred tax assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable comprehensive earnings loss cumulative translation adjustment represents company’s comprehensive earnings loss item translation adjustment represents unrealized gainslosses resulting translation financial statements company’s subsidiaries accordance sfas 52 “foreign currency translation” reclassifications certain reclassifications made prior years’ data conform current year’s presentation reclassifications impact previously reported results operations shareholders’ equity recent accounting pronouncements july 2001 financial accounting standards board issued statement financial accounting standards 141”business combinations” sfas 141 statement financial accounting standards 142 “goodwill intangible assets” sfas 142 sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 sfas 142 changes accounting goodwill amortization method impairmentonly approach thus amortization goodwill including goodwill recorded past business combinations cease upon adoption statement adopted company first quarter 2002 company expects adoption sfas 142 result pretax increase net earnings approximately 11 million fiscal year 2002 cessation amortization previously recorded goodwill expect recognize impairments company anticipates continue amortize identifiable intangible assets consists primarily patents cooperation agreement august 2001 fasb approved sfas 143 “accounting asset retirement obligations” “sfas 143” effective fiscal year beginning january 1 2003 sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs october 2001 fasb approved sfas 144 “accounting impairment disposal longlived assets” “sfas 144” supercedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” “sfas 121” accounting reporting provisions apb 30 “reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” disposal segment business sfas 144 retains many fundamental provisions sfas 121 resolves certain implementation issues associates statement sfas 144 effective fiscal year beginning january 1 2002 company anticipate adoption sfas 143 sfas 144 material impact financial condition results operations note 2 accounts receivable accounts receivable net allowance doubtful accounts 19 million 26 million december 31 2001 2000 respectively flir systems inc notes consolidated financial statementscontinued note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands property equipment includes cost equipment held company capital lease agreements cost related accumulated depreciation aggregated 25 million 14 million respectively december 31 2001 38 million 19 million respectively december 31 2000 note 5 intangible assets intangible assets amortized straightline basis summarized follows thousands note 6 notes payable company entered credit agreement number lender banks december 16 1999 credit agreement amended effective january 23 2001 credit agreement amended provided company borrowing facility maximum 934 million required certain principal payments effectively reduced maximum borrowing facility december 31 2001 result flir systems inc notes consolidated financial statementscontinued note 6 notes payablecontinued principal payments made date company 199 million borrowings addition 19 million standby letters credit 41 million financing available company december 31 2001 interest rate amended credit agreement 65 prime rate primary lender domestic borrowings plus 175 amended credit agreement expires july 15 2002 amended credit agreement includes one financial covenant related company achieving certain levels profitability beginning quarter ending march 31 2001 credit agreement collateralized substantially assets company compliance covenant december 31 2001 amended credit agreement requires minimum cumulative payments june 30 2002 december 31 2001 company made payments required june 30 2002 company interest rate swap agreements entered minimize exposure fluctuations interest rates original credit agreement agreements include notional principal amounts 30 million 10 million terminate march 2003 march 2005 respectively agreements company pays interest based upon fixed rates ranging 669 718 receiving interest based upon variable onemonth libor rates 193 december 31 2001 december 31 2001 2000 company recorded fair value obligation related agreements 23 million 13 million respectively included longterm liabilities change fair value agreements interest rate differentials paid received agreements recognized incurred included interest expense additionally company one subsidiaries 40000000 swedish kronar approximately 38 million line credit 43 december 31 2001 2000 december 31 2001 2000 company 35 million 27 million respectively outstanding line credit secured primarily accounts receivable inventories subsidiary subject automatic renewal annual basis note 7 longterm debt longterm debt summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 8 pension plans company previously offered employees outside united states participation defined benefit pension plan addition beginning 2001 company offers supplemental executive retirement plan serp executive officers company summary components net periodic pension expense benefit obligation fund assets plans follows thousands defined benefit pension plan employees outside united stated weighted average discount rates assumed 55 75 years ended december 31 2001 2000 respectively serp weighted average discount rate assumed 75 rate increase compensation levels assumed 30 year ended december 31 2001 additional minimum liability 07 million recognized serp representing excess unfunded accumulated benefit obligation accrued pension cost components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 8 pension planscontinued company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 10 million 12 million 11 million years ended december 31 2001 2000 1999 respectively company also unfunded retirement obligation former executive officer recorded reported longterm liabilities note 9 commitments company leases primary facilities various operating leases expire 2002 2006 total rent expense years ended december 31 2001 2000 1999 amounted 45 million 42 million 42 million respectively minimum rental payments required noncancelable leases equipment facilities december 31 2001 follows thousands note 10 litigation june 8 2000 securities exchange commission “sec” issued formal order investigation us certain officers directors employees individuals presently formerly associated company determine whether violations federal securities laws occurred 1998 1999 investigation relates company’s revenue recognition policies accounting controls financial reports public disclosures time period believe investigation relates among things set facts gave rise restatements financial statements periods class action lawsuits shareholders settled part investigation sec subpoenaed documents testimony current former officers employees others february 19 2002 staff sec advised us intend recommend sec bring civil injunctive action us seeking permanent injunction us violations section 17a securities act 1933 “securities act” sections 10b 13a 13b2 securities exchange act 1934 “exchange act” rules 10b5 12b20 13a1 13a13 13b21 thereunder statutes rules generally include antifraud provisions securities act antifraud reporting record flir systems inc notes consolidated financial statementscontinued note 10 litigationcontinued keeping provisions exchange act rules thereunder recommendation sec staff include civil penalties fines claims damages years 1998 1999 engaged discussions staff sec attempt reach settlement legal action contemplated staff date unable reach agreement terms settlement also submitted written statement sec believe sec bring civil injunctive action recommended staff time know whether sec authorize commencement injunctive action recommended staff whether sec authorize legal action commence administrative actions us able negotiate settlement sec regard injunctive actions administrative proceedings intend vigorously defend actions proceedings adverse finding us sec terms proposed staff could also result loss ability rely safe harbor forwardlooking statements provided securities litigation reform act 1995 addition expect continue incur expenses associated responding investigation legal administrative proceedings commenced sec involving company former current officers directors employees proceedings may divert efforts management team normal business operations company involved litigation various legal matters defended handled ordinary course business ultimate results matters described cannot presently determined management expect material adverse effect company’s results operations financial position cash flows therefore adjustments made accompanying financial statements relative matters note 11 income taxes sfas 109 “accounting income taxes” sfas 109 requires company recognize deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings loss significant geographical location follows thousands flir systems inc notes consolidated financial statementscontinued note 11 income taxescontinued provision income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 11 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2001 company us tax net operating loss carryforwards nols totaling approximately 839 million expire years 2005 2021 additionally company various us tax credits available aggregating 37 million expire years 2007 2020 approximately 138 million company’s nols generated primarily 2001 result deductions related exercises stock options tax benefit portion nols fully reserved valuation allowance utilized future portion us nols tax effected accounted direct increase additional paidin capital rather reduction year’s provision income taxes 2001 company changed policy providing taxes unremitted foreign earnings given substantial increase corporate liquidity potential negative us tax consequences remitting foreign earnings company’s strategic intent permanently reinvest foreign earnings company longer provides taxes unremitted foreign earnings accordingly deferred tax liability unremitted foreign earnings eliminated 2001 recognition acquired inprocess research development deferred tax asset recorded prior years fully dependent intent remit earnings foreign subsidiaries us parent accordingly given change noted asset written 2001 combined net deferred tax assets related two accounts fully reserved prior years thus valuation allowance adjusted accordingly sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance company recorded substantial valuation allowance amounting 182 million 241 million december 31 2001 2000 respectively deferred tax assets company believes net deferred tax asset 239 million reflected december 31 2001 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross flir systems inc notes consolidated financial statementscontinued note 11 income taxescontinued margins successful implementation tax planning strategies factors beyond company’s control assurance given sufficient taxable income generated full utilization net deferred tax assets accordingly company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income achieved note 12 capital stock december 18 2001 company completed public offering 1500000 shares common stock including 1000000 shares common stock issued sold company net proceeds company 414 million utilized reduce amounts outstanding company’s amended credit agreement remaining 500000 shares included public offering provided thirdparty shareholder june 2 1999 board directors approved shareholder rights plan provides issuance one right share outstanding common stock company reserved 300000 shares capital series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s junior participating preferred stock economic terms similar one share company’s common stock purchase price 6500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 13 stock option stock purchase plans company stock incentive plans employees consultants nonemployee directors company plans incentive stock options nonqualified stock options may granted exercise price less fair market value stock date grant options generally become exercisable threeyear period beginning one year date grant expire ten years date grant plans terminate 2002 2003 1998 company increased number shares common stock reserved future issuance pursuant incentive stock plans 4269400 company elected account employee stockbased compensation apb 25 however required sfas 123 company computed pro forma disclosure purposes value options granted 2001 2000 1999 using blackscholes option pricing model weighted average assumptions used stock option grants 2001 2000 1999 riskfree interest rate 38 61 55 respectively expected dividend yield 0 expected life three years expected volatility 850 779 495 respectively options assumed exercised upon vesting purposes valuation adjustments made options forfeited prior vesting years ended december 31 2001 2000 1999 total value options granted computed 289 million 94 million 34 million respectively would amortized straightline basis vesting period options flir systems inc notes consolidated financial statementscontinued note 13 stock option stock purchase planscontinued company accounted plans accordance sfas 123 company’s net earnings pro forma net earnings per share would follows thousands except per share data effects applying sfas 123 providing pro forma disclosure 2001 2000 1999 likely representative effects reported net earnings per share future years since options vest several years additional awards may made table summarizes company’s stock option activity flir systems inc notes consolidated financial statementscontinued note 13 stock option stock purchase planscontinued following table sets forth exercise price range number shares weighted average exercise price remaining contractual lives group similar price grant dates options outstanding exercisable december 31 2001 options available grant december 31 2001 totaled 168930 shares 1999 company established employee stock purchase plan espp plan company authorized sell 1500000 shares common stock series sixmonth offerings substantially employees company eligible participate plan employees may contribute 10 annual compensation espp limited maximum annual amount set periodically internal revenue service purchase price lesser 85 fair market value common stock enrollment date purchase date 2001 2000 company issued 93114 99195 shares respectively note 14 segment information company determined operating segments thermography imaging market segments thermography market comprised broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement imaging market comprised broad range applications focused providing enhanced vision capabilities temperature measurement required although differences temperature used create image imaging market also includes high performance daylight imaging applications accounting policies segments described note 1 company evaluates performance based upon net revenue segment evaluate segment performance income statement measurement operating segment information revenue follows thousands flir systems inc notes consolidated financial statementscontinued note 14 segment informationcontinued information related revenue significant geographical location follows thousands longlived assets significant geographic location follows thousands note 15 acquisition optronics division july 13 2001 company acquired certain net assets optronics division saabtech electronics ab effective july 1 2001 connection acquisition optronics company issued 100000 shares common stock complete acquisition shares restricted company obligated upon request saabtech electronics ab repurchase shares price 1415 per share accordingly obligation recorded longterm liabilities addition net assets acquired company received cash 03 million purchase price 14 million representing market value shares issued allocated assets acquired liabilities assumed based estimated values excess assigned cooperation agreement received acquisition cooperation agreement designates company preferred supplier saab bofors dynamics ab note 16 inframetrics merger pursuant terms agreement plan merger “merger agreement” dated march 19 1999 among company irabu acquisition corporation delaware corporation whollyowned subsidiary company “merger sub” inframetrics inc delaware corporation “inframetrics” stockholders inframetrics merger sub merged inframetrics march 30 1999 “effective time” shares capital stock inframetrics outstanding immediately prior effective time converted exchanged total 2107552 shares company’s common stock including 210755 shares company’s common stock held escrow secure indemnification obligations stockholders inframetrics september 26 1999 addition employee stock options purchase inframetrics common stock outstanding immediately prior effective time assumed company total 192439 shares company’s common stock issuable upon exercise stock options assumed company merger flir systems inc notes consolidated financial statementscontinued note 16 inframetrics mergercontinued transaction accounted pooling interests therefore financial statements reflect combined operations financial position periods conjunction merger company recorded 1999 onetime charge 346 million consisting reserve duplicative inventories 253 million transaction related costs 32 million cost exit activities 61 million inventory reserve relates duplicative product lines created merger included cost goods sold transaction related costs consisted investment advisor fees legal accounting fees direct transaction costs included combination costs separate line item operating expenses cost exit activities amount relates estimated shut costs related duplicative sales offices united kingdom germany france december 31 2001 company written disposed inventory paid transaction related costs cost exit activities quarterly financial data unaudited flir systems inc thousands except per share data 1 second quarter 2000 company recorded onetime pretax charges 73 million primarily related streamlining manufacturing corporate operations charges include 69 million related cost accumulations asset valuations written 04 million workforce reductions related costs excluding charges gross profit net earnings basic net earnings per share diluted net earnings per share would 27183 727 005 respectively 2 third quarter 2000 company recorded onetime pretax charges 127 million primarily related streamlining manufacturing corporate operations charges include 90 million related eliminating older lower margin products 19 million related cost accumulations asset valuations written 18 million workforce reductions related costs excluding charges gross profit net loss basic net loss per share diluted net loss per share would 19940 5427 037 respectively 3 fourth quarter 2000 company recorded onetime pretax charges 05 million related settlement class action lawsuit excluding charge net earnings basic net earnings per share diluted net earnings per share would 3076 021 respectively sum quarterly earnings loss per share always equal annual earnings loss per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent auditors board directors shareholders flir systems inc audited accompanying consolidated balance sheet flir systems inc oregon corporation subsidiaries december 31 2002 related consolidated statements operations shareholders’ equity cash flows year ended consolidated financial statements responsibility company’s management responsibility express opinion financial statements based audit 2001 2000 financial statements audited auditors ceased operations auditors expressed unqualified opinion financial statements revision described note 5 consolidated financial statements report dated february 8 2002 conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion 2002 consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2002 results operations cash flows year ended conformity accounting principles generally accepted united states america discussed 2001 2000 consolidated financial statements flir systems inc subsidiaries audited auditors ceased operations described note 5 financial statements revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” sfas 142 adopted company january 1 2002 opinion sfas 142 transitional disclosures 2001 2000 note 5 appropriate however engaged audit review apply procedures 2001 2000 financial statements flir systems inc respect disclosures accordingly express opinion form assurance 2001 2000 financial statements taken whole kpmg llp portland oregon january 31 2003 report independent public accountants board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2001 2000 related consolidated statements operations shareholders’ equity cash flows two years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2001 2000 results operations cash flows two years ended conformity accounting principles generally accepted united states arthur andersen llp portland oregon february 8 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants flir systems inc may 20 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements flir systems inc appearing annual report registration statements filed flir systems inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein prior period financial statements 2001 2000 revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” adopted company january 1 2002 flir systems inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets company’s products produced variety configurations suit specific customer needs include compact handheld systems surveillance inspection applications sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency except transactions operate hedge foreign currency investment position included consolidated statement operations incurred cumulative translation adjustment included accumulated comprehensive loss 4791000 2301000 december 31 2001 2002 respectively revenue recognition revenue recognized upon delivery product customer passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 101 revenue recognition financial statements sab 101 issued securities exchange commission company designs markets sells products standard offtheshelf products many company’s imaging customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts company recognizes revenue determined elements essential functionality system delivered undelivered items considered essential functionality deferred estimated fair value credit extended customers revenue recognized company determined risk uncollectibility minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months purchased cash equivalents inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard basis approximates actual cost firstin firstout basis inventory reserves established conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded reserves intended reduce carrying value company’s inventories net realizable value property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value year ended december 31 2002 company adopted provisions sfas 144 “accounting impairment disposal longlived assets” sfas 144 supersedes previous guidance financial accounting reporting impairment disposal longlived assets segments business disposed effect adopting sfas 144 material guidance provided sfas 144 substantially company’s existing policy advertising costs advertising costs included selling general administrative expenses expensed incurred flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive number additional shares calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period following table sets forth reconciliation denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2002 2001 2000 aggregated 270036 805700 2131966 respectively excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon comparison assets liabilities current market values instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximates fair value december 31 2002 stockbased compensation company adopted disclosure provisions sfas 123 “accounting stockbased compensation” sfas 123 allows companies choose whether account stockbased compensation intrinsic value method prescribed accounting principles board opinion 25 apb 25 use fair value method described sfas 123 december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 amends sfas 123 certain transition provisions companies electing adopt fair value method amends sfas 123 certain financial statement disclosures flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued company follows provisions apb 25 related interpretations accounting stockbased employee compensation plans described fully note 12 stockbased employee compensation costs reflected net earnings options granted plans exercise price equal market value underlying common stock date grant following table illustrates effect net earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share amounts fair value stockbased awards granted 2002 2001 2000 reported estimated using blackscholes option pricing model following weightedaverage assumptions blackscholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility blackscholes option pricing model weightedaverage estimated values employee stock options granted 2002 2001 2000 1958 2091 686 respectively weightedaverage estimated values shares granted employee stock purchase plan 2002 2001 2000 1516 414 260 respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales us foreign government agencies see note 13 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal use estimates preparation financial statements conformity generally accepted accounting principles united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive loss accumulated comprehensive loss includes cumulative translation adjustments additional minimum liability adjustments supplemental executive retirement plan reclassifications certain minor reclassifications made prior years’ data conform current year’s presentation reclassifications impact previously reported results operations shareholders’ equity recent accounting pronouncements june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” sfas 146 requires liability costs associated exit disposal activity recognized measured initially fair value liability incurred sfas 146 effective exit disposal activities initiated december 31 2002 company expect adoption sfas 146 material impact financial condition results operations flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncementscontinued december 2002 emerging issues task force fasb issued statement 0021 “revenue arrangements multiple deliverables” eitf 0021 eitf 0021 requires revenue arrangements multiple deliverables divided separate units accounting deliverables arrangement meet certain criteria eitf 0021 effective revenue arrangements entered beginning company’s second quarter 2003 company expect adoption eitf 0021 material impact financial condition results operations note 2 accounts receivable accounts receivable net allowance doubtful accounts 14 million 19 million december 31 2002 2001 respectively note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 5 intangible assets intangible assets summarized follows thousands aggregate amortization expense recorded 2002 approximately 493000 future estimated aggregate amortization expenses approximately 417000 2003 414000 2004 413000 2005 385000 2006 385000 2007 company recorded goodwill connection acquisition agema infrared systems ab 1997 year ended december 31 2002 company adopted provisions sfas 142 “goodwill intangible assets” sfas 142 changed accounting goodwill amortization method impairmentonly approach company annually reviews goodwill impairment determine events changes business conditions indicate carrying value asset may recoverable reviews assess fair value assets based upon company’s estimates future cash flows company expects assets generate within boundary overall market capitalization company december 31 2002 company determined impairment recorded goodwill sfas 142 also requires disclosure reported net income would periods presented exclusive amortization expense recognized periods related goodwill longer amortized following table illustrates company’s net earnings basic diluted net earnings per share would years ended december 31 2001 2000 exclusive amortization expense related goodwill thousands except per share data flir systems inc notes consolidated financial statementscontinued note 6 credit agreements march 22 2002 company entered new credit agreement bank america na keybank na union bank california na agreement provides 35 million threeyear revolving line credit option additional 25 million first two years credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread rates based upon company’s leverage ratio december 31 2002 interest rate ranged 301 425 credit agreement contains five financial covenants require maintenance certain fixed charge leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures credit agreement collateralized substantially assets company december 31 2002 company amounts outstanding credit agreement compliance covenants company two subsidiaries 60 million swedish kroner approximately 68 million line credit 455 2 million line credit 600 december 31 2002 december 31 2002 company amounts outstanding lines 60 million swedish kroner line credit secured primarily accounts receivable inventories applicable subsidiary subject automatic renewal annual basis 2 million line credit secured substantially assets applicable subsidiary subject renegotiation annually note 7 accrued product warranties company generally provides oneyear warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2002 thousands note 8 commitments company leases primary facilities various operating leases expire 2004 2007 total rent expense years ended december 31 2002 2001 2000 amounted 45 million 45 million 42 million respectively minimum rental payments required noncancelable leases equipment facilities december 31 2002 follows thousands flir systems inc notes consolidated financial statementscontinued note 9 contingencies june 8 2000 securities exchange commission “sec” issued formal order investigation company certain officers directors employees individuals presently formerly associated company determine whether violations federal securities laws occurred 1998 1999 investigation relates company’s revenue recognition policies accounting controls financial reports public disclosures time period pursuant offer settlement submitted company september 30 2002 sec instituted simultaneously settled proceeding company section 8a securities act 1933 “securities act” section 21c securities exchange act 1934 “exchange act” without admitting denying allegations sec’s order company agreed entry order requiring cease desist committing causing violations future violations antifraud provisions securities act antifraud periodic reporting record keeping internal control provisions federal securities laws set forth section 17a securities act sections 10b 13a 13b2a 13b2b exchange act rules 10b5 12b20 13a1 13a13 thereunder company incurred financial fine penalty terms settlement sec’s order states company materially overstated earnings income taxes quarters 1998 1999 well fiscal year 1998 company’s revenue recognition practices resulted material misstatements omissions financial statements contained company’s annual report form 10k originally filed year ended december 31 1998 company’s quarterly reports form 10q originally filed first three quarters 1998 1999 2000 2001 company restated financial statements 1998 1999 restatements company’s financial statements required order company expect entry order material adverse impact financial condition results operations company subject legal proceedings claims litigation arising ordinary course business accordance statement financial accounting standards 5 “accounting contingencies” company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 10 income taxes sfas 109 “accounting income taxes” requires company recognize deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings loss significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 10 income taxescontinued provisions income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 10 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2002 company us tax net operating loss carryforwards “nols” totaling approximately 665 million expire years 2019 2021 additionally company various us tax credits available aggregating 43 million expire years 2007 2021 2001 company changed policy providing taxes unremitted foreign earnings given substantial increase corporate liquidity potential negative us tax consequences remitting foreign earnings company’s strategic intent permanently reinvest foreign earnings company longer provides taxes unremitted foreign earnings sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance company believes deferred tax assets 349 million reflected december 31 2002 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance future levels taxable income dependent upon general economic conditions including limited continued growth thermography imaging markets competitive pressures sales gross margins factors beyond company’s control assurance given sufficient taxable income generated full utilization deferred tax assets accordingly company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved flir systems inc notes consolidated financial statementscontinued note 11 capital stock june 2 1999 board directors approved shareholder rights plan provides issuance one right share outstanding common stock company reserved 300000 shares capital series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s junior participating preferred stock economic terms similar one share company’s common stock purchase price 6500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 12 employee benefit plans stock option plans company two stock incentive plans employees consultants flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 2002 stock incentive plan “2002 plan” plans incentive stock options nonqualified stock options may granted exercise price less fair market value stock date grant options generally become exercisable threeyear period beginning one year grant expire ten years date grant three months following termination employment whichever occurs earlier options granted prior termination 1992 plan 2002 remain available expiration additional options may granted 1992 plan 2002 plan terminates 2012 flir systems inc 1993 stock option plan nonemployee directors “1993 plan” provides automatic grant stock options nonemployee directors date immediately following annual meeting shareholders stock options granted fair market value date grant exercisable date grant expire ten years date grant termination director whichever occurs earlier 1993 plan may terminated action board directors company’s shareholders flir systems inc notes consolidated financial statementscontinued note 12 employee benefit planscontinued information respect activity stock options plans follows following table summarizes information outstanding exercisable options december 31 2002 december 31 2001 2000 stock options exercisable 1141582 1197089 respectively december 31 2002 910255 shares common stock reserved future issuance stock option grants stock option plans employee stock purchase plan 1999 company established employee stock purchase plan “espp” allows employees purchase company’s common stock payroll deductions espp eligible employees subject certain restrictions may purchase shares company’s common stock 85 fair market value either date enrollment date purchase whichever less espp expires 2009 action company’s board directors whichever occurs earlier company issued 30109 shares 2002 92998 shares 2001 99195 shares 2000 espp 1500000 shares authorized issued espp 1277698 remained available december 31 2002 flir systems inc notes consolidated financial statementscontinued note 12 employee benefit planscontinued employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 11 million 10 million 12 million years ended december 31 2002 2001 2000 respectively company also unfunded retirement obligation former executive officer recorded reported longterm liabilities pension plans company previously offered employees outside united states participation defined benefit pension plan addition beginning 2001 company offers supplemental executive retirement plan “serp” us executive officers company summary components net periodic pension expense benefit obligation fund assets plans follows thousands defined benefit pension plan employees outside united states weighted average discount rates assumed 55 years ended december 31 2002 2001 respectively serp weighted average discount rate assumed 60 75 rate increase compensation levels assumed 30 years ended december 31 2002 2001 respectively additional minimum liability 26 million recognized serp representing excess unfunded accumulated benefit obligation accrued pension costs flir systems inc notes consolidated financial statementscontinued note 12 employee benefit planscontinued components net periodic benefit cost follows thousands note 13 operating segments related information operating segments company determined operating segments thermography imaging market segments thermography market comprised broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement imaging market comprised broad range applications focused providing enhanced vision capabilities temperature measurement required although differences temperature used create image imaging market also includes high performance daylight imaging applications accounting policies segments described note 1 company historically evaluated performance based upon net revenue segment beginning 2002 company also began evaluating segment performance earnings operations consolidated basis amount represents income interest income net taxes represented consolidated statement operations segment consists corporate expenses certain operating expenses allocated operating segments management reporting purposes segment earnings operations 2001 2000 provided organizational changes arising years make reporting consistent basis 2002 impracticable accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 13 operating segments related informationcontinued revenue longlived assets geographic area information related revenue significant geographical location follows thousands longlived assets primarily comprised net property equipment net identifiable intangible assets goodwill longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 14 acquisition optronics division july 13 2001 company acquired certain net assets optronics division saabtech electronics ab effective july 1 2001 connection acquisition optronics company issued 100000 shares common stock complete acquisition addition net assets acquired company received cash 03 million purchase price 14 million representing market value shares issued allocated assets acquired liabilities assumed based estimated values excess assigned cooperation agreement received acquisition cooperation agreement designates company preferred supplier saab bofors dynamics ab quarterly financial data unaudited flir systems inc thousands except per share data sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information independent auditors’ report board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2003 2002 related consolidated statements operations shareholders’ equity cash flows years ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits 2001 consolidated financial statements audited auditors ceased operations auditors expressed unqualified opinion consolidated financial statements revision described note 5 consolidated financial statements report dated february 8 2002 conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2003 2002 results operations cash flows years ended conformity accounting principles generally accepted united states america discussed 2001 consolidated financial statements flir systems inc subsidiaries audited auditors ceased operations described note 5 consolidated financial statements revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” adopted company january 1 2002 opinion sfas 142 transitional disclosures 2001 note 5 appropriate however engaged audit review apply procedures 2001 consolidated financial statements flir systems inc respect disclosures accordingly express opinion form assurance 2001 consolidated financial statements taken whole kpmg llp portland oregon february 2 2004 report independent public accountants board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2001 2000 related consolidated statements operations shareholders’ equity cash flows two years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2001 2000 results operations cash flows two years ended conformity accounting principles generally accepted united states arthur andersen llp portland oregon february 8 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants flir systems inc may 20 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements flir systems inc appearing annual report registration statements filed flir systems inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein prior period financial statements 2001 2000 revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” adopted company january 1 2002 flir systems inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets company’s products produced variety configurations suit specific customer needs include compact handheld systems variety commercial government applications including surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated stock split may 29 2003 company effected twoforone split share common stock outstanding may 12 2003 company issued approximately 175 million shares common stock result stock split company’s number shares per share amounts common stock restated reflect stock split periods presented foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency included consolidated statement operations incurred cumulative translation adjustment included accumulated comprehensive earnings 8079000 gain 2301000 loss december 31 2003 2002 respectively revenue recognition revenue recognized upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” “sab 104” issued securities exchange commission december 2003 sab 104 clarified existing guidance principally provided sab 101 “revenue recognition financial statements” regarding revenues contracts contain multiple elements company designs markets sells products commercial offtheshelf products many company’s imaging customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts company recognizes revenue determined elements stand alone values delivered undelivered elements objective reliable evidence fair value credit extended customers revenue recognized company determined risk uncollectibility minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months purchased cash equivalents december 31 2003 shortterm investments classified availableforsale reported fair market value related unrealized holding gains losses excluded earnings included accumulated comprehensive earnings within shareholders’ equity inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard basis approximates actual cost firstin firstout basis inventory write downs established conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded write downs intended reduce carrying value company’s inventories net realizable value create new costbasis inventories property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive number additional shares calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period following table sets forth reconciliation denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2003 2002 2001 aggregated 13675 540072 1611400 respectively excluded purposes diluted earnings per share since effect would antidilutive shares issuable 4731426 conversion company’s convertible notes excluded purposes diluted earnings per share circumstances allow conversion met supplemental cash flow disclosure thousands fair value financial instruments cash equivalents accounts receivable accounts payable accrued payroll related liabilities carrying amount approximates fair value immediate shortterm nature instruments fair value longterm debt estimated based quoted market prices convertible notes december 31 2003 fair value notes approximately 231 million flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company adopted disclosure provisions sfas 123 “accounting stockbased compensation” sfas 123 allows companies choose whether account stockbased compensation intrinsic value method prescribed accounting principles board opinion 25 “apb 25” use fair value method described sfas 123 december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 amends sfas 123 certain transition provisions companies electing adopt fair value method amends sfas 123 certain financial statement disclosures company follows provisions apb 25 related interpretations accounting stockbased employee compensation plans described fully note 14 significant stockbased employee compensation costs reflected net earnings options granted plans exercise price equal market value underlying common stock date grant following table illustrates effect net earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share amounts fair value stockbased awards granted 2003 2002 2001 reported estimated using blackscholes option pricing model following weightedaverage assumptions blackscholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable addition option pricing models require input flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued highly subjective assumptions including expected stock price volatility blackscholes option pricing model weightedaverage estimated values employee stock options granted 2003 2002 2001 1080 979 1046 respectively weightedaverage estimated values shares granted employee stock purchase plan 2003 2002 2001 739 758 207 respectively concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales us foreign government agencies see note 15 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal use estimates preparation financial statements conformity generally accepted accounting principles united states requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories realizability investments recoverability deferred tax assets impairment goodwill loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments additional minimum liability adjustments supplemental executive retirement plan unrealized losses shortterm investments reclassifications certain minor reclassifications made prior years’ data conform current year’s presentation reclassifications impact previously reported results operations shareholders’ equity flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements november 2002 financial accounting standards board “fasb” issued fasb interpretation 45 “fin 45” “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 requires upon issuance guarantee guarantor must recognize liability fair value obligation assumed guarantee fin 45 also requires additional disclosures guarantor financial statements obligations associated guarantees issued initial recognition measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements fin 45 effective financial statements issued december 15 2002 adoption interpretation impact company’s financial position results operations additionally company adopted disclosure provisions herein note 2 accounts receivable accounts receivable net allowance doubtful accounts 13 million 14 million december 31 2003 2002 respectively note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands note 5 goodwill company recorded goodwill connection acquisition agema infrared systems ab 1997 year ended december 31 2002 company adopted provisions sfas 142 “goodwill intangible assets” sfas 142 changed accounting goodwill amortization method impairmentonly approach company’s goodwill assigned thermography operating segment flir systems inc notes consolidated financial statementscontinued note 5 goodwillcontinued company reviews goodwill june year impairment determine events changes business conditions indicate carrying value asset may recoverable reviews assess fair value assets based upon company’s estimates future cash flows company expects assets generate within boundary overall market capitalization company december 31 2003 company determined impairment recorded goodwill sfas 142 also requires disclosure reported net income would periods presented exclusive amortization expense recognized periods related goodwill longer amortized following table illustrates company’s net earnings basic diluted net earnings per share would year ended december 31 2001 exclusive amortization expense related goodwill thousands except per share data note 6 intangible assets intangible assets summarized follows thousands aggregate amortization expense recorded 2003 approximately 459000 future estimated aggregate amortization expenses approximately 453000 2004 453000 2005 453000 2006 433000 2007 431000 2008 flir systems inc notes consolidated financial statementscontinued note 7 credit agreements company maintains credit agreement bank america na keybank na union bank california na agreement dated march 22 2002 amended june 5 2003 provides 35 million threeyear revolving line credit option additional 25 million september 27 2004 credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread rates based upon company’s leverage ratio december 31 2003 interest rate ranged 260 400 credit agreement contains five financial covenants require maintenance certain fixed charge leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures credit agreement collateralized substantially assets company december 31 2003 company amounts outstanding credit agreement compliance covenants company 12 million letters credit outstanding december 31 2003 company two subsidiaries 50 million swedish kroner approximately 68 million line credit 37 2 million line credit 525 december 31 2003 december 31 2003 company amounts outstanding lines 50 million swedish kroner line credit secured primarily accounts receivable inventories applicable subsidiary subject automatic renewal annual basis july 10 2003 50 million swedish kroner credit agreement replaced old agreement 60 million swedish kroner terms 2 million line credit secured substantially assets applicable subsidiary subject renegotiation annually note 8 accrued product warranties company generally provides oneyear warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2003 2002 thousands note 9 longterm debt june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 issuance made initial offering 175 million made june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year beginning december 1 2003 holders notes may convert notes shares company’s common stock conversion rate 225306 shares per 1000 principal amount notes subject adjustments prior maturity date certain circumstances generally include market price company’s common stock exceeding 130 conversion price b company calling notes redemption c flir systems inc notes consolidated financial statementscontinued note 9 longterm debtcontinued occurrence specified corporate transactions notes become rated rating lowered two rating levels company may redeem cash part notes june 8 2010 note holders right require company purchase notes june 1 2010 proceeds used general corporate purposes include acquisition indigo systems corporation working capital expenditure needs note 10 commitments company leases primary facilities various operating leases expire 2004 2009 total rent expense years ended december 31 2003 2002 2001 amounted 50 million 45 million 45 million respectively addition company party longterm minimum purchase agreements suppliers vendors future minimum obligations operating leases commitments follows thousands note 11 contingencies company subject legal proceedings claims litigation arising ordinary course business accordance statement financial accounting standards 5 “accounting contingencies” company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 12 income taxes sfas 109 “accounting income taxes” requires company recognize deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued provisions income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2003 company us tax net operating loss carryforwards totaling approximately 547 million expire years 2019 2021 additionally company various us tax credits available aggregating 64 million expire years 2007 2022 2001 company changed policy providing taxes unremitted foreign earnings given substantial increase corporate liquidity potential negative us tax consequences remitting foreign earnings company’s strategic intent permanently reinvest foreign earnings company longer provides taxes unremitted foreign earnings sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance company believes deferred tax assets 300 million reflected december 31 2003 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved note 13 capital stock june 2 1999 board directors approved shareholder rights plan provides issuance one right share outstanding common stock company reserved 300000 shares capital series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s junior participating preferred stock economic terms similar one share company’s common stock purchase price 6500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s flir systems inc notes consolidated financial statementscontinued note 13 capital stockcontinued common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 14 employee benefit plans stock option plans company two stock incentive plans employees consultants flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 2002 stock incentive plan “2002 plan” plans incentive stock options nonqualified stock options may granted exercise price less fair market value stock date grant options generally become exercisable threeyear period beginning one year grant expire ten years date grant three months following termination employment whichever occurs earlier options granted prior termination 1992 plan 2002 remain available expiration additional options may granted 1992 plan 2002 plan terminates 2012 flir systems inc 1993 stock option plan nonemployee directors “1993 plan” provides automatic grant stock options nonemployee directors date immediately following annual meeting shareholders stock options granted fair market value date grant exercisable date grant expire ten years date grant termination director whichever occurs earlier 1993 plan may terminated action board directors company’s shareholders information respect activity stock options plans follows flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued stock option planscontinued following table summarizes information outstanding exercisable options december 31 2003 december 31 2002 2001 stock options exercisable 2476072 2283164 respectively december 31 2003 5431237 shares common stock reserved future issuance stock option plans employee stock purchase plan 1999 company established employee stock purchase plan “espp” allows employees purchase company’s common stock payroll deductions espp eligible employees subject certain restrictions may purchase shares company’s common stock 85 fair market value either date enrollment date purchase whichever less espp expires 2009 action company’s board directors whichever occurs earlier company issued 56612 shares 2003 60218 shares 2002 185996 shares 2001 espp 3000000 shares authorized issued espp 2498784 shares remained available december 31 2003 employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 12 million 11 million 10 million years ended december 31 2003 2002 2001 respectively company also funded retirement obligation former executive officer recorded present value reported longterm liabilities pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition beginning 2001 company offers supplemental flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued pension planscontinued executive retirement plan “serp” certain us executive officers company summary components net periodic pension expense benefit obligation fund assets plans follows thousands defined benefit pension plan employees outside united states weighted average discount rates assumed 55 years ended december 31 2003 2002 respectively serp weighted average discount rate assumed 60 rate increase compensation levels assumed 40 30 years ended december 31 2003 2002 respectively additional minimum liability 21 million recognized serp representing excess unfunded accumulated benefit obligation accrued pension costs measurement date used serp december 31 december 31 2003 accumulated benefit obligation 3890000 benefits expected paid serp approximately 270000 2006 342000 2007 461000 2008 aggregate 2303000 fives years thereafter components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 15 operating segments related information operating segments company determined operating segments thermography imaging market segments thermography market comprised broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement imaging market comprised broad range applications focused providing enhanced vision capabilities temperature measurement required although differences temperature used create image imaging market also includes high performance daylight imaging applications accounting policies segments described note 1 company historically evaluated performance based upon net revenue segment beginning 2002 company also began evaluating segment performance earnings operations consolidated basis amount represents income interest income net taxes represented consolidated statement operations segment consists corporate expenses certain operating expenses allocated operating segments management reporting purposes segment earnings operations 2001 provided organizational changes arising years make reporting consistent basis 2003 2002 impracticable accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 15 operating segments related informationcontinued revenue longlived assets geographic area information related revenue significant geographical location follows thousands longlived assets primarily comprised net property equipment net identifiable intangible assets goodwill longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 16 acquisition optronics division july 13 2001 company acquired certain net assets optronics division saabtech electronics ab effective july 1 2001 connection acquisition optronics company issued 100000 shares common stock complete acquisition addition net assets acquired company received cash 03 million purchase price 14 million representing market value shares issued allocated assets acquired liabilities assumed based estimated values excess assigned cooperation agreement received acquisition cooperation agreement designates company preferred supplier saab bofors dynamics ab note 17 subsequent events acquisition indigo systems corporation october 21 2003 company indigo systems corporation “indigo” entered definitive agreement plan merger pursuant company acquire indigo producer infrared detectors infrared camera subsystems cameras transaction valued excluding acquisition related costs approximately 190 million closed january 6 2004 indigo security holders receiving cash consideration approximately 165 million outstanding indigo stock options converted approximately 710000 options purchase flir stock company process determining allocation purchase price include impacts allocation reporting first quarter 2004 quarterly financial data unaudited flir systems inc thousands except per share data may 29 2003 company effected twoforone split share common stock outstanding may 12 2003 company issued approximately 175 million shares common stock result stock split company’s per share amounts common stock restated reflect stock split periods presented sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information statement page report kpmg llp independent registered public accounting firm consolidated statements operations years ended december 31 2004 2003 2002 consolidated balance sheets december 31 2004 2003 consolidated statements shareholders’ equity years ended december 31 2004 2003 2002 consolidated statements cash flows years ended december 31 2004 2003 2002 notes consolidated financial statements quarterly financial data unaudited report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2004 2003 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2004 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2004 2003 results operations cash flows years threeyear period ended december 31 2004 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness flir systems inc’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 25 2005 expressed unqualified opinion management’s assessment effective operation internal control financial reporting discussed note 1 consolidated financial statements consolidated financial statements 2003 retroactively revised include effect earnings per share required emerging issue task force’s statement 0408 “the effect contingently convertible debt diluted earnings per share” adopted company fourth quarter 2004 kpmg llp portland oregon february 25 2005 flir systems inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide company’s products produced variety configurations suit specific customer needs include compact handheld systems variety commercial government applications including surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated stock split february 2 2005 company effected twoforone split share common stock outstanding january 12 2005 company issued approximately 346 million shares common stock result stock split company’s number shares per share amounts common stock restated reflect stock split periods presented foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency included consolidated statement operations incurred cumulative translation adjustment included accumulated comprehensive earnings gain 21060000 8079000 december 31 2004 2003 respectively revenue recognition revenue primarily recognized upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” “sab 104” issued securities exchange commission december 2003 company designs markets sells products commercial offtheshelf products many company’s imaging customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value credit extended customers revenue recognized company determined risk uncollectibility minimal company also limited number design development contracts principally governmental customers accounted accordance statement position 811 “accounting performance constructiontype certain productiontype contracts “sop 811” sop 811 revenues related costs recognized using percentageofcompletion method company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months purchased cash equivalents december 31 2004 shortterm investments classified availableforsale reported fair market value related unrealized holding gains losses december 31 2004 inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard basis approximates actual cost firstin firstout basis inventory writedowns established conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns intended reduce carrying value company’s inventories net realizable value create new costbasis inventories property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued intangible assets intangible assets goodwill depreciated using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2004 2003 24 million 11 million respectively advertising costs year ended december 31 2002 immaterial costbasis investments company investments thirdparty entities accounted cost basis carrying value investments december 31 2004 2003 1850000 1443000 respectively excess estimated fair values investments included assets consolidated balance sheets earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed conversion 210 million convertible notes number additional shares assumed exercise stock options calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period conversion convertible notes assumed taken place date issuance addition net earnings used purposes computing diluted earnings per share reported net earnings adjusted interest costs convertible notes net statutory tax conversion taken place convertible notes issued november 2004 financial accounting standards board ratified emerging issues task force’s statement 0408 “the effect contingently convertible debt diluted earnings per share” “eitf 0408” eitf 0408 addresses issue dilutive effects contingently convertible debt instruments included diluted earnings per share statement concludes contingently convertible debt instruments included diluted earnings per share regardless whether conversion criteria met addition prior period earnings per share amounts presented comparative purposes restated eitf 0408 effective reporting periods ending december 15 2004 accordingly company included dilutive effect assumed conversion 210 million convertible notes date issuance computation diluted earnings per share year ended december 31 2004 restated diluted earnings per share year ending december 31 2003 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per sharecontinued following table sets forth reconciliation denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2004 2003 2002 aggregated 13039 27350 1080144 respectively excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands fair value financial instruments cash equivalents accounts receivable accounts payable accrued payroll related liabilities carrying amount approximates fair value immediate shortterm nature instruments fair value longterm debt estimated based quoted market prices convertible notes december 31 2004 fair value notes approximately 343 million stockbased compensation company adopted disclosure provisions statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” sfas 123 allows companies choose whether account stockbased compensation intrinsic value method prescribed accounting principles board opinion 25 “apb 25” use fair value method described sfas 123 december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 amends sfas 123 certain transition provisions companies electing adopt fair value method amends sfas 123 certain financial statement disclosures flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued company follows provisions apb 25 related interpretations accounting stockbased employee compensation plans described fully note 14 significant stockbased employee compensation costs reflected net earnings options granted plans exercise price equal market value underlying common stock date grant following table illustrates effect net earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share amounts fair value stockbased awards granted 2004 2003 2002 reported estimated using blackscholes option pricing model following weightedaverage assumptions effects applying sfas 123 pro forma disclosures necessarily indicative future amounts blackscholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued blackscholes option pricing model weightedaverage estimated values employee stock options granted 2004 2003 2002 follows thousands except per share amounts concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales us foreign government agencies see note 15 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal use estimates preparation financial statements conformity generally accepted accounting principles united states requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories realizability investments recoverability deferred tax assets impairment goodwill loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments additional minimum liability adjustments supplemental executive retirement plan unrealized losses shortterm investments recent accounting pronouncements december 2004 financial accounting standards board issued revision sfas 123 “sharebased payment” statement supersedes apb opinion 25 “accounting stock issued employees” flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncementscontinued amendment requires recognition cost employee services received exchange valuable equity instruments issued liabilities incurred employees sharebased payment transactions statement effective interim period beginning june 15 2005 company adopt revision sfas 123 july 1 2005 impact adopting revision sfas 123 impracticable estimate time contingent upon number nature future options granted selected transition method selection option valuation model adoption statement impact company’s cash flows note 2 accounts receivable accounts receivable net allowance doubtful accounts 16 million 13 million december 31 2004 2003 respectively note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands note 5 goodwill company recorded goodwill connection acquisition agema infrared systems ab 1997 acquisition indigo systems corporation 2004 year ended december 31 2002 company adopted provisions sfas 142 “goodwill intangible assets” sfas 142 changed accounting goodwill amortization method impairmentonly approach company reviews goodwill june year impairment determine events changes business conditions indicate flir systems inc notes consolidated financial statementscontinued note 5 goodwillcontinued carrying value asset may recoverable reviews assess fair value assets based upon company’s estimates future discounted cash flows company expects assets generate within boundary overall market capitalization company december 31 2004 company determined impairment recorded goodwill reporting segment follows thousands note 6 intangible assets intangible assets summarized follows thousands acquired identifiable intangible assets 48000000 acquired part acquisition indigo systems corporation january 2004 note 16 aggregate amortization expense recorded 2004 approximately 6000000 future estimated aggregate amortization expenses approximately 6091000 2005 6050000 four years thereafter note 7 credit agreements april 28 2004 company signed amended restated credit agreement “credit agreement” bank america na union bank california na us bank national association agreement provides 50 million five year revolving line credit option additional 50 million april 28 2008 credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread underover rates based upon company’s leverage ratio december 31 2004 interest rate ranged 383 500 credit agreement contains four financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures collateralized substantially assets company december 31 2004 company amounts outstanding credit agreement compliance four financial covenants company 22 million letters credit outstanding credit agreement december 31 2004 reduces total available credit flir systems inc notes consolidated financial statementscontinued note 7 credit agreementscontinued company two subsidiaries 40 million swedish kroner approximately 60 million line credit 27 2 million line credit 625 december 31 2004 december 31 2004 company amounts outstanding lines 40 million swedish kroner line credit secured primarily accounts receivable inventories company’s sweden subsidiary subject automatic renewal annual basis 2 million line credit secured substantially assets company’s united kingdom subsidiary subject renegotiation annually note 8 accrued product warranties company generally provides twelve month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2004 2003 thousands note 9 longterm debt june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended issuance made initial offering 175 million june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year beginning december 1 2003 holders notes may convert notes shares company’s common stock conversion rate 450612 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 proceeds used primarily general corporate purposes included acquisition indigo working capital expenditure needs quarter ended september 30 2004 one terms allow conversion company’s convertible notes described prospectus met company’s stock closed price higher 5770 per share fewer 20 last 30 trading days quarter ended september 30 2004 december 31 2004 note holders elected convert notes company stock flir systems inc notes consolidated financial statementscontinued note 10 commitments company leases primary facilities various operating leases expire 2005 2013 company also leases certain operating machinery equipment office equipment operating lease agreements total rent expense years ended december 31 2004 2003 2002 amounted 69 million 50 million 45 million respectively future minimum obligations operating leases follows thousands november 2004 company entered purchase sale agreement purchase facility purchase price 102 million payable cash anticipated close first quarter 2005 note 11 contingencies company subject legal proceedings claims litigation arising ordinary course business accordance statement financial accounting standards 5 “accounting contingencies” company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 12 income taxes sfas 109 “accounting income taxes” requires company recognize deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued provisions income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2004 company us tax net operating loss carryforwards totaling approximately 630 million expire years 2019 2024 additionally company various us tax credits available aggregating 113 million expire years 2007 2024 sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance company believes deferred tax assets 223 million reflected december 31 2004 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved company provided us federal income foreign withholding taxes undistributed earnings nonus operations december 31 2004 earnings intended reinvested indefinitely outside united states amount company’s undistributed foreign earnings december 31 2004 reasonably estimable company reevaluated position respect indefinite reinvestment foreign earnings take account possible election repatriation provisions contained american jobs creation act 2004 status company’s evaluation provisions described following section american jobs creation act 2004repatriation foreign earnings american jobs creation act 2004 “jobs act” enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction would result approximate 525 federal tax rate repatriated earnings plus state income taxes qualify deduction earnings must reinvested united states pursuant domestic reinvestment plan established company’s chief executive officer approved company’s board directors certain criteria jobs act must satisfied well company process evaluating whether repatriate foreign earnings repatriation provisions jobs act deduction subject number limitations today uncertainty remains interpret numerous provisions act management yet flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued american jobs creation act 2004repatriation foreign earningscontinued position decide whether extent foreign earnings yet remitted us might repatriated company oneyear period qualifying distributions made calendar year 2005 company repatriate amount eligible temporary deduction company estimates would accrue additional tax expense approximate rate 6 less foreign income tax credits availability credits depends passage technical corrections jobs act future issuance favorable regulatory guidance company accrue tax qualifying dividend quarter company’s board directors make decision make qualifying dividend note 13 capital stock june 2 1999 board directors approved shareholder rights plan amended november 4 2004 provided issuance one right share outstanding common stock company reserved 300000 shares capital series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s junior participating preferred stock economic terms similar one share company’s common stock purchase price 22500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 14 employee benefit plans stock option plans company two stock incentive plans employees consultants flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 2002 stock incentive plan “2002 plan” plans incentive stock options nonqualified stock options may granted exercise price less fair market value stock date grant options generally become exercisable oneyear period threeyear period beginning one year grant expire ten years date grant three months following termination employment whichever occurs earlier options granted prior termination 1992 plan 2002 remain available expiration additional options may granted 1992 plan 2002 plan terminates 2012 flir systems inc 1993 stock option plan nonemployee directors “1993 plan” provides automatic grant stock options nonemployee directors date immediately following annual meeting shareholders stock options granted fair market value date grant exercisable date grant expire ten years date grant termination director whichever occurs earlier 1993 plan may terminated action board directors company’s shareholders flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued stock option planscontinued additionally company stock options assumed connection acquisition indigo systems corporation 2004 note 16 information respect activity stock options plans follows following table summarizes information outstanding exercisable options december 31 2004 december 31 2003 2002 stock options exercisable 5619804 4952144 respectively december 31 2004 14866882 shares common stock reserved future issuance stock option plans flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued employee stock purchase plan 1999 company established employee stock purchase plan “espp” allows employees purchase company’s common stock payroll deductions espp eligible employees subject certain restrictions may purchase shares company’s common stock 85 fair market value either date enrollment date purchase whichever less espp expires 2009 action company’s board directors whichever occurs earlier company issued 122442 shares 2004 113224 shares 2003 120436 shares 2002 espp 6000000 shares authorized issued espp 4875126 shares remained available december 31 2004 employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 25 million 12 million 11 million years ended december 31 2004 2003 2002 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition beginning 2001 company offers supplemental executive retirement plan “serp” certain us executive officers company summary components net periodic pension expense benefit obligation fund assets plans follows thousands flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued pension planscontinued weighted average assumptions used follows additional minimum liability 20 million recognized serp representing excess unfunded accumulated benefit obligation accrued pension costs measurement date used serp december 31 december 31 2004 accumulated benefit obligation 5110000 benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands company also funded retirement obligation former executive officer recorded present value reported longterm liabilities note 15 operating segments related information operating segments company determined operating segments thermography imaging market segments thermography market comprised broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement imaging market comprised flir systems inc notes consolidated financial statementscontinued note 15 operating segments related informationcontinued operating segmentscontinued broad range applications focused providing enhanced vision capabilities temperature measurement required although differences temperature used create image imaging market also includes high performance daylight imaging applications accounting policies segments described note 1 company historically evaluated performance based upon operating earnings segment consolidated basis amount represents earnings operations represented consolidated statement operations segment consists corporate expenses certain operating expenses allocated operating segments management reporting purposes accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands revenue longlived assets geographic area information related revenue significant geographical location follows thousands flir systems inc notes consolidated financial statementscontinued note 15 operating segments related informationcontinued revenue longlived assets geographic areacontinued longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 16 acquisition indigo systems corporation january 6 2004 pursuant terms agreement plan merger reorganization dated october 21 2003 among company indigo systems corporation “indigo” fiji sub inc william parrish shareholders’ agent fiji sub inc merged indigo “merger” result merger indigo became wholly owned subsidiary company prior merger indigo privately held company focused developing supplying advanced infrared cameras components covering entire infrared spectrum indigo provided infrared cameras software enclosure solutions commercial industrial security military research development applications outstanding shares indigo capital stock certain warrants outstanding immediately prior merger converted right receive cash amount equal 253537 per share aggregate approximately 165478000 option purchase indigo capital stock outstanding immediately prior merger assumed company 1419890 shares company’s common stock valued 23728000 issuable company upon exercise indigo stock options assumed company merger flir systems inc notes consolidated financial statementscontinued note 16 acquisition indigo systems corporationcontinued acquisition accounted business combination sfas 141 “business combinations” consolidated statement income year ended december 31 2004 includes results operations indigo period beginning january 6 2004 december 31 2004 company allocated purchase price 192134000 includes professional fees costs directly associated acquisition follows thousands following table lists components identifiable intangible assets thousands amortization expense associated developedcore product technology included cost goods sold amortization expense associated customer relationships trademarks trade names included selling general administrative expenses consolidated statement income allocation purchase price based valuation assets acquired liabilities assumed determined assistance independent appraiser allocation generally based fair value assets determined using income approach 136975000 allocated goodwill represents excess purchase price fair value net assets acquired accordance sfas 142 “goodwill intangible assets” goodwill amortized tested impairment least annually goodwill deductible tax purposes 103943000 goodwill allocated imaging segment 33032000 goodwill allocated thermography segment flir systems inc notes consolidated financial statementscontinued note 16 acquisition indigo systems corporationcontinued following pro forma information assumes indigo acquisition occurred beginning 2003 pro forma results necessarily indicative actually would occurred acquisition effect period presented note 17 subsequent events twoforone stock split december 16 2004 company announced twoforone stock split common stock result stock split shareholders receive one additional share common stock every share held record date january 12 2005 company issued approximately 346 million shares common stock result stock split additional shares distributed february 2 2005 quarterly financial data unaudited flir systems inc thousands except per share data february 2 2005 company effected twoforone split share common stock outstanding january 12 2005 november 2004 financial accounting standards board ratified emerging issues task force’s statement 0408 “the effect contingently convertible debt diluted earnings per share” eitf 0408 eitf 0408 addresses issue dilutive effects contingently convertible debt instruments included diluted earnings per share statement concludes contingently convertible debt instruments included diluted earnings per share regardless whether conversion criteria met addition prior period earnings per share amounts presented comparative purposes restated company’s per share amounts common stock restated reflect stock split effect restatement assumed conversion convertible notes periods presented sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2005 2004 related consolidated statements income shareholders’ equity cash flows years threeyear period ended december 31 2005 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2005 2004 results operations cash flows years threeyear period ended december 31 2005 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness flir system inc’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 2 2006 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp portland oregon march 2 2006 flir systems inc consolidated statements income thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide company’s products produced variety configurations suit specific customer needs include compact handheld systems variety commercial government applications including surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness many types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated stock split february 2 2005 company effected twoforone split share common stock outstanding january 12 2005 company issued approximately 346 million shares common stock result stock split reclassifications certain reclassifications made prior year’s data conform current year’s presentation including reclassification december 31 2004 balance sheet 10317000 longterm deferred tax assets net longterm deferred tax liability reclassifications impact previously reported results operations shareholders’ equity foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency included consolidated statement operations incurred cumulative translation adjustment included accumulated comprehensive loss earnings loss 5221000 december 31 2005 gain 21060000 december 31 2004 revenue recognition revenue primarily recognized upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” “sab 104” issued securities exchange commission december 2003 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued company designs markets sells products commercial offtheshelf products many company’s imaging customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value recognition revenue contracts multiple elements consistent guidance provided eitf 0021 “revenue arrangements multiple deliverables” credit extended customers revenue recognized company determined risk uncollectibility minimal company also limited number design development contracts principally governmental customers accounted accordance statement position 811 “accounting performance constructiontype certain productiontype contracts “sop 811” sop 811 revenues related costs recognized using percentageofcompletion method company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2005 2004 50910000 16530000 respectively inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard basis approximates actual cost firstin firstout basis inventory writedowns established conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventoriescontinued combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns intended reduce carrying value company’s inventories net realizable value create new costbasis inventories property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred intangible assets intangible assets goodwill depreciated using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2005 2004 2003 25 million 24 million 11 million respectively costbasis investments company investments thirdparty entities accounted cost basis carrying value investments december 31 2005 2004 24 million 19 million excess estimated fair values investments included assets consolidated balance sheets earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed conversion 210 million convertible notes number additional shares assumed exercise stock options calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period conversion convertible notes assumed taken place date issuance addition net earnings used purposes computing diluted earnings per share reported net earnings adjusted interest costs convertible notes net statutory tax conversion taken place convertible notes issued flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per sharecontinued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2005 2004 2003 aggregated 1975643 13039 27350 respectively excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands fair value financial instruments cash equivalents accounts receivable accounts payable accrued payroll related liabilities carrying amount approximates fair value instruments due shortterm nature fair value longterm debt estimated based quoted market prices convertible notes december 31 2005 fair value notes approximately 2468 million stockbased compensation company adopted disclosure provisions statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” sfas 123 allows companies choose whether account stockbased compensation intrinsic value method prescribed accounting principles board opinion 25 “apb 25” use fair value method described sfas 123 december 2002 financial accounting standards board issued sfas 148 “accounting stockbased compensationtransition flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued disclosure” sfas 148 amends sfas 123 certain transition provisions companies electing adopt fair value method amends sfas 123 certain financial statement disclosures company follows provisions apb 25 related interpretations accounting stockbased employee compensation plans described fully note 14 significant stockbased employee compensation costs reflected net earnings options granted plans exercise price equal market value underlying common stock date grant following table illustrates effect net earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation thousands except per share amounts fair value stockbased awards granted 2005 2004 2003 reported estimated using blackscholes option pricing model following weightedaverage assumptions effects applying sfas 123 pro forma disclosures necessarily indicative future amounts blackscholes option pricing model developed use estimating fair value traded options vesting restrictions fully transferable addition option pricing models require input highly subjective assumptions including expected stock price volatility flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued blackscholes option pricing model weightedaverage estimated values employee stock options granted 2005 2004 2003 follows thousands except per share amounts concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales us foreign government agencies see note 15 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal use estimates preparation financial statements conformity generally accepted accounting principles united states requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories realizability investments recoverability deferred tax assets impairment goodwill loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive loss earnings accumulated comprehensive earnings includes cumulative translation adjustments additional minimum liability adjustments pension plans unrealized losses shortterm investments recent accounting pronouncements december 2004 financial accounting standards board “fasb” issued sfas 123r “sharebased payment” sfas 123r requires measurement employee stockbased compensation awards using fairvalue method recording expense consolidated financial statements addition flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncementscontinued adoption sfas 123r require additional accounting related income tax effects disclosure regarding cash flow effects resulting sharedbased payment arrangements january 2005 united states securities exchange commission issued staff accounting bulletin 107 provides supplemental implementation guidance sfas 123r company adopted sfas 123r beginning 2006 company selected blackscholes optionpricing model appropriate fairvalue method awards recognize compensation expense awards’ respective vesting periods company expects adoption sfas 123r material impact results operations however uncertainties including company’s future stockbased compensation strategies stock price volatility estimated forfeitures employee stock option exercise behavior make difficult determine whether stockbased compensation expense company incur future periods similar pro forma expense disclosed previously note consolidated financial statements adoption sfas 123r impact company’s cash flows november 2004 fasb issued sfas 151 “inventory costs” statement amends guidance chapter 4 arb 43 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs wasted material statement requires items recognized current period charges regardless whether meet criterion “so abnormal” requires allocation fixed production overheads costs conversion based normal capacity production facilities statement effective inventory costs incurred fiscal year beginning june 15 2005 accordingly company adopted sfas 151 january 1 2006 expect material effect company’s financial position results operations may 2005 fasb issued sfas 154 “accounting changes error corrections” statement replaces apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” changes requirements accounting reporting change accounting principle statement effective fiscal year beginning december 15 2005 accordingly company adopted sfas 154 january 1 2006 june 2005 fasb issued fasb staff position 1431 “accounting electronic equipment waste obligations” address accounting obligations associated directive 200296ec waste electrical electronic equipment adopted european union guidance effective beginning later first reporting period ending june 8 2005 date adoption law applicable eu member country impact guidance company’s “historical waste” estimated material well effect sale company’s current products company continues process interpreting new laws evaluating financial impact countries operates company expect material effect financial position results operations note 2 accounts receivable accounts receivable net allowance doubtful accounts 13 million 16 million december 31 2005 2004 respectively flir systems inc notes consolidated financial statementscontinued note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2005 2004 2003 8481000 7721000 5187000 respectively note 5 goodwill company recorded goodwill connection acquisition agema infrared systems ab 1997 acquisition indigo systems corporation 2004 acquisition brysen optical corporation 2005 company also recorded estimate goodwill associated november 23 2005 acquisition scientific materials corporation company reviews goodwill june year impairment determine events changes business conditions indicate carrying value assets may recoverable reviews assess fair value assets based upon company’s estimates future discounted cash flows company expects assets generate within boundary overall market capitalization company june 30 2005 company determined impairment recorded goodwill december 31 2005 triggering events would require updated impairment review goodwill reporting segment follows thousands flir systems inc notes consolidated financial statementscontinued note 6 intangible assets intangible assets summarized follows thousands acquired identifiable intangible assets 48000000 acquired part acquisition indigo systems corporation 2540000 acquired part brysen optical corporation acquisition estimated 3500000 acquired part scientific materials corporation acquisition note 16 aggregate amortization expense recorded 2005 approximately 6349000 future estimated aggregate amortization expenses approximately 6364000 2006 four years thereafter note 7 credit agreements april 28 2004 company signed amended restated credit agreement “credit agreement” bank america na union bank california na us bank national association agreement provides 50 million five year revolving line credit option additional 50 million april 28 2008 credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread underover rates based upon company’s leverage ratio december 31 2005 interest rate ranged 570 675 credit agreement contains four financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures collateralized substantially assets company december 31 2005 company amounts outstanding credit agreement compliance four financial covenants company 34 million letters credit outstanding credit agreement december 31 2005 reduces total available credit company two subsidiaries 30 million swedish kroner approximately 38 million line credit 220 2 million line credit 600 december 31 2005 december 31 2005 company amounts outstanding lines 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s sweden subsidiary subject automatic renewal annual basis 2 million line credit secured substantially assets company’s united kingdom subsidiary subject renegotiation annually flir systems inc notes consolidated financial statementscontinued note 8 accrued product warranties company generally provides twelve month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2005 2004 thousands note 9 longterm debt june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended issuance made initial offering 175 million june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year beginning december 1 2003 holders notes may convert notes shares company’s common stock conversion rate 450612 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 proceeds used primarily general corporate purposes included acquisition indigo systems corporation working capital expenditure needs quarter ended september 30 2004 one terms allow conversion company’s convertible notes described prospectus met december 31 2005 note holders elected convert notes company stock note 10 commitments company leases primary facilities various operating leases expire 2006 2013 company also leases certain operating machinery equipment office equipment operating lease agreements total rent expense years ended december 31 2005 2004 2003 amounted 69 million 69 million 50 million respectively future minimum obligations operating leases follows thousands flir systems inc notes consolidated financial statementscontinued note 11 contingencies company subject legal proceedings claims litigation arising ordinary course business accordance statement financial accounting standards 5 “accounting contingencies” company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 12 income taxes sfas 109 “accounting income taxes” requires company recognize deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued deferred tax assets liabilities composed following components thousands provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2005 company us tax net operating loss carryforwards totaling approximately 239 million state tax net operating loss carryforwards totaling approximately 644 million expire years 2019 2024 additionally company various federal tax credits available aggregating 145 million various state tax credits available aggregating 25 million net federal benefit expire years 2007 2025 flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued sfas 109 requires tax benefits described recorded asset extent management assesses utilization assets “more likely not” otherwise valuation allowance required recorded based guidance company believes net deferred tax assets 271 million reflected december 31 2005 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved american jobs creation act 2004repatriation foreign earnings american jobs creation act 2004 “jobs act” enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated oneyear period deduction would result approximate 525 federal tax rate repatriated earnings plus state income taxes qualify deduction earnings must reinvested united states pursuant domestic reinvestment plan established company’s chief executive officer approved company’s board directors certain criteria jobs act must satisfied well fourth quarter calendar year 2005 company completed evaluation repatriation provisions jobs act based upon evaluation company made decision repatriate 375 million jobs act repatriation caused recognition 10 million tax expense net foreign tax credits tax expense reflected current income tax expense 2005 prior jobs act company provide deferred taxes undistributed earnings foreign subsidiaries intended utilize earnings expansion business operations outside united states indefinite period time going forward company intends indefinitely reinvest prospective foreign earnings including earnings repatriated december 31 2005 accordingly us income tax provided unremitted earnings foreign subsidiaries note 13 capital stock june 2 1999 board directors approved shareholder rights plan amended november 4 2004 provided issuance one right share outstanding common stock company reserved 300000 shares capital series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s junior participating preferred stock economic terms similar one share company’s common stock purchase price 22500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised flir systems inc notes consolidated financial statementscontinued note 14 employee benefit plans stock option plans company two stock incentive plans employees consultants flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 2002 stock incentive plan “2002 plan” plans incentive stock options nonqualified stock options may granted exercise price less fair market value stock date grant options generally become exercisable oneyear period threeyear period beginning one year grant expire ten years date grant three months following termination employment whichever occurs earlier options granted prior termination 1992 plan 2002 remain available expiration additional options may granted 1992 plan 2002 plan terminates 2012 flir systems inc 1993 stock option plan nonemployee directors “1993 plan” provides automatic grant stock options nonemployee directors date immediately following annual meeting shareholders stock options granted fair market value date grant exercisable date grant expire ten years date grant termination director whichever occurs earlier 1993 plan may terminated action board directors company’s shareholders additionally company stock options assumed connection acquisition indigo systems corporation 2004 information respect activity stock options plans follows flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued stock option planscontinued following table summarizes information outstanding exercisable options december 31 2005 december 31 2004 2003 stock options exercisable 7206430 5619804 respectively weighted average exercise prices 1229 755 respectively december 31 2005 12923476 shares common stock reserved future issuance stock option plans employee stock purchase plan 1999 company established employee stock purchase plan “espp” allows employees purchase company’s common stock payroll deductions espp eligible employees subject certain restrictions may purchase shares company’s common stock 85 fair market value either date enrollment date purchase whichever less espp expires 2009 action company’s board directors whichever occurs earlier company issued 156203 shares 2005 122442 shares 2004 113224 shares 2003 espp 6000000 shares authorized issued espp 4718923 shares remained available december 31 2005 employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 27 million 25 million 12 million years ended december 31 2005 2004 2003 respectively flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company offers supplemental executive retirement plan “serp” certain us officers company summary components net periodic pension expense benefit obligation fund assets plans follows thousands discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations additional minimum liability 38 million 20 million december 31 2005 2004 respectively recognized pension plans representing excess unfunded accumulated flir systems inc notes consolidated financial statementscontinued note 14 employee benefit planscontinued pension planscontinued benefit obligation accrued pension costs measurement date used pension plans december 31 december 31 2005 2004 accumulated benefit obligation 128 million 108 million respectively benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands company also funded retirement obligation former executive officer recorded present value reported longterm liabilities note 15 operating segments related information operating segments company determined operating segments thermography imaging market segments thermography market comprised broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement imaging market comprised broad range applications focused providing enhanced vision capabilities temperature measurement required although differences temperature used create image imaging market also includes high performance daylight imaging applications accounting policies segments described note 1 company historically evaluated performance based upon operating earnings segment consolidated basis amount represents earnings operations represented consolidated statement operations consists corporate expenses certain operating expenses allocated operating segments management reporting purposes accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis flir systems inc notes consolidated financial statementscontinued note 15 operating segments related informationcontinued operating segmentscontinued operating segment information follows thousands revenue longlived assets geographic area information related revenue significant geographical location follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands flir systems inc notes consolidated financial statementscontinued note 15 operating segments related informationcontinued major customers revenue derived major customers follows thousands note 16 business acquisitions january 6 2004 pursuant terms agreement plan merger reorganization dated october 21 2003 among company indigo systems corporation “indigo” fiji sub inc william parrish shareholders’ agent fiji sub inc merged indigo “merger” result merger indigo became wholly owned subsidiary company acquisition indigo accounted purchase allocation purchase price follows thousands 104142000 goodwill allocated imaging segment 33095000 goodwill allocated thermography segment may 12 2005 company acquired cash net assets brysen optical corporation “brysen” maker advanced optical coatings acquisition accounted purchase portion 42 million purchase price includes professional fees costs directly associated acquisition excess net assets acquired reported intangible assets goodwill 2540000 932000 respectively operations brysen material company’s consolidated financial statements november 23 2005 company acquired outstanding stock scientific materials corporation “smc” supplier laser assemblies laser components materials 135 million cash acquisition accounted purchase result smc become wholly owned subsidiary company operations smc material company’s consolidated financial statements allocation purchase price finalized however company estimated recorded allocation purchase price follows thousands quarterly financial data unaudited flir systems inc thousands except per share data february 2 2005 company effected twoforone split share common stock outstanding january 12 2005 sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information statement page report kpmg llp independent registered public accounting firm consolidated statements income years ended december 31 2006 2005 2004 consolidated balance sheets december 31 2006 2005 consolidated statements shareholders’ equity comprehensive earnings loss years ended december 31 2006 2005 2004 consolidated statements cash flows years ended december 31 2006 2005 2004 notes consolidated financial statements quarterly financial data unaudited report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2006 2005 related consolidated statements income shareholders’ equity comprehensive earnings loss cash flows years threeyear period ended december 31 2006 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2006 2005 results operations cash flows years threeyear period ended december 31 2006 conformity us generally accepted accounting principles discussed note 2 consolidated financial statements consolidated financial statements december 31 2005 years twoyear period ended december 31 2005 restated discussed note 1 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123 revised 2004 sharebased payment also audited accordance standards public company accounting oversight board united states effectiveness flir systems inc’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 16 2007 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp portland oregon march 16 2007 flir systems inc consolidated statements income thousands except per share amounts 1 see note 2 “restatement consolidated financial statements” accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value 1 see note 2 “restatement consolidated financial statements” accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity comprehensive earnings loss thousands 1 see note 2 “restatement consolidated financial statements” accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands 1 see note 2 “restatement consolidated financial statements” accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide company’s products produced variety configurations suit specific customer needs include compact handheld systems applications surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness many types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates effect balance sheet date revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency included consolidated statement operations incurred cumulative translation adjustment included accumulated comprehensive earnings loss gain 22719000 december 31 2006 loss 5221000 december 31 2005 revenue recognition revenue primarily recognized upon delivery product customer fixed determinable price reasonable assurance collection passage title customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” issued securities exchange commission december 2003 company designs markets sells products primarily commercial offtheshelf products many company’s government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value recognition revenue contracts multiple elements consistent guidance provided eitf 0021 “revenue arrangements multiple deliverables” credit extended customers revenue recognized company determined risk uncollectibility minimal flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued company also limited number design development contracts principally governmental customers accounted accordance statement position 811 “accounting performance constructiontype certain productiontype contracts” “sop 811” sop 811 revenues related costs recognized using percentageofcompletion method company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts recognized services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2006 2005 129910000 50910000 respectively inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard basis approximates actual cost firstin firstout basis inventory writedowns recorded conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 167 million 108 million december 31 2006 2005 respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year interim basis required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets goodwill depreciated using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2006 2005 2004 36 million 25 million 24 million respectively costbasis investments company three investments accounted cost basis carrying value investments december 31 2006 2005 13 million 24 million respectively excess estimated fair values investments included assets consolidated balance sheets earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed conversion 210 million convertible notes number additional shares assumed exercise stock options calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period conversion convertible notes assumed taken place dates convertible notes issued addition net earnings used purposes computing diluted earnings per share net earnings adjusted interest costs convertible notes net statutory tax conversion taken place dates convertible notes issued flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per sharecontinued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2006 2005 2004 aggregated 2314588 1975643 13039 respectively excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands fair value financial instruments cash equivalents accounts receivable accounts payable accrued payroll related liabilities carrying amount approximates fair value instruments due shortterm nature fair value longterm debt estimated based quoted market prices convertible notes december 31 2006 fair value notes approximately 3220 million stockbased compensation prior january 1 2006 company followed provisions accounting principles board 25 “accounting stock issued employees” “apb 25” related interpretations accounting stockbased employee compensation plans described fully note 15 january 1 2006 company adopted provisions statement financial accounting standards 123r “sharebased payment” “sfas 123r” requiring company recognize expense related fair value stockbased compensation awards company elected use modified prospective transition method permitted sfas 123r therefore restated financial results prior periods flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued modified prospective transition method stockbased compensation expense recognized remaining requisite service stockbased compensation awards granted prior january 1 2006 determined sfas 123 “accounting stockbased compensation” “sfas 123” stockbased compensation awards granted subsequent january 1 2006 based grant date estimated fair value determined sfas 123r company uses blackscholes option pricing model estimate fair value stockbased compensation awards date grant except restricted stock awards valued fair market value date grant company recognizes compensation expense timebased options restricted stock awards straightline basis requisite service period award compensation expense tranche performancebased options recognized year related performance criteria met tranche independent others performance criteria particular year met related tranche vest following table sets forth stockbased compensation expense related tax benefit recognized consolidated statement income year ended december 31 2006 thousands december 31 2006 stockbased compensation costs 612000 capitalized inventory company approximately 20110000 total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 16 years prior adoption sfas 123r company accounted stockbased compensation recognition measurement provisions apb 25 following table illustrates effect net earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation years ended december 31 2005 2004 thousands except per share amounts flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued following table presents impact adoption sfas 123r selected line items company’s consolidated financial statements year ended december 31 2006 thousands except per share amounts fair value stockbased awards determined blackscholes model granted years ended december 31 2006 2005 2004 reported estimated following weightedaverage assumptions company uses us treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2006 80 percent stock options granted performancebased options whereas prior 2006 stock options timebased options difference nature awards taken consideration determining expected term company uses estimated forfeiture rate 2 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2006 2005 2004 13216000 24241000 16231000 respectively related excess tax benefit realized exercise stock options 5473000 11590000 17718000 respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions sfas 123 since effective date additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales us foreign government agencies see note 17 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued use estimates preparation financial statements conformity generally accepted accounting principles united states requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories realizability investments recoverability deferred tax assets impairment goodwill loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings includes cumulative translation adjustments change minimum liability pension plans unrealized losses shortterm investments recent accounting pronouncements june 2006 financial accounting standards board “fasb” issued fasb interpretation 48 “accounting uncertainty income taxes” “fin 48” interpretation sfas 109 “accounting income taxes” “sfas 109” clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 interpretation prescribes recognition threshold morelikelythannot measurement attribute tax positions taken expected taken tax return order recognized financial statements fin 48 effective fiscal years beginning december 15 2006 accordingly company adopt fin 48 january 1 2007 company currently assessing impact fin 48 financial statements september 2006 fasb issued statement financial accounting standards 157 “fair value measurements” “sfas 157” statement defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 accordingly company adopt sfas 157 company currently assessing impact sfas 157 financial statements september 2006 fasb issued statement financial accounting standard 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” “sfas 158” statement improves financial reporting requiring employer recognize overfunded underfunded status defined benefit postretirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income business entity statement also improves financial reporting requiring employer measure funded status plan date yearend statement financial position limited exceptions sfas 158 effective fiscal years ending december 15 2006 accordingly company adopted sfas 158 december 31 2006 recorded minimum pension liability comprehensive earnings loss estimated benefit paid 2007 reported current liabilities addition company measures pension obligation end fiscal year september 2006 securities exchange commission issued staff accounting bulletin 108 “sab 108” expresses staff’s views regarding process quantifying financial statement flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncementscontinued misstatements sab 108 addresses diversity practice quantifying financial statement misstatements potential current practice build improper amounts balance sheet sab 108 applicable financial statements fiscal years ending november 15 2006 company’s adoption sab 108 impact financial statements note 2 restatement consolidated financial statements stock option practices 2006 company undertook voluntary review historical stock option practices related accounting treatment result apparent issuance options favorable dates prior 2000 based upon preliminary results review company’s board directors “board” formed special committee comprised two outside directors investigate stock option grants practices procedures 1995 2006 special committee conducted investigation assistance independent legal counsel perkins coie llp outside forensic accountants deloitte financial advisory services llp retained independent counsel special committee completed investigation provided findings recommendations company’s full board respect stock options granted period early 1995 middle 2000 special committee found inaccuracies determination measurement dates certain stock option grants affecting company’s accounting disclosures years special committee also found strong circumstantial evidence improper selection grant dates given lack supporting documentation fact exercise price certain grants lowest stock price first quarter years 1995 1999 respect stock options granted period middle 2000 2006 special committee identified certain procedural corporate governance issues resulted use incorrect measurement dates find evidence grant dates selected based upon attempt seek favorable price special committee also reported investigated certain option practices period 1995 2006 identified evidence improper dating option exercises limited exceptions related accelerated vesting leaves absences addition special committee’s investigation stock option practices company reviewed restricted stock grants 1996 2006 company’s review restricted stock grants 1996 1999 also found strong circumstantial evidence improper selection measurement dates used recognize compensation expense years based findings special committee’s investigation company’s subsequent internal analysis including company’s findings restricted stock company concluded audit committee board agreed restatement certain company’s annual historical consolidated financial statements appropriate therefore company recording additional noncash compensation expense related tax effects regard past stockbased compensation programs restating previously issued financial statements aggregate noncash compensation expense recognized 1995 2004 143 million related tax effects adjustments record noncash compensation expense also resulted recognition additional payroll tax obligations 18 million period resulting cumulative reduction earnings taxes 161 million 2004 since portion compensation expense financial statement purposes yet recognizable deduction tax purposes aggregate benefit company’s income tax provision period recognized recording deferred tax assets 39 million thereby resulting cumulative flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued stock option practicescontinued net income effect 122 million adjustments made 1995 2004 net income effect recorded 09 million 2004 114 million cumulatively prior 2004 according accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related authoritative accounting literature place prior 2006 measurement date accounting purposes first date number shares individual entitled receive option purchase price known option share granted apb 25 requires recognition compensation expense equal market price stock measurement date minus amount individual required pay option share measurement date change effective date grant determine compensation expense required recognized accounting purposes connection grant result company’s review stock option restricted stock grants 1995 2006 company certain cases established new measurement dates based upon date company believes apb 25 criteria satisfied cases company established new measurement date considered information included limited dates option grants communicated individuals dates option grant details provided thirdparty service providers used internally enter grants stock option system contemporaneous emails minutes meetings board compensation committee information obtained interviews current former compensation committee members company’s management employees payroll records personnel files various records maintained company’s legal finance human resources departments grants sufficient evidence documentation support original measurement date determine precise date number options exercise price finalized company used available relevant information form reasonable conclusion likely measurement date grants following summarizes results investigation special committee company’s review impact primary stock option restricted stock accounting errors terms noncash compensation expense related tax effects underlying restatement references number options restricted shares share prices discussion adjusted stock splits since 1995 inaccurate measurement dates certain stock options restricted shares granted january 5 1995 june 30 2000 period january 5 1995 june 30 2000 company issued total 106 million stock options 70 million issued part annual bonus programs 13 million issued connection acquisitions 05 million issued nonemployee directors 18 million issued purposes primarily connection hiring promoting employees company determined inaccurate measurement dates used connection six annual stock option bonus grants period company also restricted stock program officers 1996 1999 determined inaccurate measurement dates used originally recognize compensation expenses awards made restricted stock programs totaled 06 million shares amount additional compensation expense recorded period stock option grants restricted stock awards 36 million discussion following italicized headings provides details types errors identified accounts entire 36 million additional compensation expense arising awards 1995 middle 2000 flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued stock option practicescontinued company’s determination appropriate measurement date used stock option grants january 5 1995 june 30 2000 based upon best available information corroborative evidence respective grant described errors arising likely grant dates selected hindsight incomplete lists awards option grant dates26 million special committee identified strong circumstantial evidence option grant dates used annual awards 1995 1999 totaling 54 million options selected based upon stock price considerations likely using hindsight additionally inadequate documentation validate complete lists recipients awards available grant dates used option awards january 6 1995 january 19 1996 january 2 1997 february 3 1998 march 5 1999 dated prior dates complete lists stock option recipients appear available option grants years dated dates lowest stock price first quarter respective year options awarded conjunction annual performance review program occurred first quarter year company determined appropriate measurement date grants date complete lists stock option recipients corroborative evidence including thirdparty billing statements option agreements available aggregate additional compensation expense related errors 26 million errors relating valuing compensation expense related restricted stock awards measurement dates likely selected hindsight07 million beginning 1996 company restricted stock program officers program officers eligible receive maximum number shares based upon attainment defined annual financial performance criteria size award based upon level attainment performance criteria 1996 1999 total 06 million shares awarded officers compensation expense recognized respective year based upon market price originally determined measurement date measurement dates used 1998 october 7 lowest price fourth quarter second lowest price year 1999 october 21 lowest price year actual results performance criteria could determined end respective year compensation committee given opportunity make discretionary adjustments provided program accordingly company determined measurement date awards 1996 1997 programs date first board meetings completion audits years 1998 1999 program years however shares awarded end year apparently anticipation annual results 1998 1999 company determined measurement date list awards provided transfer agent issuance shares occurred december 1998 1999 respectively aggregate compensation expense related errors restricted stock 07 million errors related incomplete list awards options grant date03 million april 17 2000 company awarded us based employees options purchase aggregate 16 million shares common stock primarily based upon length service criteria due financial difficulties company experiencing time broad issuance options lieu cash bonuses flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued stock option practicescontinued normally paid time year option grant date coincided public release audited financial statements 1999 calendar year although majority awards based length service criteria individual sufficient exceptions made criteria establishing final list awards company determined appropriate measurement date awards date lists final provided thirdparty responsible generating individual option agreements compensation expense related error 03 million inaccurate measurement dates certain stock options restricted shares granted july 1 2000 february 4 2005 period july 1 2000 december 31 2006 company issued total 189 million stock options 72 million issued officers either retention bonus purposes 73 million issued employees officers either retention bonus purposes 14 million issued connection acquisitions 12 million related 2000 hiring earl lewis president chief executive officer 09 million issued nonemployee directors 09 million shares issued purposes primarily related hiring employees company determined inaccurate measurement dates used period july 1 2000 february 4 2005 related 70 million options issued retention bonuses purposes 41 million 29 million officers employees respectively company also determined extensions time given two former employees exercise options accounted differently discussion following italicized headings provides details types errors identified accounts 107 million additional compensation expense arising awards july 1 2000 december 31 2006 errors related incomplete list awards options grant date65 million company identified three instances lists stock option recipients approved compensation committee either incomplete subsequently modified follows • december 27 2001 compensation committee awarded options purchase 28 million shares common stock officers bonus purposes exercise price 925 compensation committee award made understanding 30 million shares available company’s 1992 stock incentive plan “1992 plan” shortly thereafter company determined number shares available 1992 plan actually 25 million shares order remain compliance 1992 plan company’s officers voluntarily agreed forfeit certain options awarded final award 24 million options determined time next meeting compensation committee february 12 2002 market price company’s common stock day 1173 company determined measurement date option grants february 12 2002 list awards final compensation expense related grants 59 million • january 8 2004 compensation committee approved issuance 18 million stock options pool employees market price day 1958 complete list option recipients number options awarded recipient final february 17 2004 market price 1994 company determined measurement date option grants february 17 2004 thus recognizing compensation expense grants 06 million flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued stock option practicescontinued • february 4 2005 compensation committee approved award 11 million stock options list employees exercise price 3140 modifications made list subsequent compensation committee’s meeting company determined measurement date grants february 28 2005 list final employees notified individual awards however since market price day 3125 compensation expense required recognized error related failure recognize performance criteria stock options30 million january 1 2001 company awarded shares restricted stock officers vesting provisions based upon attainment certain financial results year september 7 2001 company’s chief executive officer submitted proposal compensation committee convert shares restricted stock options september 12 2001 compensation committee approved proposal awarded 07 million stock options company’s us officers market price day 722 however special committee determined compensation committee intended apply performance criteria place restricted stock grants stock options since one restrictions deemed intended compensation committee related completion audit fiscal 2001 company determined measurement date grants february 12 2002 board met accepted audited 2001 financial statements accordingly based market price 1173 day company recognizing compensation expense 30 million error related extension time exercise stock options10 million 2001 company allowed two individuals extension time exercise vested stock options past time provided option agreements company determined extension time resulted new award individuals recognized compensation expense fair value new awards dates respective shares would cancelled compensation expense recognized new awards 10 million error related stock options granted subject shareholder approval option plan01 million february 12 2002 compensation committee awarded options purchase 10 million shares common stock exercise price 1173 officers contingent upon shareholder approval new stock option plan annual meeting held april 24 2002 plan approved options issued however since options subject shareholders’ approval plan measurement date day approval market price 1181 consequently company recognizing compensation expense 01 million grants adjustments reclassifications company also adjusted previously recognized deferred tax assets originally recorded credit additional paidin capital shareholders’ equity previous periods result certain stock options qualify deductible performancebased compensation accordance internal revenue code section 162m adjustments primarily impact previously reported net operating loss carryforwards amount deferred tax assets accrued income taxes reported consolidated balance sheets since flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued adjustments reclassificationscontinued original tax benefit items recorded shareholders’ equity impact previously reported consolidated statements income related resulting section 162m limitations section 162m limitations resulted cumulative reduction net operating losses 335 million cumulative increase income taxes payable net tax credit utilization 89 million december 31 2006 incremental impact incremental impact recognizing stockbased compensation related payroll income tax effects resulting restatement follows thousands income tax benefit 14 million recognized 2002 related reversal valuation allowance years 1995 2000 deferred tax assets related stockbased compensation expense payroll taxes net operating losses company full valuation allowance related periods longer necessary 2002 deferred tax asset recognized stockbased compensation expense related options granted officers company subject internal revenue code section 162m net impact statements income permanent disallowance tax benefit section 162m 54000 832000 1175000 282000 years ended december 31 2004 2003 2002 2001 respectively effectively reduces tax benefit recorded periods flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued incremental impactcontinued following table presents effect stockbased compensation expense adjustments related tax effects made company’s previously reported consolidated statement income year ended december 31 2004 thousands except per share amounts following table presents effect stockbased compensation expense adjustments related tax effects made company’s previously reported consolidated balance sheet december 31 2005 thousands flir systems inc notes consolidated financial statementscontinued note 2 restatement consolidated financial statementscontinued incremental impactcontinued adjustments made december 31 2005 consolidated balance sheet due following • increase deferred income tax assets current results reclassification federal income tax credits noncurrent deferred income tax assets net additional utilization net operating loss carryforwards due impact irc section 162m • decrease deferred income tax assets long term relates reclassification tax assets deferred tax liabilities • increase accrued payroll related liabilities pertains cumulative additional payroll tax expense related change classification options incentive stock options nonqualified stock options • increase income taxes payable additional 2005 tax liability utilization net operating losses federal tax credits caused disallowance stock deductions irc section 162m • increase deferred income tax liabilities relates reclassification certain federal tax credits longterm deferred tax assets • increase additional paidin capital impact cumulative noncash stockbased compensation cumulative additional excess tax deductions upon exercise disallowance prior stock option deductions due irc section 162m • decrease retained earnings cumulative income statement impact associated additional stockbased compensation expense related tax effects recognized impact adjustments consolidated balance sheet quarterly basis would materially different adjustment december 31 2005 warrant provision disclosure quarterly information following table presents effect stockbased compensation expense adjustments related tax effects made company’s previously reported consolidated statements cash flows years ended december 31 2005 2004 thousands see also notes 1 13 17 impacts restatement flir systems inc notes consolidated financial statementscontinued note 3 accounts receivable accounts receivable net allowance doubtful accounts 16 million 13 million december 31 2006 2005 respectively note 4 inventories consist following thousands note 5 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2006 2005 2004 12465000 8481000 7721000 respectively note 6 goodwill company recorded goodwill connection acquisition agema infrared systems ab 1997 acquisition indigo systems corporation 2004 acquisition brysen optical corporation scientific materials corporation 2005 accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” company reviews goodwill impairment annually frequently facts circumstances warrant review provisions sfas 142 require twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing performed second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair flir systems inc notes consolidated financial statementscontinued note 6 goodwillcontinued value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed boundary overall market capitalization company june 30 2006 company determined impairment recorded goodwill december 31 2006 triggering events would require updated impairment review goodwill reporting segment follows thousands note 7 intangible assets intangible assets summarized follows thousands acquired identifiable intangible assets 48000000 acquired part acquisition indigo systems corporation 2540000 acquired part brysen optical corporation acquisition 4054000 acquired part scientific materials corporation acquisition aggregate amortization expense recorded 2006 approximately 8086000 future estimated aggregate amortization expenses approximately 8032000 years 2007 2008 2009 2010 5312000 2011 sfas 142 also requires intangible assets definite lives amortized estimated useful life reviewed impairment whenever impairment indicator exists company continually monitors events changes circumstances could indicate carrying amounts company’s intangible flir systems inc notes consolidated financial statementscontinued note 7 intangible assetscontinued assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether carrying value assets recovered undiscounted expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2006 2005 2004 note 8 credit agreements october 6 2006 company signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders agreement replaces credit agreement dated april 28 2004 credit agreement provides 300 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting company certain designated subsidiaries borrow euro kroner sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread underover eurodollar rates based upon company’s leverage ratio december 31 2006 interest rate ranged 610 percent 825 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum liquidity cash availability credit agreement credit agreement collateralized substantially assets company december 31 2006 company 455 million outstanding credit agreement company 55 million letters credit outstanding credit agreement december 31 2006 reduces total available credit company sweden subsidiary 30 million swedish kroner approximately 44 million line credit 370 percent december 31 2006 december 31 2006 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s sweden subsidiary subject automatic renewal annual basis note 9 accrued product warranties company generally provides twelve month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2006 2005 thousands flir systems inc notes consolidated financial statementscontinued note 10 longterm debt june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended issuance made initial offering 175 million june 11 2003 subsequent exercise full underwriters option purchase additional 35 million june 17 2003 net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares company’s common stock conversion rate 450612 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 proceeds used primarily general corporate purposes included acquisition indigo systems corporation working capital expenditure needs longterm debt consists following thousands quarter ended september 30 2004 one terms allow conversion company’s convertible notes described prospectus met december 31 2006 note holders elected convert notes company stock note 11 commitments company leases primary facilities various operating leases expire 2007 2017 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2006 2005 2004 amounted 75 million 69 million 69 million respectively future minimum obligations operating leases net sublease income 109000 2007 follows thousands note 12 contingencies company named nominal defendant four shareholder derivatives cases filed december 2006 january 2007 united states district court district oregon edward j goodman life income trust v earl r lewis et al chris larson v earl r lewis et al glenn hutton v earl flir systems inc notes consolidated financial statementscontinued note 12 contingenciescontinued r lewis et al paul zetlmaier v earl r lewis et al plaintiffs filed unopposed motion consolidate four lawsuits one case complaints allege certain stock options granted company dated improperly purport assert claims various common law theories federal securities law allege company entitled damages various individual defendants variety legal theories company may liable costs defending claims individuals sued company’s articles incorporation amended december 31 2006 company unable reasonably estimate costs company also subject legal proceedings claims litigation arising ordinary course business accordance statement financial accounting standards 5 “accounting contingencies” company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 13 income taxes sfas 109 requires company recognize deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 13 income taxescontinued provisions income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 13 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2006 company us tax net operating loss carryforwards totaling approximately 33 million state tax net operating loss carryforwards totaling approximately 288 million expire years 2019 2025 additionally company various state tax credits available aggregating 13 million net federal benefit expire years 2008 2026 sfas 109 requires tax benefits described recorded asset benefits probable recognized extent management assesses realization assets “more likely not” valuation allowance required recorded based guidance company believes net deferred tax assets 189 million reflected december 31 2006 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved us income taxes provided accumulated undistributed earnings certain foreign subsidiaries company currently intends reinvest earnings operations outside us note 14 capital stock june 2 1999 board directors approved shareholder rights plan amended november 4 2004 provided issuance one right share outstanding common stock company reserved 300000 shares capital series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s junior participating preferred stock economic terms similar one share company’s common stock purchase price 22500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem flir systems inc notes consolidated financial statementscontinued note 14 capital stockcontinued exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock awards granted three plans flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” prior january 1 2006 stock options granted timebased vesting schedules ranging immediate vesting three years generally expire ten years grant date company discontinued issuing option awards 1992 plan 1993 plan previously granted options plans remain outstanding expiration 2006 company also began granting performancebased options restricted stock awards vesting performancebased options contingent upon meeting certain diluted earnings per share growth targets three independent tranches three year period options expire ten years grant date vesting tranche dependent tranches restricted stock awards timebased generally vest three year period company also stock options issued replacement options connection acquisition indigo systems corporation 2004 shares issued result stock option exercises vesting restricted stock new shares information respect stock option activity follows 1042200 performancebased options granted net forfeitures year ended december 31 2006 outstanding december 31 2006 flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensationcontinued stock incentive planscontinued information respect restricted stock activity follows december 31 2006 11790191 shares common stock reserved future issuance stock incentive plans employee stock purchase plan additionally company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 fair market value lower either date enrollment purchase date 181827 shares issued espp year ended december 31 2006 4537096 shares remain available december 31 2006 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 29 million 27 million 25 million years ended december 31 2006 2005 2004 respectively flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain us officers company 2006 company adopted sfas 158 requires company recognize overfunded underfunded status defined benefit postretirement plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income accordingly company recorded minimum pension liability comprehensive earnings loss estimated benefit paid 2007 reported current liabilities addition company measures pension obligation end fiscal year following table presents impact adoption sfas 158 selected lines company’s consolidated balance sheet december 31 2006 thousands amounts recognized comprehensive earnings loss years ended december 31 2006 2005 net tax follows thousands components comprehensive earnings loss related company’s pension plans december 31 2006 2005 follows thousands amounts recognized comprehensive earnings loss related pension plans year ended december 31 2004 flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued amortization transition obligation recognized net periodic benefit costs years ended december 31 2006 2005 2004 38000 37000 38000 respectively summary components net periodic pension expense benefit obligation fund assets plans follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 37 million 38 million december 31 2006 2005 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs measurement date used pension plans december 31 december 31 2006 2005 accumulated benefit obligation 144 million 128 million respectively benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued components net periodic benefit cost expected recognized amounts comprehensive earnings loss year ending december 31 2007 follows thousands company also funded retirement obligation former executive officer recorded present value reported current longterm liabilities based expected payout note 17 operating segments related information operating segments company determined operating segments thermography government systems commercial vision systems market segments thermography segment addresses broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement analytic information examples markets served include predictive preventive maintenance process control building inspection electrical inspection research development scientific analysis gas detection government systems commercial vision systems markets comprised applications focused providing enhanced vision capabilities utilizing infrared energy case many government system products additional sensor technologies visible cameras low light cameras lasers government systems segment addresses mainly government markets military paramilitary homeland security program driven markets within united states internationally products contain multiple sensors deployed airborne maritime landbased manportable platforms applications include search rescue force protection surveillance drug interdiction maritime patrol targeting commercial vision systems segment addresses mainly commercial markets including oem camera modules perimeter security firefighting marine automotive airborne transportation markets characterized rapidly growing volumes driven declining costs uncooled infrared technology year ended december 31 2006 company separated imaging segment government systems commercial vision systems segments described accordingly company restated previously reported periods comparable basis accounting policies segments company evaluates performance based upon revenue earnings operations consolidated basis amount represents earnings operations represented consolidated statement income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segmentscontinued accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued revenue longlived assets geographic areacontinued longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 18 business acquisitions may 12 2005 company acquired cash net assets brysen optical corporation “brysen” maker advanced optical coatings acquisition accounted purchase portion 42 million purchase price includes professional fees costs directly associated acquisition excess net assets acquired reported intangible assets goodwill 2540000 932000 respectively operations brysen material company’s consolidated financial statements november 23 2005 company acquired outstanding stock scientific materials corporation “smc” supplier laser assemblies laser components materials 136 million cash acquisition accounted purchase result smc become wholly owned subsidiary company operations smc material company’s consolidated financial statements purchase price including professional fees costs directly associated acquisition allocated follows thousands note 19 repurchase company stock april 2005 february 2006 company’s board directors authorized repurchase 30 million shares 50 million shares respectively company’s outstanding shares common stock flir systems inc notes consolidated financial statementscontinued note 19 repurchase company stockcontinued open market april 2005 authorization expired april 2006 february 2006 authorization expired february 2007 authorizations company repurchased 47 million shares total 1191 million year ended december 31 2006 20 million shares total 485 million year ended december 31 2005 note 20 subsequent event unaudited february 2007 company’s board directors authorized repurchase additional 60 million shares company’s outstanding shares common stock open market authorization expires february 2009 quarterly financial data unaudited flir systems inc thousands except per share data sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding third quarter 2006 company recognized discrete items tax purposes relating recognition foreign tax credits resulted 29 million reduction income tax expense fourth quarter 2006 company recognized discrete tax items resulted net decrease income tax expense 35 million including decrease 13 million related recognition federal research development tax credits reenacted december 2006 22 million related prior period discrete tax items related intercompany profit inventory item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2007 2006 related consolidated statements income shareholders’ equity comprehensive earnings cash flows years threeyear period ended december 31 2007 connection audits consolidated financial statements also audited financial statement schedule ii form 10k years threeyear period ended december 31 2007 consolidated financial statements financial statement schedule ii responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule ii based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2007 2006 results operations cash flows years threeyear period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule ii considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123 revised 2004 sharebased payment also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 28 2008 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon february 28 2008 flir systems inc consolidated statements income thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity comprehensive earnings thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc “company” designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide company’s products produced variety configurations suit specific customer needs include compact handheld systems applications surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness many types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated stock split december 10 2007 company effected twoforone split share common stock outstanding november 11 2007 result stock split company issued approximately 684 million shares common stock form stock dividend company’s number shares per share amounts common stock restated reflect stock split periods presented reclassification made 3873000 current deferred income taxes net prepaid expenses current assets december 31 2006 balance sheet conform december 31 2007 presentation reclassification impact previously reported results operations shareholders’ equity foreign currency translation assets liabilities company’s foreign subsidiaries translated us dollars current exchange rates effect balance sheet date revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency included consolidated statement operations incurred cumulative translation adjustment included accumulated comprehensive earnings gain 39569000 22719000 december 31 2007 2006 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” issued securities exchange commission december 2003 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued company designs markets sells products primarily commercial offtheshelf products many company’s government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts undelivered end reporting period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value credit extended customers revenue recognized company determined risk uncollectibility minimal company also limited number design development contracts principally governmental customers revenues related costs recognized using percentageofcompletion method company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts recognized services provided research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2007 2006 27916000 129910000 respectively inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventoriescontinued inventory writedowns recorded conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 199 million 167 million december 31 2007 2006 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year frequently required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets goodwill depreciated using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2007 2006 2005 57 million 36 million 25 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued costbasis investments company three private company investments consist investments company ability exercise significant influence accounted cost method cost method accounting investments carried cost adjusted otherthantemporary declines realizable value additional investments carrying value investments december 31 2007 2006 16 million 13 million respectively excess estimated fair values investments included assets consolidated balance sheets earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed conversion 210 million convertible notes number additional shares assumed exercise stock options calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period conversion convertible notes assumed taken place date convertible notes issued addition net earnings used purposes computing diluted earnings per share net earnings adjusted interest costs convertible notes net statutory tax conversion taken place date convertible notes issued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands year ended december 31 2007 stock options excluded effect stock options years ended december 31 2006 2005 aggregated 4629176 3951286 respectively excluded purposes diluted earnings per share since effect would antidilutive flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued supplemental cash flow disclosure thousands fair value financial instruments cash equivalents accounts receivable accounts payable accrued payroll related liabilities carrying amount approximates fair value instruments due shortterm nature fair value longterm debt estimated based quoted market prices convertible notes december 31 2007 fair value notes approximately 6030 million stockbased compensation company uses blackscholes option pricing model estimate fair value stockbased compensation awards date grant except restricted stock awards valued fair market value date grant company recognizes compensation expense timebased options restricted stock awards straightline basis requisite service period award compensation expense tranche performancebased options recognized vesting period applicable tranche independent others performance criteria particular year met related tranche vest following table sets forth stockbased compensation expense related tax benefit recognized consolidated statement income years ended december 31 2007 2006 thousands december 31 2007 2006 stockbased compensation costs 786000 612000 respectively capitalized inventory december 31 2007 company approximately 23402000 total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 18 years flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued prior adoption provisions statement financial accounting standards 123r “sharebased payment” company accounted stockbased compensation recognition measurement provisions apb 25 following table illustrates effect net earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation year ended december 31 2005 thousands except per share amounts fair value stockbased awards determined blackscholes model granted years ended december 31 2007 2006 2005 reported estimated following weightedaverage assumptions company uses us treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2007 2006 approximately 80 percent stock options granted performancebased options whereas prior 2006 stock options timebased options difference nature awards taken consideration determining expected term company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2007 2006 2005 38876000 13216000 24241000 respectively related excess tax benefit realized exercise stock options 18085000 5473000 11590000 respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions sfas 123 since effective date additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales us foreign government agencies see note 16 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions believes risk loss minimal flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued use estimates preparation financial statements conformity us generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings includes cumulative translation adjustments changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration recent accounting pronouncements june 2006 financial accounting standards board “fasb” issued interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” statement clarifies criteria individual tax position must satisfy benefits position recognized company’s financial statements fin 48 prescribes recognition threshold morelikelythannot measurement attribute tax positions taken expected taken tax return order tax positions recognized financial statements effective january 1 2007 company adopted provisions fin 48 material adjustments liability unrecognized income tax benefits upon adoption september 2006 fasb issued statement financial accounting standards 157 “fair value measurements” “sfas 157” statement defines fair value establishes framework measuring fair value us generally accepted accounting principles expands disclosures fair value measurements statement effective financial statements issued fiscal years beginning november 15 2007 although early adoption permitted company’s adoption sfas 157 expected impact consolidated financial statements february 2007 fasb issued statement financial accounting standards 159 “the fair value option financial assets financial liabilities” “sfas 159” statement permits option choose measure many financial instruments certain items fair value improve financial reporting providing opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions statement effective financial statements issued fiscal years beginning november 15 2007 company’s adoption sfas 159 expected impact consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncementscontinued december 2007 fasb issued statement financial accounting standards 141r “business combinations” “sfas 141r” replaces sfas 141 sfas 141r establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed controlling interest recognizes measures goodwill acquired business combination gain bargain purchase determines information disclose enable users financial statements evaluate nature financial effects business combination fas 141r applied prospectively business combinations acquisition date entity’s fiscal year begins december 15 2008 company assess impact sfas 141r future acquisition occurs note 2 accounts receivable accounts receivable net allowance doubtful accounts 13 million 16 million december 31 2007 2006 respectively note 3 inventories consist following thousands note 4 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2007 2006 2005 17277000 12465000 8481000 respectively flir systems inc notes consolidated financial statementscontinued note 5 goodwill year ended december 31 2007 company recorded goodwill connection acquisition australasian infrared systems pty ltd extech instruments corporation accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” company reviews goodwill impairment annually frequently facts circumstances warrant review provisions sfas 142 require twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared carrying value goodwill june 30 2007 company determined impairment recorded goodwill december 31 2007 triggering events would require updated impairment review carrying value goodwill reporting segment activity 2006 2007 follows thousands flir systems inc notes consolidated financial statementscontinued note 6 intangible assets intangible assets summarized follows thousands acquired intangible assets include product technology 30070000 customer relationships 35301000 trademarks tradename portfolios 7987000 identifiable intangible assets 90000 year ended december 31 2007 identifiable intangible assets 18690000 acquired part acquisition extech instruments corporation 351000 acquired part australasian infrared systems pty ltd acquisition aggregate amortization expense recorded 2007 2006 2005 8631000 8086000 6349000 respectively future estimated aggregate amortization expense years ending december 31 2008 2012 approximately thousands sfas 142 also requires intangible assets definite lives amortized estimated useful life reviewed impairment whenever impairment indicator exists company continually monitors events changes circumstances could indicate carrying amounts company’s intangible assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether carrying value assets recovered expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2007 2006 2005 flir systems inc notes consolidated financial statementscontinued note 7 credit agreements october 6 2006 company signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting company certain designated subsidiaries borrow euro kroner sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon company’s leverage ratio eurodollar interest rate 565 percent prime lending rate 725 percent december 31 2007 rates 610 percent 825 percent respectively december 31 2006 credit agreement requires company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 0175 percent 0325 percent december 31 2007 2006 commitment fee rate 0175 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum liquidity cash availability credit agreement credit agreement collateralized substantially assets company december 31 2007 2006 company 190 million 455 million respectively outstanding credit agreement company 66 million 55 million letters credit outstanding credit agreement december 31 2007 2006 respectively reduces total available credit company sweden subsidiary 30 million swedish kroner approximately 47 million line credit interest rate 470 percent december 31 2007 december 31 2007 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s sweden subsidiary subject automatic renewal annual basis note 8 accrued product warranties company generally provides twelve month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2007 2006 thousands note 9 longterm debt june 2003 company issued 210 million 30 senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds flir systems inc notes consolidated financial statementscontinued note 9 longterm debtcontinued issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares company’s common stock conversion rate 901224 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 longterm debt consists following thousands debt issuance costs capitalized amortized term underlying agreements costs amortized date convertible notes first redeemable may 2010 included interest expense unamortized balance costs shown reduction carrying amount convertible notes company’s convertible notes eligible conversion option note holders december 31 2007 notes value 4000 converted 360 shares company’s common stock note 10 commitments company leases primary facilities various operating leases expire 2008 2017 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2007 2006 2005 amounted 85 million 75 million 69 million respectively future minimum obligations operating leases net sublease income 112000 2008 follows thousands flir systems inc notes consolidated financial statementscontinued note 11 contingencies company named nominal defendant four shareholder derivative actions filed december 2006 january 2007 united states district court district oregon edward j goodman life income trust v earl r lewis et al chris larson v earl r lewis et al glenn hutton v earl r lewis et al paul zetlmaier v earl r lewis et al “original cases” complaints alleged certain stock options granted company dated improperly purported assert claims various common law theories federal securities laws alleged company entitled damages various individual defendants variety legal theories cases dismissed november 7 2007 june 2007 company named fifth shareholder derivative action filed united states district court district oregon kathleen edith sommers v earl r lewis et al sommers complaint includes factual allegations regarding company’s stock option practices legal theories relief identical asserted original cases material respects december 31 2007 company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable company subsidiary indigo systems corporation together “flir parties” named lawsuit filed raytheon company march 2 2007 united states district court eastern district texas complaint asserts claims tortious interference patent infringement trade secret misappropriation unfair competition flir parties filed amended answer counterclaims june 22 2007 denied material allegations december 31 2007 company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 12 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued provisions income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 2007 company us tax net operating loss carryforwards totaling approximately 30 million state tax net operating loss carryforwards totaling approximately 73 million expire years 2019 2025 additionally company federal tax credits available aggregating 20 million various state tax credits available aggregating 03 million net federal benefit expire years 2008 2017 tax benefits described recorded asset benefits likely recognized extent management assesses realization assets likely valuation allowance required recorded company believes net deferred tax assets 133 million reflected december 31 2007 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved us income taxes provided accumulated undistributed earnings certain foreign subsidiaries company currently intends reinvest earnings operations outside us indefinitely december 31 2007 cumulative amount earnings upon us income taxes provided approximately 2278 million determination amount unrecognized deferred tax liability related earnings practicable january 1 2007 adopted provisions fin 48 result applying provisions fin 48 recognize change liability unrecognized tax benefits change retained earnings january 1 2007 addition reclassified certain tax liabilities unrecognized tax benefits well potential penalties interest current liabilities longterm liabilities unrecognized tax benefits december 31 2007 relate us jurisdiction following table summarizes activity related unrecognized tax benefits thousands flir systems inc notes consolidated financial statementscontinued note 12 income taxescontinued december 31 2007 company approximately 43 million net unrecognized tax benefits net federal tax benefit state issues would affect company’s effective tax rate recognized next twelve months company expects increases unrecognized tax benefits consistent prior year increases including increases interest penalties expect unrecognized tax benefits decrease significantly next twelve months company classifies interest penalties related uncertain tax positions income tax expense year ended december 31 2007 company 203500 accrued interest 132500 net federal state benefits related uncertain tax positions file us state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 13 capital stock june 2 1999 board directors approved shareholder rights plan amended november 4 2004 provided issuance one right share outstanding common stock company reserved 300000 shares series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 company’s outstanding common stock right entitles holder purchase one onehundredth share company’s series junior participating preferred stock economic terms similar one share company’s common stock purchase price 22500 subject adjustment company generally entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 company’s common stock acquiring person group acquires beneficial ownership 15 company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 14 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock flir systems inc notes consolidated financial statementscontinued note 14 stockbased compensationcontinued stock incentive planscontinued awards referred restricted stock unit awards granted three plans flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” prior january 1 2006 stock options granted timebased vesting schedules ranging immediate vesting three years generally expire ten years grant date company discontinued issuing option awards 1992 plan 1993 plan previously granted options plans remain outstanding expiration 2006 company also began granting performancebased options timebased restricted stock unit awards vesting performancebased options contingent upon meeting certain diluted earnings per share growth targets three independent tranches three year period options expire ten years grant date vesting tranche dependent tranches restricted stock unit awards generally vest three year period shares issued result stock option exercises vesting restricted stock units new shares company also stock options issued replacement options connection acquisition indigo systems corporation 2004 information respect stock option activity 2007 follows included number options outstanding december 31 2007 2417624 performancebased options information respect restricted stock unit activity 2007 follows flir systems inc notes consolidated financial statementscontinued note 14 stockbased compensationcontinued stock incentive planscontinued december 31 2007 18310440 shares common stock reserved future issuance stock incentive plans employee stock purchase plan additionally company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 fair market value lower either date enrollment purchase date 257780 shares issued espp year ended december 31 2007 8816412 shares remain available december 31 2007 future issuance shares issued espp purchases new shares note 15 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 36 million 29 million 27 million years ended december 31 2007 2006 2005 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain us officers company amounts recognized accumulated comprehensive earnings loss years ended december 31 2007 2006 2005 net tax follows thousands components accumulated comprehensive earnings loss related company’s pension plans december 31 2007 2006 follows thousands flir systems inc notes consolidated financial statementscontinued note 15 employee benefit planscontinued pension plans continued amortization transition obligation recognized net periodic benefit costs years ended december 31 2007 2006 2005 42000 38000 37000 respectively summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations flir systems inc notes consolidated financial statementscontinued note 15 employee benefit planscontinued pension planscontinued pension liability 44 million 37 million december 31 2007 2006 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs measurement date used pension plans december 31 december 31 2007 2006 accumulated benefit obligation 157 million 144 million respectively benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2008 follows thousands company also funded retirement obligation former executive officer recorded present value amount reported current longterm liabilities based expected payout note 16 operating segments related information operating segments company determined operating segments thermography government systems commercial vision systems market segments flir systems inc notes consolidated financial statementscontinued note 16 operating segments related informationcontinued operating segments continued thermography segment addresses broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement analytic information examples markets served include predictive preventive maintenance process control building inspection electrical inspection research development scientific analysis gas detection government systems commercial vision systems markets comprised applications focused providing enhanced vision capabilities utilizing infrared energy case many government system products additional sensor technologies visible cameras low light cameras lasers government systems segment addresses mainly government markets military paramilitary homeland security program driven markets within united states internationally products contain multiple sensors deployed airborne maritime landbased manportable platforms applications include search rescue force protection surveillance drug interdiction maritime patrol targeting commercial vision systems segment addresses mainly commercial markets including oem camera modules perimeter security firefighting marine automotive airborne transportation markets characterized rapidly growing volumes driven declining costs uncooled infrared technology accounting policies segments company evaluates performance based upon revenue earnings operations consolidated basis amount represents earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 16 operating segments related informationcontinued operating segmentscontinued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 17 business acquisitions april 1 2007 company acquired cash net assets australasian infrared systems pty ltd “australasian” distributor infrared camera systems acquisition accounted purchase portion 34 million purchase price excess net assets acquired reported intangible assets goodwill 351000 28 million respectively operations australasian material company’s consolidated financial statements november 7 2007 company acquired outstanding stock extech instruments corporation “extech” distributor handheld test equipment 403 million cash acquisition accounted purchase result extech become wholly owned subsidiary company operations extech material company’s consolidated financial statements purchase price including professional fees costs directly associated acquisition preliminarily allocated follows thousands preliminary allocation goodwill subject refinement related final determination purchase price acquisition costs goodwill identifiable tangible assets related extech acquisition recorded company’s thermography business segment note 18 repurchase company stock february 2006 february 2007 company’s board directors authorized repurchase 100 million shares 120 million shares respectively company’s outstanding shares common stock open market february 2006 authorization expired february 2007 authorizations company repurchased 177000 shares total 37 million year ended december 31 2007 94 million shares total 1191 million year ended december 31 2006 note 19 subsequent event unaudited january 3 2008 company acquired 693 percent outstanding common stock cedip infrared systems approximately 566 million cash pursuant share purchase agreements dated september 13 2007 two principal shareholders three shareholders “sellers” cedip infrared systems company organized existing laws france “cedip” cedip leading provider infrared cameras stabilized gimbaled systems cedip listed french alternext stock market company process determining allocation purchase price quarterly financial data unaudited flir systems inc thousands except per share data sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2008 2007 related consolidated statements income shareholders’ equity comprehensive earnings cash flows years threeyear period ended december 31 2008 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2008 2007 results operations cash flows years threeyear period ended december 31 2008 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 27 2009 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon february 27 2009 flir systems inc consolidated statements income thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity comprehensive earnings thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide company’s products produced variety configurations suit specific customer needs include compact handheld systems applications surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure minute temperature differences see objects total darkness many types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification 52 million made current deferred revenue longterm liabilities december 31 2007 consolidated balance sheet properly classify revenue deferred longer one year reclassification impact previously reported results operations shareholders’ equity foreign currency translation assets liabilities company’s foreign subsidiaries translated united states dollars current exchange rates effect balance sheet date revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency included consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive loss earnings loss 90 million gain 396 million december 31 2008 2007 respectively transaction gains losses included income net gains 129 million 29 million 25 million years ended december 31 2008 2007 2006 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations pursuant guidance provided staff accounting bulletin 104 “revenue recognition” issued securities exchange commission december 2003 company designs markets sells products primarily commercial offtheshelf products many company’s government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc undelivered end reporting period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value credit extended customers revenue recognized company determined risk uncollectibility minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2008 2007 2057 million 279 million respectively inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist suggest inventories may excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventoriescontinued combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 204 million 199 million december 31 2008 2007 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year frequently required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets goodwill depreciated using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2008 2007 2006 73 million 57 million 36 million respectively costbasis investments company four private company investments consist investments company ability exercise significant influence accounted cost method cost method accounting investments carried cost adjusted otherthantemporary declines realizable value additional investments carrying value investments december 31 2008 2007 89 million 16 million respectively investments included assets consolidated balance sheets flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards assumed conversion convertible notes number additional shares assumed exercise stock options calculated assuming outstanding stock options exercised proceeds exercises used acquire shares common stock average market price reporting period conversion convertible notes assumed taken place date convertible notes issued addition net earnings used purposes computing diluted earnings per share net earnings adjusted interest costs convertible notes net statutory tax conversion taken place date convertible notes issued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands year ended december 31 2007 stock options excluded effect stock options years ended december 31 2008 2006 aggregated 9000 4629000 excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company uses blackscholes option pricing model estimate fair value stockbased compensation awards date grant except restricted stock unit awards valued fair market value company’s common stock date grant company recognizes compensation expense timebased options restricted stock unit awards straightline basis requisite service period award compensation expense tranche performancebased options recognized vesting period applicable tranche independent others performance criteria particular year met related tranche vest following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2008 2007 2006 thousands december 31 2008 2007 stockbased compensation costs 963000 786000 respectively capitalized inventory december 31 2008 company approximately 291 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 19 years fair value stockbased awards determined blackscholes model granted years ended december 31 2008 2007 2006 reported estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2008 stock options granted performancebased options 2007 2006 approximately 80 percent stock options granted performancebased options approximately 20 percent timebased options difference nature awards taken consideration determining expected term company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2008 2007 2006 367 million 389 million 132 million respectively related tax benefit realized exercise stock options 274 million 181 million 55 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions statement financial accounting standards 123 revised 2004 “sharebased payment” since effective date january 1 2006 additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration riskcontinued substantial portion company’s revenue derived sales united states foreign government agencies see note 17 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill longlived assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive loss earnings accumulated comprehensive loss earnings includes cumulative translation adjustments changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration recent accounting pronouncements december 2007 financial accounting standards board issued statement financial accounting standards 141 revised 2007 “business combinations” “sfas 141r” replaces sfas 141 sfas 141r establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed controlling interest recognizes measures goodwill acquired business combination gain bargain purchase determines information disclose enable users financial statements evaluate nature financial effects business combination sfas 141r applied prospectively business combinations acquisition date entity’s fiscal year begins december 15 2008 may 2008 fasb issued fasb staff position apb 141 “accounting convertible debt instruments may settled cash upon conversion including partial cash settlement” “fsp apb 141” fsp apb 141 specifies issuers convertible debt instruments may settled cash separately account liability equity components manner reflect entity’s nonconvertible debt borrowing rate interest cost recognized subsequent periods fsp apb 141 effective financial statements issued fiscal years beginning december 15 2008 retrospective application company currently assessing impact pronouncement financial statements flir systems inc notes consolidated financial statementscontinued note 2 fair value financial instruments cash equivalents december 31 2008 2007 2057 279 million respectively company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets accordance statement financial accounting standards 157 “fair value measurements” company financial assets liabilities measured fair value carrying amount accounts receivable accounts payable accrued payroll related liabilities approximates fair value instruments due shortterm nature fair value convertible notes included longterm debt estimated based quoted market prices convertible notes december 31 2008 fair value convertible notes approximately 5074 million note 3 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2008 2007 2006 thousands note 4 inventories consist following thousands note 5 property equipment property equipment summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 5 property equipmentcontinued depreciation expense years ended december 31 2008 2007 2006 231 million 173 million 125 million respectively note 6 goodwill year ended december 31 2008 company recorded goodwill connection acquisitions cedip infrared systems “cedip” ifara tecnologias sl “ifara” see note 18 accordance statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” company reviews goodwill impairment annually frequently triggering event provisions sfas 142 require twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared carrying value goodwill june 30 2008 company determined impairment recorded goodwill december 31 2008 triggering events would require updated impairment review carrying value goodwill reporting segment activity 2007 2008 follows thousands flir systems inc notes consolidated financial statementscontinued note 7 intangible assets intangible assets summarized follows thousands year ended december 31 2008 identifiable intangible assets 166 million acquired part acquisition cedip 35 million acquired part ifara acquisition see note 18 aggregate amortization expense recorded 2008 2007 2006 168 million 86 million 81 million respectively estimated future aggregate amortization expense years ending december 31 2009 2013 approximately thousands sfas 142 also requires intangible assets definite lives amortized estimated useful life reviewed impairment whenever triggering event occurs company continually monitors events changes circumstances could indicate carrying amounts company’s intangible assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether carrying value assets recovered expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2008 2007 2006 flir systems inc notes consolidated financial statementscontinued note 8 credit agreements october 6 2006 company signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting company certain designated subsidiaries borrow euro kroner sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon company’s leverage ratio eurodollar interest rate 2175 percent prime lending rate 325 percent december 31 2008 rates 565 percent 725 percent respectively december 31 2007 credit agreement requires company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 0175 percent 0325 percent december 31 2008 2007 commitment fee rate 0175 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum level liquidity comprised cash undrawnunutilized availability credit agreement credit agreement collateralized substantially assets company december 31 2008 company amounts outstanding 190 million outstanding december 31 2007 credit agreement company 158 million 66 million letters credit outstanding credit agreement december 31 2008 2007 respectively reduces total available credit company sweden subsidiary 30 million swedish kroner approximately 39 million line credit interest rate 281 percent december 31 2008 december 31 2008 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s swedish subsidiary subject automatic renewal annual basis note 9 accrued product warranties company generally provides twelve month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2008 2007 thousands flir systems inc notes consolidated financial statementscontinued note 10 longterm debt longterm debt consists following thousands june 2003 company issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds issuance approximately 2039 million issuance costs amortized period seven years interest payable semiannually june 1 december 1 year holders notes may convert notes shares company’s common stock conversion rate 901224 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 debt issuance costs capitalized amortized term underlying agreements costs amortized date convertible notes first redeemable june 2010 included interest expense unamortized balance costs shown reduction carrying amount convertible notes company’s convertible notes eligible conversion option note holders december 31 2008 notes aggregate principal amount 186 million converted 17 million shares company’s common stock note 11 commitments company leases primary facilities various operating leases expire 2009 2017 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2008 2007 2006 amounted 105 million 85 million 75 million respectively future minimum obligations noncancelable leases net sublease income 123000 2009 follows thousands flir systems inc notes consolidated financial statementscontinued note 12 contingencies june 2007 company named nominal defendant shareholder derivative action filed united states district court district oregon kathleen edith sommers v earl r lewis et al sommers complaint alleged certain stock options granted company dated improperly purported assert claims various common law theories federal securities laws alleged company entitled damages various individual defendants variety legal theories june 16 2008 court dismissed complaint granted plaintiff leave amend july 31 2008 plaintiff filed amended complaint asserting materially claims defendants moved dismiss amended complaint multiple bases february 12 2009 court granted defendants’ motion dismiss february 18 2009 entered judgment dismissing amended complaint prejudice ruling subject review appeal company subsidiary indigo systems corporation together “flir parties” named lawsuit filed raytheon company march 2 2007 united states district court eastern district texas august 11 2008 raytheon company granted leave file second amended complaint amended asserts claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer second amended complaint counterclaims september 2 2008 denied material allegations company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 13 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 13 income taxescontinued provisions income taxes follows thousands deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 13 income taxescontinued provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences december 31 2008 company united states tax net operating loss carryforwards totaling approximately 26 million expire 2025 additionally company federal tax credits available aggregating 05 million expire 2015 tax benefits described recorded asset benefits likely recognized extent management assesses realization assets likely valuation allowance required recorded company believes net deferred tax assets 216 million reflected december 31 2008 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved united states income taxes provided accumulated undistributed earnings certain foreign subsidiaries company currently intends reinvest earnings operations outside united states indefinitely december 31 2008 cumulative amount earnings upon united states income taxes provided approximately 2860 million determination amount unrecognized deferred tax liability related earnings practicable january 1 2007 company adopted provisions financial accounting standards board interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” result applying provisions fin 48 company recognize change liability unrecognized tax benefits change retained earnings january 1 2007 addition company reclassified certain tax liabilities unrecognized tax benefits well potential penalties interest current liabilities longterm liabilities unrecognized tax benefits december 31 2008 relate united states jurisdiction flir systems inc notes consolidated financial statementscontinued note 13 income taxescontinued following table summarizes activity related unrecognized tax benefits thousands december 31 2008 company approximately 57 million unrecognized tax benefits would affect company’s effective tax rate recognized next twelve months company expects increases unrecognized tax benefits consistent prior year increases including increases interest penalties company expect unrecognized tax benefits decrease significantly next twelve months company classifies interest penalties related uncertain tax positions income tax expense year ended december 31 2008 company 493000 accrued interest 323000 net federal state benefits related uncertain tax positions recorded longterm accrued income taxes consolidated balance sheet company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 14 capital stock june 2 1999 board directors approved shareholder rights plan amended june 5 2003 november 4 2004 provided issuance one right share outstanding common stock company reserved 300000 shares series junior participating preferred stock plan rights become exercisable event acquiring party acquires beneficial ownership 15 percent company’s outstanding common stock announces tender exchange offer consummation would result beneficial ownership party 15 percent company’s outstanding common stock right entitles holder purchase one onehundredth share company’s series junior participating preferred stock economic terms similar one share company’s common stock purchase price 22500 subject adjustment company generally flir systems inc notes consolidated financial statementscontinued note 14 capital stockcontinued entitled redeem rights 001 per right time prior tenth day acquiring person acquired beneficial ownership 15 percent company’s common stock acquiring person group acquires beneficial ownership 15 percent company’s outstanding common stock company redeem exchange rights right beneficially owned acquiring person group entitle holder purchase rights’ current exercise price number shares common stock value equal two times exercise price rights expire june 2 2009 previously redeemed exchanged exercised note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted three plans flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” prior january 1 2006 stock options granted timebased vesting schedules ranging immediate vesting three years generally expire ten years grant date company discontinued issuing option awards 1992 plan 1993 plan previously granted options plans remain outstanding expiration 2006 company also began granting performancebased options timebased restricted stock unit awards vesting performancebased options contingent upon meeting certain diluted earnings per share growth targets three independent tranches three year period options expire ten years grant date vesting tranche dependent tranches restricted stock unit awards generally vest three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options issued replacement options connection acquisition indigo systems corporation 2004 information respect stock option activity 2008 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensationcontinued stock incentive planscontinued included number options outstanding december 31 2008 2758000 performancebased options information respect restricted stock unit activity 2008 follows december 31 2008 14126000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan additionally company adopted employee stock purchase plan january 1999 “1999 espp” allowed employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date 1999 espp expired january 2009 february 4 2009 company’s board directors approved new employee stock purchase plan submission company’s shareholders connection 2009 annual meeting shareholders proposed plan incorporates substantially terms conditions 1999 espp 191000 shares issued 1999 espp 2008 8625000 shares remain available december 31 2008 future issuance shares issued 1999 espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 40 million 36 million 29 million years ended december 31 2008 2007 2006 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states accordance sfas 158 company recorded minimum pension liability comprehensive loss earnings estimated benefit paid 2009 reported current liabilities measurement date used pension plans december 31 flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued amounts recognized accumulated comprehensive loss earnings years ended december 31 2008 2007 2006 net tax follows thousands components accumulated comprehensive loss earnings related company’s pension plans december 31 2008 2007 follows thousands amortization transition obligation recognized net periodic benefit costs years ended december 31 2008 2007 2006 43000 42000 38000 respectively summary components net periodic pension expense benefit obligation fund assets plans follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 98 million 44 million december 31 2008 2007 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued components net periodic benefit cost expected recognized amounts accumulated comprehensive loss earnings year ending december 31 2009 follows thousands note 17 operating segments related information operating segments company determined operating segments thermography government systems commercial vision systems market segments thermography segment addresses broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement analytic information examples markets served include predictive preventive maintenance process control building inspection electrical inspection research development scientific analysis gas detection government systems commercial vision systems markets comprised applications focused providing enhanced vision capabilities utilizing infrared energy case many government system products additional sensor technologies visible cameras low light cameras lasers government systems segment addresses mainly government markets military paramilitary homeland security program driven markets within united states internationally products contain multiple sensors deployed airborne maritime landbased manportable platforms applications include search rescue force protection surveillance drug interdiction maritime patrol targeting commercial vision systems segment addresses mainly commercial markets including oem camera modules perimeter security firefighting marine automotive airborne transportation markets characterized rapidly growing volumes driven declining costs uncooled infrared technology accounting policies segments company’s chief operating decision maker evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segmentscontinued operating segment information follows thousands revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued revenue longlived assets geographic areacontinued longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 18 business acquisitions 2008 company acquired 999 percent outstanding common stock cedip infrared systems “cedip” provider infrared cameras stabilized gimbaled systems company acquired cedip common stock purchase price approximately 958 million including professional fees costs directly associated acquisition company recorded 166 million identifiable intangible assets 505 million goodwill 132 million identifiable intangible assets 449 million goodwill recorded company’s thermography business segment 24 million identifiable intangible assets 55 million goodwill recorded government systems business segment 10 million identifiable intangible assets recorded commercial vision systems business segment allocation purchase price follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitionscontinued april 8 2008 company acquired 100 percent stock ifara tecnologias sl “ifara” provider middleware client application software used create sensor networks approximately 112 million cash company recorded 35 million identifiable intangible assets 76 million goodwill commercial vision systems business segment allocation purchase price follows thousands operating results acquisitions included company’s results operations since respective dates acquisition goodwill recognized cedip ifara acquisitions deductible united states tax purposes acquisitions significant defined regulation sx securities exchange commission compared company’s overall financial position accordingly pro forma financial statements combined entities presented note 19 repurchase company stock february 2006 february 2007 company’s board directors authorized repurchase 100 million shares 120 million shares respectively company’s outstanding shares common stock open market february 2006 authorization expired february 2007 february 2007 authorization expired february 2009 authorizations company repurchased 1381000 shares total 407 million 177000 shares total 37 million 9391000 shares total 1191 million years ended december 31 2008 2007 2006 respectively february 4 2009 company’s board directors authorized repurchase 200 million shares 24 month period commencing date note 20 subsequent event february 5 2009 company commenced exchange offer outstanding convertible notes holders elect exchange notes offer whose notes accepted exchange company receive 901224 shares company’s common stock cash payment 20 per 1000 principal amount notes offer scheduled expire march 9 2009 quarterly financial data unaudited flir systems inc thousands except per share data sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2009 2008 related consolidated statements income shareholders’ equity comprehensive earnings cash flows years threeyear period ended december 31 2009 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2009 2008 results operations cash flows years threeyear period ended december 31 2009 conformity us generally accepted accounting principles discussed note 2 consolidated financial statements company changed accounting convertible debt due adoption financial accounting standards board fasb staff position apb 141 accounting convertible debt instruments may settled cash upon conversion including partial cash settlement included fasb accounting standards codification subtopic 47020 debt conversion options january 1 2009 also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2010 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon february 26 2010 flir systems inc consolidated statements income thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity comprehensive earnings thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc designs manufactures markets thermal imaging stabilized camera systems wide variety applications commercial industrial government markets worldwide company’s products produced variety configurations suit specific customer needs include compact handheld systems applications surveillance search rescue industrial analysis monitoring sealed autonomous systems fixed security monitoring installations stabilized gimbaled systems airborne shipborne use company’s thermal imaging systems use advanced infrared technology detects infrared radiation heat enabling operator measure small temperature differences see objects total darkness many types adverse conditions including smoke haze types fog many company’s products also incorporate visible light cameras laser rangefinders laser illuminators image analysis software gyrostabilized gimbal technology principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated average exchange rates year resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss gain 126 million loss 90 million december 31 2009 2008 respectively transaction gains losses included income net loss 39 million net gains 129 million 29 million years ended december 31 2009 2008 2007 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations company designs markets sells products primarily commercial offtheshelf products many company’s government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc undelivered end reporting period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value credit extended customers revenue recognized company determined risk uncollectability minimal flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue stated net representative commissions service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2009 2008 2007 3136 million 2057 million 279 million respectively accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventoriescontinued recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 236 million 204 million december 31 2009 2008 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year frequently required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets goodwill amortized using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2009 2008 2007 82 million 73 million 57 million respectively costbasis investments company three private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued costbasis investmentscontinued events occurred fair value investments calculated practicable carrying value investments december 31 2009 2008 92 million 89 million respectively investments included assets consolidated balance sheets contigencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards assumed conversion convertible notes number additional shares assumed exercise stock options calculated assuming outstanding stock options exercised proceeds exercises unrecognized compensation expense unvested options considered proceeds used acquire shares common stock average market price reporting period number additional shares assumed vesting unvested restricted stock awards calculated assuming unvested restricted stock awards vested unrecognized compensation expense awards considered proceeds used acquire shares common stock average market price reporting period conversion convertible notes assumed taken place date convertible notes issued addition net earnings used purposes computing diluted earnings per share net earnings adjusted interest costs convertible notes net statutory tax conversion taken place date convertible notes issued flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per sharecontinued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stock options years ended december 31 2009 2008 aggregated 515000 9000 excluded purposes diluted earnings per share since effect would antidilutive year ended december 31 2007 stock options excluded supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stockbased compensation awards date grant except restricted stock unit awards valued fair market value company’s common stock date grant company recognizes compensation expense timebased options restricted stock unit awards straightline basis requisite service period award compensation expense tranche performancebased options recognized vesting period applicable tranche independent others performance criteria particular year met related tranche vest flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2009 2008 2007 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2009 2008 2007 follows thousands december 31 2009 company approximately 327 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 18 years fair value stockbased awards determined blackscholes model granted years ended december 31 2009 2008 2007 reported estimated following weightedaverage assumptions company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2009 approximately 30 percent stock options granted performancebased options approximately 70 percent timebased options 2008 stock options granted performancebased options 2007 approximately 80 percent stock options granted performancebased options approximately 20 percent timebased options difference nature awards taken consideration determining expected term company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2009 2008 2007 170 million 367 million 389 million respectively related tax benefit realized exercise stock options 92 million 274 million 181 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” since effective date january 1 2006 additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill longlived assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration subsequent events company performed review subsequent events date filing financial statements securities exchange commission february 26 2010 recent accounting pronouncements december 2007 financial accounting standards board “fasb” issued accounting standards codification topic 805 “business combinations” “asc topic 805” revised principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed controlling interest recognizes measures goodwill acquired business combination gain bargain purchase determines information disclose enable users financial statements evaluate nature financial effects business combination company adopted asc topic 805 effective business acquisitions fiscal years beginning december 31 2008 june 2009 fasb issued accounting standards codification topic 105 “generally accepted accounting principles” “asc topic 105” establishes fasb accounting standards codificationtm “codification” source authoritative us generally accepted accounting principles “gaap” recognized fasb applied nongovernmental entities rules interpretive releases securities exchange commission “sec” authority federal securities laws also sources authoritative gaap sec registrants effective date codification superseded thenexisting nonsec accounting reporting standards nongrandfathered nonsec accounting literature included codification became nonauthoritative company adopted asc topic 105 effective financial statements issued interim annual periods ending september 15 2009 october 2009 fasb issued accounting standards update 200913 “revenue recognition topic 605 multipledeliverable revenue arrangementsa consensus fasb emerging issues task force” “asu 200913” provides amendments criteria subtopic 60525 “revenue recognitionmultipleelement arrangements” separating consideration multipledeliverable flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncementscontinued arrangements expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 accordingly company adopt asu 200913 january 1 2010 company’s adoption asu 200913 expected material impact consolidated financial statements october 2009 fasb issued accounting standards update 200914 “software topic 985 certain revenue arrangements include software elementsa consensus fasb emerging issues task force” “asu 200914” changes accounting model revenue arrangements include tangible products software elements asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 accordingly company adopt asu 200914 january 1 2011 company’s adoption asu 200914 expected material impact consolidated financial statements note 2 accounting convertible debt january 1 2009 company adopted provisions financial accounting standards board accounting standards codification subtopic 47020 “debt conversion options” “asc subtopic 47020” asc subtopic 47020 requires issuers convertible debt instruments may settled cash separately account liability equity components manner reflects entity’s nonconvertible debt borrowing rate interest cost recognized subsequent periods asc subtopic 47020 effective financial statements issued fiscal years beginning december 15 2008 retrospective application required june 2003 company issued 210 million 30 percent senior convertible notes due 2023 net proceeds issuance approximately 2039 million company determined expected life notes seven years since notes first redeemable june 2010 company estimates nonconvertible borrowing rate debt seven year maturity issued june 2003 60 percent accordingly value liability component notes time issuance 1744 million value equity component 356 million company retrospectively applied provisions asc subtopic 47020 financial statements beginning 2003 notes issued retrospective application includes separation liability equity components convertible notes reallocation 61 million issuance costs liability equity components increase interest expense periods subsequent issuance reflect estimated nonconvertible borrowing rate related tax effects asc subtopic 47020 also requires debt extinguished gain loss recognized difference fair value liability component carrying value company’s retrospective application therefore also includes impact conversions notes aggregate principal amount 186 million prior january 1 2009 flir systems inc notes consolidated financial statementscontinued note 2 accounting convertible debtcontinued carrying amounts convertible notes follows thousands unamortized discount issuance costs amortized june 2010 unamortized balance costs shown reduction carrying amount convertible notes december 31 2009 53 million shares company’s common stock issuable upon conversion remaining notes valued 1734 million closing market price day 1734 million excess principal amount 1146 million effective interest rate convertible notes 60 percent interest amortization expense convertible notes recognized consolidated statements income follows thousands following table presents effect retrospective application asc subtopic 47020 related tax effects made company’s previously reported consolidated statements income years ended december 31 2008 2007 thousands flir systems inc notes consolidated financial statementscontinued note 2 accounting convertible debtcontinued following table presents effect retrospective application asc subtopic 47020 related tax effects made company’s previously reported consolidated balance sheet december 31 2008 thousands following table presents effect retrospective application asc subtopic 47020 related tax effects made company’s previously reported consolidated statements shareholders’ equity comprehensive earnings december 31 2006 thousands following table presents effect retrospective application asc subtopic 47020 related tax effects made company’s previously reported consolidated statement cash flows years ended december 31 2008 2007 thousands note 3 fair value financial instruments cash equivalents december 31 2009 2008 3136 million 2057 respectively company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets accordance fasb asc topic 820 “fair value measurements disclosures” cash equivalents instruments convertible cash daily company material financial assets liabilities measured fair value carrying amount accounts receivable accounts payable accrued payroll related liabilities approximates fair value instruments due shortterm nature fair value foreign flir systems inc notes consolidated financial statementscontinued note 3 fair value financial instrumentscontinued currency exchange contracts december 31 2009 significant fair value convertible notes included longterm debt estimated based quoted market prices convertible notes december 31 2009 fair value convertible notes approximately 1734 million note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2009 2008 2007 thousands note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2009 2008 2007 261 million 231 million 173 million respectively flir systems inc notes consolidated financial statementscontinued note 7 goodwill year ended december 31 2009 company recorded goodwill connection acquisitions salvador imaging inc omnitech partners inc infrared korea ltd see note 18 company reviews goodwill impairment annually frequently triggering event twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared carrying value goodwill june 30 2009 company determined impairment recorded goodwill december 31 2009 triggering events would require updated impairment review carrying value goodwill reporting segment activity two year period ending december 31 2009 follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets intangible assets summarized follows thousands year ended december 31 2009 identifiable intangible assets acquired part acquisitions thousands aggregate amortization expense recorded 2009 2008 2007 164 million 168 million 86 million respectively intangible assets recorded december 31 2009 estimated future aggregate amortization expense years ending december 31 2010 2014 approximately thousands company continually monitors events changes circumstances could indicate carrying amounts company’s intangible assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether carrying value assets recovered expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2009 2008 2007 flir systems inc notes consolidated financial statementscontinued note 9 credit agreements october 6 2006 company signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 6 2011 credit agreement includes 100 million sublimit multicurrency option permitting company certain designated subsidiaries borrow euro kroner pound sterling agreed upon currencies credit agreement borrowings bear interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon company’s leverage ratio eurodollar interest rate 1001 percent prime lending rate 325 percent december 31 2009 rates 2175 percent 325 percent respectively december 31 2008 credit agreement requires company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 0175 percent 0325 percent december 31 2009 2008 commitment fee rate 0175 percent credit agreement contains five financial covenants require maintenance certain leverage ratios addition minimum levels ebitda consolidated net worth maximum level capital expenditures commencing december 31 2009 minimum level liquidity comprised cash undrawnunutilized availability credit agreement credit agreement collateralized substantially assets company december 31 2009 2008 company amounts outstanding credit agreement company 78 million 158 million letters credit outstanding credit agreement december 31 2009 2008 respectively reduces total available credit company sweden subsidiary 30 million swedish kroner approximately 42 million line credit interest rate 095 percent december 31 2009 december 31 2009 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s swedish subsidiary subject automatic renewal annual basis note 10 accrued product warranties company generally provides twelve month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2009 2008 2007 thousands flir systems inc notes consolidated financial statementscontinued note 11 longterm debt longterm debt consists following thousands june 2003 company issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds issuance approximately 2039 million interest payable semiannually june 1 december 1 year holders notes may convert notes shares company’s common stock conversion rate 901224 shares per 1000 principal amount notes prior maturity date certain circumstances company may redeem cash part notes june 8 2010 company’s convertible notes eligible conversion option note holders february 5 2009 company commenced exchange offer outstanding convertible notes holders elected exchange notes offer whose notes accepted exchange company received 901224 shares company’s common stock cash payment 20 per 1000 principal amount notes offer expired march 9 2009 notes aggregate principal amount 999 million exchanged pursuant exchange offer converted approximately 90 million shares company’s common stock company recognized gain 22 million extinguishment notes gain 20 million expense associated cash inducement reported income net consolidated statements income addition july 2009 convertible notes aggregate principal amount 301 million converted approximately 27 million shares company’s common stock december 2009 convertible notes aggregate principal amount 27 million converted 244000 shares company’s common stock december 31 2009 notes aggregate principal amount 1512 million converted approximately 136 million shares company’s common stock convertible notes classified longterm liability consolidated balance sheet stated contractual maturity 2023 however company anticipates remaining note holders exercise option convert june 2010 note 12 commitments company leases primary facilities various operating leases expire 2010 2018 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2009 2008 2007 amounted 101 million 105 million 85 million respectively flir systems inc notes consolidated financial statementscontinued note 12 commitmentscontinued future minimum obligations noncancelable leases net expected sublease income contractual obligations follows thousands note 13 contingencies company subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company march 2 2007 united states district court eastern district texas august 11 2008 raytheon company granted leave file second amended complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer second amended complaint counterclaims september 2 2008 denied material allegations august 31 2009 court entered order granting flir parties’ motion summary judgment raytheon’s trade secret misappropriation claim based flir parties’ statute limitations defense raytheon abandoned claims except patent claims currently set trial commence april 19 2010 company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences december 31 2009 company united states tax net operating loss carryforwards totaling approximately 58 million expire 2029 addition company colorado state net operating loss carryforwards totaling approximately 39 million expire 2029 tax benefits described recorded asset benefits likely recognized extent management assesses realization assets likely valuation allowance required recorded company believes net deferred tax assets 186 million reflected december 31 2009 consolidated balance sheet realizable based future forecasts taxable income relatively short time horizon recorded valuation allowance company may required record valuation allowance deferred tax assets future periods future forecasts taxable income achieved united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company currently intends reinvest earnings operations outside united states indefinitely december 31 2009 cumulative amount earnings upon united states income taxes provided approximately 3203 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits thousands unrecognized tax benefits december 31 2009 relate united states jurisdiction flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued approximately 37 million tax positions expected reverse next 12 month period due expiration statute limitations recorded current accrued income taxes consolidated balance sheet december 31 2009 december 31 2009 company approximately 83 million unrecognized tax benefits would affect company’s effective tax rate recognized next twelve months company expects increases unrecognized tax benefits consistent prior year increases including increases interest penalties company classifies interest penalties related uncertain tax positions income tax expense december 31 2009 company 786000 accrued interest 510000 net federal state benefits related uncertain tax positions recorded current noncurrent accrued income taxes consolidated balance sheet company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted three plans flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” prior january 1 2006 stock options granted timebased vesting schedules ranging immediate vesting three years generally expired ten years grant date company discontinued issuing option awards 1992 plan 1993 plan previously granted options plans remain outstanding expiration 2006 company also began granting performancebased options timebased restricted stock unit awards vesting performancebased options contingent upon meeting certain diluted earnings per share growth targets primarily three independent tranches three year period options expire ten years grant date vesting tranche dependent tranches restricted stock unit awards generally vest three year period shares issued result stock option exercises distribution vested restricted stock units new shares flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensationcontinued stock incentive planscontinued company also stock options issued replacement options connection acquisition indigo systems corporation 2004 information respect stock option activity 2009 follows information respect restricted stock unit activity 2009 follows december 31 2009 11563000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan additionally company adopted employee stock purchase plan january 1999 “1999 espp” allowed employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date 1999 espp expired new offerings january 2009 may 1 2009 company’s shareholders approved flir systems inc 2009 employee stock purchase plan “2009 espp” incorporates substantially terms conditions 1999 espp first offering period 2009 espp commenced may 4 2009 company reserved 5000000 shares common stock issuance 2009 espp flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensationcontinued employee stock purchase plancontinued 135000 shares issued 1999 espp 127000 shares issued 2009 espp 2009 4873000 shares remain available 2009 espp december 31 2009 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 44 million 40 million 36 million years ended december 31 2009 2008 2007 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded minimum pension liability comprehensive earnings loss estimated benefit paid 2010 reported current liabilities measurement date used pension plans december 31 amounts recognized comprehensive earnings loss years ended december 31 2009 2008 2007 net tax follows thousands components accumulated comprehensive earnings loss related company’s pension plans december 31 2009 2008 follows thousands amortization transition obligation recognized net periodic benefit costs years ended december 31 2009 2008 2007 37000 43000 42000 respectively flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 86 million 98 million december 31 2009 2008 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2010 follows thousands note 17 operating segments related information operating segments company determined operating segments thermography government systems commercial vision systems market segments thermography segment addresses broad range commercial industrial applications utilizing infrared cameras provide precise temperature measurement analytic information examples markets served include predictive preventive maintenance process control building inspection electrical inspection research development scientific analysis gas detection government systems commercial vision systems markets comprised applications focused providing enhanced vision capabilities utilizing infrared energy case many government system products additional sensor technologies visible cameras low light cameras lasers flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segmentscontinued government systems segment addresses mainly government markets military paramilitary homeland security program driven markets within united states internationally products contain multiple sensors deployed airborne maritime landbased manportable platforms applications include search rescue force protection surveillance drug interdiction maritime patrol targeting commercial vision systems segment addresses mainly commercial markets including oem camera modules perimeter security firefighting marine automotive airborne transportation markets characterized rapidly growing volumes driven declining costs uncooled infrared technology accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segmentscontinued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions 2009 company acquired outstanding stock salvador imaging inc omnitech partners inc certain assets infrared korea ltd approximately 571 million cash purchase accounting allocations recorded 2009 relation acquisitions included recording identifiable intangible assets approximately 171 million goodwill approximately 344 million contingent consideration approximately 19 million additionally december 2009 company acquired outstanding stock directed perception inc approximately 202 million cash allocation purchase price identifiable intangible assets goodwill subject final determination valuation assets acquired liabilities assumed excess purchase price approximately 185 million reported assets december 31 2009 2008 company acquired 999 percent outstanding stock cedip infrared systems ifara tecnologias sl respectively approximately 1069 million cash including costs directly associated acquisitions company recorded identifiable intangible assets approximately 201 million goodwill approximately 581 million relation acquisitions operating results acquisitions included company’s results operations since respective dates acquisition acquisitions significant either individually aggregate defined regulation sx securities exchange commission compared company’s overall financial position accordingly pro forma financial statements combined entities presented note 19 repurchase company stock february 2007 february 2009 company’s board directors authorized repurchase 120 million shares 200 million shares respectively company’s outstanding shares common stock open market february 2007 authorization expired february 2009 february 2009 authorization expires february 2011 authorizations company repurchased 3232000 shares total 732 million 1381000 shares total 407 million 177000 shares total 37 million years ended december 31 2009 2008 2007 respectively quarterly financial data unaudited flir systems inc thousands except per share data sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2013 2012 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2013 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2013 2012 results operations cash flows years threeyear period ended december 31 2013 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission coso report dated march 3 2014 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon march 3 2014 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years financial statements conform presentation year ended december 31 2013 reclassifications included certain severance expenses 38 million 07 million recognized years ended december 31 2012 2011 respectively originally reported cost goods sold reported operating expenses certain demonstration assets 23 million originally reported inventory december 31 2012 reported current assets addition december 31 2012 balance sheet adjusted purchase price accounting completed 2013 associated acquisitions lorex technology inc lorex traficon international nv traficon see note 7 goodwill note 8 intangible assets note 14 income taxes note 18 business acquisitions additional information reclassifications effect consolidated financial position shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings gain 265 million gain 147 million december 31 2013 2012 respectively transaction gains losses included income net loss 03 million net loss 30 million net gain 11 million years ended december 31 2013 2012 2011 respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined risk uncollectability minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2013 2012 285 million 59 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 427 million 358 million december 31 2013 2012 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed third quarter year frequently warranted impairment determine events changes business conditions indicate carrying value may recoverable see note 7 goodwill additional information intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required company recognize impairment charges intangible assets indefinite lives years ended december 31 2013 2012 2011 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges longlived assets years ended december 31 2013 2012 2011 advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2013 2012 2011 107 million 85 million 111 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated practicable carrying value investments 135 million december 31 2013 2012 investments included assets consolidated balance sheets flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards assumed conversion convertible notes following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2013 2012 2011 aggregated 549000 1198000 352000 shares excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued fair market value companys stock discounted dividends date grant except marketbased restricted stock units fair value determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2013 2012 2011 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2013 2012 2011 follows thousands december 31 2013 company approximately 427 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 18 years fair value stockbased awards granted years ended december 31 2013 2012 2011 estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2013 2012 2011 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2013 2012 2011 company granted approximately 1173000 985000 534000 timevested restricted stock units respectively addition year ended december 31 2011 company granted approximately 101000 performancebased restricted stock units fair value timevested performancebased restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested performancebased restricted stock units granted years ended december 31 2013 2012 2011 2398 2166 3435 respectively years ended december 31 2013 2012 company also granted approximately 7000 795000 marketbased restricted stock units respectively units may earned based upon companys total shareholder return compared total shareholder return sp 500 index three year period fair value marketbased restricted stock units granted years ended december 31 2013 2012 1587 1173 respectively total fair value restricted stock unit awards granted years ended december 31 2013 2012 table 282 million 307 million includes 01 million 93 million respectively grant date fair value associated marketbased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2013 2012 2011 46 million 36 million 138 million respectively related tax benefit realized exercise stock options 06 million 01 million 55 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” since effective date january 1 2006 additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill longlived assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments fair value adjustments cash flow hedges changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive income year ended december 31 2013 amounts reclassified accumulated comprehensive earnings pension plan items recorded selling general administrative expenses amounts reclassified cash flow hedge items recorded interest expense companys consolidated statement income year ended december 31 2013 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements february 2013 financial accounting standards board fasb issued accounting standards update 201302 reporting amounts reclassified accumulated comprehensive income asu 201302 establishes new requirements disclosing reclassifications items accumulated comprehensive income includes identification line items net earnings affected reclassifications asu 201302 effective annual interim periods fiscal years beginning december 15 2012 accordingly company adopted asu 201302 january 1 2013 march 2013 fasb issued accounting standards update 201305 parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity asu 201305 addresses accounting cumulative translation adjustment parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity asu 201305 effective annual interim periods beginning december 15 2014 accordingly company currently intends adopt asu 201305 january 1 2015 expect adoption asu 201305 material impact consolidated financial statements july 2013 fasb issued accounting standards update 201311 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists asu 201311 asu 201311 amends guidance related presentation unrecognized tax benefits allows reduction deferred tax asset net operating loss nol carryforward whenever nol tax credit carryforward would available reduce additional taxable income tax due tax position disallowed asu 201311 effective annual interim periods fiscal years beginning december 15 2013 early adoption permitted since asu 201311 relates presentation unrecognized tax benefits expect adoption asu 201311 january 2014 material effect financial position results operations cash flows note 2 fair value financial instruments company 285 million 59 million cash equivalents december 31 2013 2012 respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets accordance fasb asc topic 820 “fair value measurements disclosures” cash equivalents instruments convertible cash daily fair value company’s forward currency contracts interest rate swap contracts december 31 2013 2012 disclosed note 3 derivative financial instruments based level 2 inputs fair value company’s senior unsecured notes described note 11 longterm debt approximately 2595 million based upon level 2 inputs december 31 2013 fair value companys term loan also described note 11 approximates carrying value due variable market rate used calculate interest payments company significant financial assets liabilities measured fair value carrying amount accounts receivable accounts payable accrued payroll related liabilities approximates fair value instruments due shortterm nature note 3 derivative financial instruments foreign currency exchange rate risk company’s foreign businesses enter contracts customers vendors denominated currencies functional currencies protect functional currency equivalent cash flows associated certain contracts company enters foreign currency forward contracts company’s activities involving foreign currency forward contracts designed hedge changes functional currency equivalent cash flows due movements foreign exchange rates compared functional currency foreign currencies hedged primarily euro swedish kroner company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts gains losses foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount gains losses related derivative instruments recorded expense year ended december 31 2013 2012 2011 loss 46 million gain 51 million loss 23 million respectively general losses offset consolidated statement income reciprocal gains underlying assets liabilities originally gave rise exposure flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued notional amounts used measure volume foreign currency forward contracts represent exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2013 2012 thousands december 31 2013 company’s foreign currency forward contracts general maturities six months less carrying amount derivative instruments included consolidated balance sheets follows thousands interest rates companys outstanding longterm debt december 31 2013 consists fixed rate notes floating rate term loan company maintains floating rate revolver flexibility fund working capital needs uses cash interest expense companys floating rate debt typically calculated based fixed spread reference rate libor also known eurocurrency rate therefore fluctuations market interest rates cause interest expense increases decreases given amount floating rate debt company managing interest rate risk related floating rate debt entering interest rate swaps company receives floating rate payments makes fixed rate payments impact interest rate swaps fix floating rate basis calculation interest term loan levels indicated table effective interest rate paid equal fixed rates shown plus credit spread effect december 31 2013 effective interest rate term loan 249 percent december 31 2013 following interest rate swaps outstanding interest rate swaps cash flow hedges recorded asset liability companys consolidated balance sheet fair value fair value adjustments recorded adjustment accumulated comprehensive loss earnings except gains losses ineffectiveness interest rate swaps would recorded adjustment expense income net fair value carrying amount companys interest rate swaps 25 million 35 million 10 million recorded assets current liabilities respectively consolidated balance sheet december 31 2013 amount recognized comprehensive income loss year ended december 31 2013 gain 17 million net tax effects flir systems inc notes consolidated financial statementscontinued note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2013 2012 2011 thousands note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2013 2012 2011 359 million 353 million 438 million respectively flir systems inc notes consolidated financial statementscontinued note 7 goodwill year ended december 31 2013 company completed purchase price accounting associated 2012 acquisitions lorex traficon resulting increase goodwill 612 million retrospectively adjusted also 2013 company recorded goodwill connection acquisition marine remote sensing solutions ltd marss acquisition certain tangible assets intellectual property digitaloptics corporation east doc charlotte see note 18 business acquisitions additional information company reviews goodwill impairment annually third quarter frequently triggering event twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared net assets reporting unit third quarter 2013 company completed annual review goodwill determined impairment recorded goodwill necessary december 31 2013 triggering events indicators impairment would require updated impairment review carrying value goodwill reporting segment activity two year period ending december 31 2013 follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets intangible assets summarized follows thousands year ended december 31 2013 company acquired 04 million identifiable intangible assets part acquisition marss 25 million identifiable intangible assets part acquisition certain tangible assets intellectual property doc charlotte year ended december 31 2012 company acquired 151 million identifiable intangible assets part acquisition lorex 201 million part acquisition traficon intangible assets december 31 2012 retrospectively adjusted purchase price accounting completed 2013 associated lorex traficon acquisitions see note 18 business acquisitions aggregate amortization expense recorded 2013 2012 2011 247 million 244 million 332 million respectively intangible assets recorded december 31 2013 estimated future aggregate amortization expense years ending december 31 2014 2018 approximately thousands flir systems inc notes consolidated financial statementscontinued note 9 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 amendment also incorporated revised schedule fees interest rate spreads company right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 150 million time prior april 5 2018 credit agreement allows company certain designated subsidiaries borrow united states dollars euros swedish kronor pound sterling japanese yen canadian dollars australian dollars agreed upon currencies borrowing rates credit agreement determined company’s option time borrowing generally based either prime lending rate bank america na rate interest paid deposits relevant currency plus specified spread based established consolidated total leverage ratio pricing grid specified margins ranging 025 percent 225 percent based type loan total leverage ratio company including respective spreads onemonth libor interest rate 1669 percent prime lending rate 375 percent december 31 2013 credit agreement requires company pay commitment fee amount unused revolving credit rate based company’s total leverage ratio commitment fee rate ranges 025 percent 040 percent unused revolving commitments december 31 2013 commitment fee rate 030 percent credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2013 credit facilities available credit agreement unsecured december 31 2013 company revolving loans outstanding credit agreement 195 million letters credit outstanding reduces total available revolving credit agreement note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2013 2012 2011 thousands flir systems inc notes consolidated financial statementscontinued note 11 longterm debt longterm debt consists following thousands august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” net proceeds issuance notes approximately 2477 million deducting underwriting fees offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases company’s common stock april 5 2013 company borrowed 150 million term loan facility incorporated credit agreement principal payments 375 million made quarterly commenced june 30 2013 continue december 31 2018 final maturity payment including interest due april 5 2019 interest accrued onemonth libor rate plus scheduled spread paid monthly see note 3 derivative financial instruments interest rates additional information effective interest rate term loan december 31 2013 note 12 commitments company leases primary facilities various operating leases expire 2014 2023 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2013 2012 2011 amounted 183 million 136 million 101 million respectively future minimum obligations noncancelable leases net expected sublease income contractual obligations follows thousands flir systems inc notes consolidated financial statementscontinued note 13 contingencies company subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas raytheons complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer complaint september 2 2008 denied material allegations august 31 2009 court entered order granting flir parties motion summary judgment raytheons trade secret misappropriation claim based flir parties statute limitations defense raytheon abandoned claims except claims relating four patents “patent claims” august 11 2010 flir parties raytheon entered agreement principle resolve remaining patent claims resulted payment 3 million flir parties raytheon entitles flir parties certain license rights patents subject patent claims parties appealed certain rulings district court united states court appeals federal circuit august 1 2012 reversed judgment district court remanded case proceedings consistent appellate courts opinion company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable may 20 2011 company made cash settlement payment 390 million resolve pending claims action filed company settlement agreement company also received nonexclusive license certain infrared technology company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations continuing operations follows thousands provisions income taxes continuing operations follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued deferred tax assets liabilities composed following components thousands provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued companys foreign tax rate differential primarily result multiyear agreement effective august 1 2012 european jurisdiction well impact lower foreign statutory rates december 31 2013 company united states tax net operating loss carryforwards totaling approximately 398 million expire 2018 2031 addition company various state net operating loss carryforwards totaling approximately 751 million expire 2018 2033 federal state net operating losses primarily generated icx technologies prior acquisition company 2010 finally company various foreign net operating loss carryforwards totaling approximately 1015 million expire 2018 2033 tax benefits described accounted using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities extent management assesses realization assets likely valuation allowance required recorded believe net deferred tax assets 440 million reflected december 31 2013 consolidated balance sheet mostly realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 135 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income achieved united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company intends reinvest earnings operations outside united states indefinitely december 31 2013 cumulative amount earnings upon united states income taxes provided approximately 799 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2013 relate united states united kingdom various foreign jurisdictions december 31 2013 company approximately 295 million unrecognized tax benefits 295 million would affect company’s effective tax rate recognized next twelve months company expects minimal changes unrecognized tax benefits company classifies interest penalties related uncertain tax positions income tax expense december 31 2013 company 26 million accrued interest penalties 25 million net federal state benefits related uncertain tax positions recorded current noncurrent accrued income taxes consolidated balance sheet flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted three plans flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 1993 plan 2002 plan previously granted awards 1993 plan 2002 plan remain outstanding company granted timebased options performancebased options timebased restricted stock unit awards performancebased restricted stock unit awards marketbased restricted stock unit awards vesting performancebased options restricted stock unit awards contingent upon meeting certain diluted earnings per share growth targets primarily three independent tranches three year period vesting tranche dependent tranches options generally expire ten years grant date timebased options restricted stock unit awards generally vest three year period marketbased restricted stock unit awards may earned based upon companys total shareholder return compared total shareholder return sp 500 index three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options issued replacement options connection acquisition indigo systems corporation 2004 stock options restricted stock unit awards issued replacement awards connection acquisition icx 2010 information respect stock option activity 2013 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation continued information respect restricted stock unit activity 2013 follows december 31 2013 12080000 shares common stock reserved future issuance 2011 plan employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date company reserved 5000000 shares common stock issuance espp 223000 shares issued 2013 3630000 shares remain available espp december 31 2013 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 49 million 58 million 75 million years ended december 31 2013 2012 2011 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded minimum pension liability accumulated comprehensive earnings estimated benefit paid 2014 reported current liabilities measurement date used pension plans december 31 amounts recognized comprehensive earnings years ended december 31 2013 2012 2011 net tax follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued components accumulated comprehensive earnings related company’s pension plans december 31 2013 2012 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 34 million 81 million december 31 2013 2012 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings year ending december 31 2014 follows thousands note 17 operating segments related information operating segments company two business divisions commercial systems government systems commercial systems division commercial systems division focused design manufacture marketing instrument sensor electronics solutions facilitate improved situational awareness environmental analytics commercial customers division comprised two operating segments thermal vision measurement raymarine thermal vision measurement segment provides advanced thermal imaging solutions customer need see night adverse conditions image scene gathering valuable temperature information raymarine segment provides electronics maritime market leading global provider fully integrated “stem stern” networked electronic systems boats sizes government systems division government systems division designs manufactures markets advanced imaging detection systems government markets high performance required division comprised three operating segments surveillance detection integrated systems surveillance segment provides enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare detection segment produces sensor instruments detect identify chemical biological radiological nuclear explosives “cbrne” threats military force protection homeland security commercial applications integrated systems segment develops platform solutions combating sophisticated security threats incorporates multiple sensor systems order deliver actionable intelligence wide area surveillance intrusion detection facility security flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions december 2012 company acquired lorex provider consumer oriented professional grade video surveillance systems approximately 612 million cash december 31 2012 company initially reported net tangible assets 191 million respective balance sheet accounts excess purchase price 421 million assets company since performed purchase price allocation resulted allocation 151 million identifiable intangible assets 311 million goodwill conjunction lorex acquisition recorded company’s thermal vision measurement segment goodwill consists largely ability lorex provide company domain knowledge distribution channels adjacent security markets purchase price adjustments applied retrospectively december 31 2012 balance sheet allocation purchase price follows thousands none goodwill recognized deductible income tax purposes identifiable intangible assets estimated useful life follows thousands also december 2012 company acquired traficon provider video image processing software hardware traffic analysis applications approximately 463 million cash december 31 2012 company initially reported net tangible assets 51 million respective balance sheet accounts excess purchase price 412 million assets april 2013 company made additional payment 21 million cash adjustment purchase price purchase traficon company performed purchase price allocation resulted allocation 201 million identifiable intangible assets 301 million goodwill conjunction traficon acquisition recorded company’s thermal vision measurement segment goodwill consists largely ability traficon expand companys presence global traffic monitoring market provision domain expertise distribution channels purchase price adjustments applied retrospectively december 31 2012 balance sheet flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions continued allocation purchase price follows thousands none goodwill recognized deductible income tax purposes identifiable intangible assets estimated useful life follows thousands april 2013 company acquired marss developer software sensor control systems use maritime security applications including water port security shipbased man overboard detection approximately 32 million cash company recorded 04 million identifiable intangible assets 25 million goodwill companys integrated systems segment august 2013 company acquired certain tangible assets intellectual property related design manufacturing waferlevel optics doc charlotte approximately 149 million cash company performed purchase price allocation resulted allocation 25 million identifiable intangible assets 24 million goodwill recorded company’s thermal vision measurement segment flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions continued allocation purchase price doc charlotte follows thousands none goodwill recognized deductible income tax purposes identifiable intangible assets estimated useful life follows thousands operating results marss doc charlotte included company’s results operations since respective dates acquisition operating results lorex traficon included companys 2012 results operations results significant acquisitions significant either individually aggregate defined regulation sx securities exchange commission compared company’s overall financial position note 19 discontinued operations 2010 connection acquisition icx technologies inc icx company began pursue sale certain business units icx results operations business units reported discontinued operations year second quarter 2012 company sold remaining two business units reported discontinued operations operating losses operations including insignificant associated losses recognized subsequent disposal net losses sales units net tax reflected consolidated statements income year ended december 31 2012 note 20 shareholders’ equity february 2011 company’s board directors authorized repurchase 200 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expired february 2013 february 2013 company’s board directors authorized repurchase 250 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expire february 6 2015 authorizations company repurchased 5988000 shares total 1621 million 10466000 shares total 2142 million 6135000 shares total 1607 million years ended december 31 2013 2012 2011 respectively december 31 2013 19012000 shares remaining february 2013 authorization may repurchased february 9 2011 company’s board directors adopted dividend policy company intends pay quarterly cash dividends common stock year ended december 31 2013 company paid dividends quarterly rate 009 per share total 514 million year ended december 31 2012 company paid dividends quarterly rate 007 per share total 425 million year ended december 31 2011 company paid dividends quarterly rate 006 per share total 380 million flir systems inc notes consolidated financial statementscontinued note 21 restructuring costs years ended december 31 2013 2012 company recorded net pretax restructuring expenses totaling 275 million 20 million respectively 2013 company initiated realignment plan includes closing six nottoscale sites united states europe transfer operations companys larger facilities company also consolidating optics laser manufacturing businesses better realize benefits vertical integration areas 2012 company recorded restructuring expenses associated relocation one companys manufacturing facilities europe existing facility united states company recorded restructuring expenses segments follows thousands restructuring expenses recorded consolidated statements income follows thousands following table summarizes activity cost type thousands december 31 2012 company restructuring accruals 06 million related 2012 activities utilized year ended december 31 2013 note 22 subsequent events february 7 2014 company’s board directors declared quarterly dividend 010 per share common stock payable march 7 2014 shareholders record close business february 19 2014 total cash payment dividend approximately 141 million 1 certain expenses reclassified conform presentation quarterly data 2013 sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2014 2013 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2014 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2014 2013 results operations cash flows years threeyear period ended december 31 2014 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso report dated february 27 2015 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon february 27 2015 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years notes financial statements conform presentation year ended december 31 2014 reclassifications effect consolidated financial position shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive loss earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income expense net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive loss earnings loss 620 million gain 265 million december 31 2014 2013 respectively transaction gains losses included income expense net gain 02 million net loss 03 million net loss 30 million years ended december 31 2014 2013 2012 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognition continued company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined risk uncollectability minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2014 2013 298 million 285 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers inventories stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories continued inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 396 million 427 million december 31 2014 2013 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed third quarter year frequently warranted impairment determine events changes business conditions indicate carrying value may recoverable company recognize impairment charges goodwill years ended december 31 2014 2013 2012 see note 7 goodwill additional information intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required company recognize impairment charges intangible assets indefinite lives years ended december 31 2014 2013 2012 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges longlived assets years ended december 31 2014 2013 2012 advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2014 2013 2012 126 million 107 million 85 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated practicable carrying value investments 135 million december 31 2014 2013 investments included assets consolidated balance sheets flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2014 2013 2012 aggregated 171000 549000 1198000 shares excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued fair market value companys stock discounted expected dividends date grant except marketbased restricted stock units fair value determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2014 2013 2012 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2014 2013 2012 follows thousands december 31 2014 company approximately 360 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 18 years fair value stockbased awards granted years ended december 31 2014 2013 2012 estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2014 2013 2012 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2014 2013 2012 company granted approximately 685000 1173000 985000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2014 2013 2012 3280 2398 2166 respectively years ended december 31 2013 2012 company also granted approximately 7000 795000 marketbased restricted stock units respectively units may earned based upon companys total shareholder return compared total shareholder return sp 500 index three year period fair value marketbased restricted stock units granted years ended december 31 2013 2012 1587 1173 respectively marketbased restricted stock units granted 2014 total fair value restricted stock unit awards granted years ended december 31 2013 2012 table 282 million 307 million includes 01 million 93 million respectively grant date fair value associated marketbased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2014 2013 2012 442 million 46 million 36 million respectively related tax benefit realized exercise stock options 128 million 06 million 01 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments fair value adjustments cash flow hedges changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive loss income year ended december 31 2014 amounts reclassified accumulated comprehensive loss earnings pension plan items recorded selling general administrative expenses amounts reclassified cash flow hedge items recorded interest expense companys consolidated statement income year ended december 31 2014 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements march 2013 fasb issued accounting standards update 201305 parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity asu 201305 addresses accounting cumulative translation adjustment parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity asu 201305 effective annual interim periods beginning december 15 2014 accordingly company currently intends adopt asu 201305 january 1 2015 expect adoption asu 201305 material impact consolidated financial statements may 2014 fasb issued accounting standards update 201409 revenue contracts customers asu 201409 establishes new guidance companies recognize revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 also provides additional disclosure requirements asu 201409 effective annual period interim periods within annual period beginning december 15 2016 accordingly company currently intends adopt asu 201409 january 1 2017 currently evaluating impact adoption asu 201409 consolidated financial statements june 2014 fasb issued accounting standards update 201412 accounting sharebased payments terms award provide performance target could achieved requisite service period asu 201412 requires performance target affects vesting could achieved requisite service period treated performance condition asu 201412 effective annual interim periods within annual period beginning december 15 2015 accordingly company currently intends adopt asu 201412 january 1 2016 expect adoption asu 201412 material impact consolidated financial statements august 2014 fasb issued accounting standards update 201415 presentation financial statementsgoing concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu 201415 new guidance management required assess entity’s ability continue going concern provide related footnote disclosures certain circumstances asu 201415 effective annual interim periods beginning december 15 2016 accordingly company currently intends adopt asu 201415 january 1 2017 expect adoption asu 201415 impact consolidated financial statements note 2 fair value financial instruments factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements disclosures” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk level 3 significant inputs generally less observable objective sources including assumptions determining fair value factors methodology used valuing securities necessarily indication risk associated investing securities company 298 million 285 million cash equivalents december 31 2014 2013 respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair value company’s forward currency contracts interest rate swap contracts december 31 2014 2013 disclosed note 3 derivative financial instruments based level 2 inputs fair value company’s senior unsecured notes described note 11 longterm debt approximately 2594 million based upon level 2 inputs december 31 2014 fair value companys term loan also described note 11 approximates carrying value due variable market rate used calculate interest payments company significant financial assets liabilities measured fair value flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments foreign currency exchange rate risk company’s foreign businesses enter contracts customers vendors denominated currencies functional currencies protect functional currency equivalent cash flows associated certain contracts company enters foreign currency forward contracts company’s activities involving foreign currency forward contracts designed hedge changes functional currency equivalent cash flows due movements foreign exchange rates compared functional currency foreign currencies hedged primarily euro swedish kroner company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts changes fair value foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount gains losses related derivative instruments recorded expense year ended december 31 2014 2013 2012 loss 83 million loss 46 million gain 51 million respectively general gains losses offset consolidated statement income reciprocal gains losses underlying assets liabilities originally gave rise exposure notional amounts used measure volume foreign currency forward contracts represent companys total exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2014 2013 thousands december 31 2014 company’s foreign currency forward contracts general maturities six months less carrying amount foreign exchange contracts included consolidated balance sheets follows thousands interest rate swap contracts companys outstanding longterm debt december 31 2014 consists fixed rate notes floating rate term loan company maintains floating rate revolver flexibility fund working capital needs uses cash interest expense companys floating rate debt typically calculated based fixed spread reference rate libor also known eurocurrency rate therefore fluctuations market interest rates cause interest expense increases decreases given amount floating rate debt flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued interest rate swap contracts continued company managing interest rate risk related floating rate debt interest rate swaps company receives floating rate payments makes fixed rate payments impact interest rate swaps fix floating rate basis calculation interest term loan levels indicated table effective interest rate paid equal fixed rates shown plus credit spread effect december 31 2014 effective interest rate term loan 249 percent december 31 2014 following interest rate swaps outstanding interest rate swaps cash flow hedges recorded asset liability companys consolidated balance sheet fair value fair value adjustments recorded adjustment accumulated comprehensive loss earnings except gains losses ineffectiveness interest rate swaps would recorded adjustment expense income net fair value carrying amount companys interest rate swaps 13 million 21 million 08 million recorded assets current liabilities respectively consolidated balance sheet december 31 2014 amount recognized comprehensive loss income year ended december 31 2014 loss 07 million net tax effects note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2014 2013 2012 thousands note 5 inventories consist following thousands flir systems inc notes consolidated financial statementscontinued note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2014 2013 2012 346 million 359 million 353 million respectively property equipment net december 31 2014 includes land building valued approximately 28 million held sale note 7 goodwill year ended december 31 2013 company recorded 25 million goodwill connection acquisition marine remote sensing solutions ltd marss 24 million goodwill connection acquisition certain tangible assets intellectual property digitaloptics corporation east doc charlotte see note 18 business acquisitions additional information following summarizes goodwill activity year ended december 31 2013 thousands february 2014 company announced realignment business resulted formation six reportable operating segments effective january 1 2014 reorganization required company reassign reported goodwill january 1 2014 new reporting units based relative fair value respective business units time carrying value goodwill reporting segment activity year ending december 31 2014 follows thousands activity oem emerging markets segment reduction goodwill related companys august 2014 sale certain tangible assets intellectual property related design manufacturing nonthermal microoptics company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value assets exceeds fair value third quarter 2014 company completed annual review goodwill determined impairment recorded goodwill necessary december 31 2014 triggering events indicators impairment would require updated impairment review flir systems inc notes consolidated financial statementscontinued note 8 intangible assets intangible assets summarized follows thousands year ended december 31 2014 company purchased certain patents 58 million year ended december 31 2013 company acquired 04 million identifiable intangible assets part acquisition marss 25 million identifiable intangible assets part acquisition certain tangible assets intellectual property doc charlotte aggregate amortization expense recorded 2014 2013 2012 211 million 247 million 244 million respectively intangible assets recorded december 31 2014 estimated future aggregate amortization expense years ending december 31 2015 2019 approximately thousands flir systems inc notes consolidated financial statementscontinued note 9 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 amendment also incorporated revised schedule fees interest rate spreads company right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 150 million time prior april 5 2018 credit agreement allows company certain designated subsidiaries borrow united states dollars euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies borrowing rates credit agreement determined company’s option time borrowing generally based either prime lending rate bank america na rate interest paid deposits relevant currency plus specified spread based established consolidated total leverage ratio pricing grid specified margins ranging 025 percent 225 percent per annum based type loan total leverage ratio company including respective spreads onemonth libor interest rate 1669 percent per annum prime lending rate 375 percent per annum december 31 2014 credit agreement requires company pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio commitment fee rate ranges 025 percent 040 percent unused revolving commitments december 31 2014 commitment fee rate 030 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2014 credit facilities available credit agreement unsecured december 31 2014 company revolving loans outstanding credit agreement 440 million letters credit outstanding reduces total available revolving credit agreement note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2014 2013 2012 thousands flir systems inc notes consolidated financial statementscontinued note 11 longterm debt longterm debt consists following thousands august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” net proceeds issuance notes approximately 2477 million deducting underwriting fees offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases company’s common stock april 5 2013 company borrowed 150 million term loan facility incorporated credit agreement principal payments term loan 375 million made quarterly commenced june 30 2013 continue december 31 2018 final maturity payment respect term loan including interest due april 5 2019 interest accrued onemonth libor rate plus scheduled spread paid monthly see note 3 derivative financial instruments interest rates additional information effective interest rate term loan december 31 2014 note 12 commitments company leases primary facilities various operating leases expire 2015 2023 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2014 2013 2012 amounted 140 million 183 million 136 million respectively future minimum obligations noncancelable leases contractual obligations follows thousands flir systems inc notes consolidated financial statementscontinued note 13 contingencies company subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas raytheons complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer complaint september 2 2008 denied material allegations october 27 2010 flir parties raytheon entered settlement agreement resolved patent infringement claims patent claims pursuant flir parties paid 3 million raytheon entitles flir parties certain license rights patents subject patent claims october 28 2014 fourweek trial began respect raytheons remaining claims misappropriations trade secrets claims related 31 alleged trade secrets november 24 2014 jury united states district court eastern district texas rejected raytheon’s claims determined 27 alleged trade secrets fact trade secrets neither indigo prior acquisition company infringed trade secrets claimed awarded raytheon damages court yet rule company’s motion award attorney’s fees amount 28 million prevailing party texas theft liability act matter remains ongoing subject appeal company unable estimate amount range potential loss recovery might result final determination matter favorable unfavorable adverse ruling merits original claims flir parties remote could material company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations continuing operations follows thousands provisions income taxes continuing operations follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued net deferred tax assets liabilities classified balance sheet follows thousands tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued companys foreign tax rate differential primarily result multiyear agreement effective august 1 2012 european jurisdiction well impact lower foreign statutory rates december 31 2014 company united states tax net operating loss carryforwards totaling approximately 169 million expire 2018 2031 addition company various state net operating loss carryforwards totaling approximately 496 million expire 2015 2033 federal state net operating losses primarily generated icx technologies prior acquisition company 2010 finally company various foreign net operating loss carryforwards totaling approximately 745 million expire 2018 2033 tax benefits described accounted using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities extent management assesses realization assets likely valuation allowance required recorded december 31 2014 determined valuation allowance deferred tax assets 133 million required primarily related certain acquired net operating losses review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company intends reinvest earnings operations outside united states indefinitely december 31 2014 cumulative amount earnings upon united states income taxes provided approximately 886 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2014 relate united states united kingdom various foreign jurisdictions december 31 2014 company approximately 154 million unrecognized tax benefits would affect company’s effective tax rate recognized next twelve months company expects minimal changes unrecognized tax benefits company classifies interest penalties related uncertain tax positions income tax expense december 31 2014 company 12 million accrued interest penalties related uncertain tax positions recorded current noncurrent accrued income taxes consolidated balance sheet flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted three plans flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 1993 plan 2002 plan previously granted awards 1993 plan 2002 plan remain outstanding company granted timebased options performancebased options timebased restricted stock unit awards performancebased restricted stock unit awards marketbased restricted stock unit awards vesting performancebased options restricted stock unit awards contingent upon meeting certain diluted earnings per share growth targets primarily three independent tranches three year period vesting tranche dependent tranches options generally expire ten years grant date timebased options restricted stock unit awards generally vest three year period marketbased restricted stock unit awards may earned based upon companys total shareholder return compared total shareholder return sp 500 index three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options restricted stock unit awards issued replacement awards connection acquisition icx technologies 2010 information respect stock option activity 2014 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation continued stock incentive plans continued information respect restricted stock unit activity 2014 follows december 31 2014 14169000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date company reserved 5000000 shares common stock issuance espp 155000 shares issued average purchase price 2610 2014 3475000 shares remain available espp december 31 2014 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 69 million 49 million 58 million years ended december 31 2014 2013 2012 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded changes minimum pension liability accumulated comprehensive loss earnings estimated benefit paid 2015 reported current liabilities remaining obligations recorded pension longterm liabilities measurement date used pension plans december 31 amounts recognized comprehensive loss income years ended december 31 2014 2013 2012 net tax follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued components accumulated comprehensive loss earnings related company’s pension plans december 31 2014 2013 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued pension liability 36 million 34 million december 31 2014 2013 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings year ending december 31 2015 follows thousands note 17 operating segments related information operating segments february 2014 company announced realignment business resulted elimination former divisional structure formation six reporting segments effective january 1 2014 operating segments follows surveillance segment develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms services related systems instruments segment develops manufactures devices image measure assess thermal energy gases environmental elements industrial commercial scientific applications products include thermal imaging cameras gas detection cameras firefighting cameras process automation cameras environmental test measurement devices flir systems inc notes consolidated financial statementscontinued note 17 operating segments related information continued operating segments continued oem emerging markets oem emerging markets segment develops manufactures thermal imaging camera cores components utilized third parties create thermal types imaging systems segment also develops manufactures intelligent traffic systems handheld weaponmounted thermal imaging systems use consumers law enforcement maritime segment develops manufactures electronics imaging instruments recreational commercial maritime market segment provides full suite networked electronic systems including multifunction helm displays navigational instruments autopilots radars sonar systems thermal visible imaging systems communications equipment boats sizes security segment develops manufactures cameras video recording systems use commercial critical infrastructure home security applications products include thermal visiblespectrum cameras digital networked video recorders related software accessories enable efficient effective safeguarding assets hours day adverse weather conditions detection segment develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives threats military force protection homeland security commercial applications accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded cost eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segments continued operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segments continued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions april 2013 company acquired marss developer software sensor control systems use maritime security applications including water port security shipbased man overboard detection approximately 32 million cash company recorded 04 million identifiable intangible assets 25 million goodwill august 2013 company acquired certain tangible assets intellectual property related design manufacturing waferlevel optics doc charlotte approximately 149 million cash company performed purchase price allocation resulted allocation 25 million identifiable intangible assets 24 million goodwill allocation purchase price doc charlotte follows thousands none goodwill recognized deductible income tax purposes identifiable intangible assets estimated useful life follows thousands operating results marss doc charlotte included company’s results operations since respective dates acquisition acquisitions significant either individually aggregate defined regulation sx securities exchange commission compared company’s overall financial position note 19 shareholders’ equity february 2011 company’s board directors authorized repurchase 250 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expired february 2013 february 2013 company’s board directors authorized repurchase 250 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expired february 6 2015 authorizations company repurchased 4243000 shares total 1392 million 5988000 shares total 1621 million 10466000 shares total 2142 million years ended december 31 2014 2013 2012 respectively december 31 2014 14769000 shares remaining february 2013 authorization may repurchased year ended december 31 2014 company paid dividends quarterly rate 010 per share total 565 million year ended december 31 2013 company paid dividends quarterly rate 009 per share total 514 million year ended december 31 2012 company paid dividends quarterly rate 007 per share total 425 million flir systems inc notes consolidated financial statementscontinued note 20 restructuring costs years ended december 31 2014 2013 2012 company recorded net pretax restructuring expenses totaling 170 million 275 million 20 million respectively 2013 company initiated realignment plan includes closing six nottoscale sites united states europe transfer operations companys larger facilities company also consolidating optics laser manufacturing businesses better realize benefits vertical integration areas 2012 company recorded restructuring expenses associated relocation one companys manufacturing facilities europe existing facility united states company recorded restructuring expenses segments follows thousands restructuring expenses recorded consolidated statements income follows thousands following table summarizes activity cost type thousands note 21 subsequent events february 5 2015 company’s board directors declared quarterly dividend 011 per share common stock payable march 6 2015 shareholders record close business february 20 2015 total cash payment dividend approximately 140 million february 5 2015 companys board directors authorized repurchase 150 million shares companys outstanding shares common stock open market privately negotiated transactions authorization expire february 5 2017 1 2014 gross profit includes restructuring expenses 06 million reported first quarter 2 2014 net earnings includes restructuring expenses 84 million reported first quarter 35 million reported second quarter 41 million reported third quarter 10 million reported fourth quarter 3 2013 gross profit includes restructuring expenses 17 million reported fourth quarter 4 2013 net earnings includes restructuring expenses of275 million reported fourth quarter sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2016 2015 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2016 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2016 2015 results operations cash flows years threeyear period ended december 31 2016 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso report dated february 24 2017 expressed unqualified opinion effectiveness flir systems incs internal control financial reporting report effectiveness internal control financial reporting december 31 2016 contains explanatory paragraph states management’s assessment effectiveness internal control financial reporting audit internal control financial reporting flir systems inc excludes evaluation internal control financial reporting acquired innovative security designs llc armasight inc point grey research inc prox dynamics kpmg llp portland oregon february 24 2017 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years notes financial statements conform presentation year ended december 31 2016 reclassifications effect consolidated financial position net earnings shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected expense income net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss 1646 million 1237 million december 31 2016 2015 respectively transaction gains losses included expense income net loss 22 million net loss 25 million net gain 02 million years ended december 31 2016 2015 2014 respectively revenue recognition revenue recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated contractual terms fulfillment significant obligations flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognition continued company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available company uses estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined risk uncollectability minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2016 2015 83 million 290 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers inventories stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories continued inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 369 million 368 million december 31 2016 2015 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed third quarter year frequently warranted impairment determine events changes business conditions indicate carrying value may recoverable company recognize impairment charges goodwill years ended december 31 2016 2015 2014 see note 7 goodwill additional information intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required company recognize impairment charges intangible assets indefinite lives years ended december 31 2016 2015 2014 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges longlived assets years ended december 31 2016 2015 2014 advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2016 2015 2014 193 million 187 million 126 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated required carrying value investments 32 million 52 million december 31 2016 2015 respectively investments included assets consolidated balance sheets flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals disclosures adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance shares upon vesting restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2016 2015 2014 aggregated 233000 354000 171000 shares respectively excluded purposes diluted earnings per share since effect inclusion would antidilutive supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued based fair market value companys stock discounted expected dividends date grant restricted stock units containing performancebased vesting criteria valued date grant based fair value companys stock discounted expected dividends estimate illiquidity fair value marketbased restricted stock units determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation discount illiquidity estimated discount illiquidity relevant share based awards require plan participant hold shares specified period time award vests estimated using protective put method company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued following table sets forth stockbased compensation expense recognized consolidated statements income years ended december 31 2016 2015 2014 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2016 2015 2014 follows thousands december 31 2016 company approximately 410 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 190 years fair value stockbased awards granted years ended december 31 2016 2015 2014 estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2016 2015 2014 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2016 2015 2014 company granted approximately 865000 804000 685000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2016 2015 2014 2948 2630 3280 per share respectively years ended december 31 2016 2015 company granted approximately 64000 128000 marketbased restricted stock units may earned based upon companys total shareholder return compared total shareholder return three year period component company 60th percentile level sp 500 index shares vested marketbased restricted stock unit awards must held participant period one year vest date fair value marketbased restricted stock units granted year ended december 31 2016 2015 2289 2555 per share respectively years ended december 31 2016 company granted approximately 62000 performancebased restricted stock units earned based upon companys return invested capital three year period fair value performancebased restricted units granted year ended december 31 2016 2641 per share total fair value restricted stock unit awards granted year ended december 31 2016 table 286 million includes 15 million grant date fair value associated marketbased restricted stock units 16 million grant date fair value associated performancebased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2016 2015 2014 77 million 208 million 442 million respectively related tax benefits realized exercise stock options 13 million 39 million 128 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments fair value adjustments cash flow hedges changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued accumulated comprehensive earnings loss continued following table sets forth changes balances component accumulated comprehensive earnings loss year ended december 31 2016 amounts reclassified accumulated comprehensive earnings loss pension plan items recorded selling general administrative expenses amounts reclassified cash flow hedge items recorded interest expense companys consolidated statement income year ended december 31 2016 recent accounting pronouncements may 2014 financial accounting standards board fasb issued accounting standards update 201409 revenue contracts customers asu 201409 establishes new guidance companies recognize revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 also provides additional disclosure requirements fasb recently issued several amendments new standard including clarification accounting licenses intellectual property identifying performance obligations amendments include asu 201608 revenue contracts customers topic 606principal versus agent considerations issued march 2016 clarifies implementation guidance principal versus agent considerations asu 201409 asu 201610 revenue contracts customers topic 606identifying performance obligations licensing issued april 2016 amends guidance asu 201409 related identifying performance obligations accounting licenses intellectual property new standard permits adoption either using full retrospective approach periods presented period adoption ii modified retrospective approach cumulative effect initially applying new standard recognized date initial application providing certain additional disclosures asu 201409 effective annual periods interim periods beginning december 15 2016 july 9 2015 fasb approved deferral effective date periods beginning december 15 2017 accordingly company currently intends adopt asu 201409 january 1 2018 company currently plans adopt using modified retrospective approach however final decision regarding adoption method finalized time final determination depend number factors significance impact new standard financial results system readiness ability accumulate analyze information necessary assess impact prior period financial statements necessary company made progress toward completing evaluation potential changes adopting new standard financial reporting disclosures company evaluated impact standard revenue streams significant contracts company expects complete contract evaluation validate impact accounting disclosure changes business processes controls systems first half 2017 design changes business processes controls systems middle 2017 implement changes remainder 2017 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements continued july 2015 fasb issued accounting standards update 201511 inventory topic 330 simplifying measurement inventory asu 201511 amendments update require inventory measured lower cost net realizable value net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation asu 201511 effective fiscal years beginning december 15 2016 including interim periods within fiscal years amendments update applied prospectively earlier application permitted company currently intends adopt asu 201511 january 1 2017 expect adoption asu 201511 material impact consolidated financial statements february 2016 fasb issued accounting standards update 201602 “leases topic 842” “asu 201602” amendments update require identification arrangements accounted leases lessees general lease arrangements exceeding twelve month term arrangements must recognized assets liabilities balance sheet lessee asu 201602 requires use modified retrospective method require adjustment comparative periods presented consolidated financial statements asu 201609 effective interim annual reporting periods beginning december 15 2018 early adoption permitted company currently intends adopt asu 201602 january 1 2019 company assessing impact asu 201602 consolidated financial statements expects primary impact upon adoption recognition discounted basis minimum commitments noncancelable operating leases consolidated balance sheets resulting recording right use assets lease obligations companys current minimum commitments noncancelable operating leases disclosed note 12 march 2016 fasb issued accounting standards update 201609 “compensation stock compensation topic 718” “asu 201609” amendments update identify areas simplification involving several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities option recognize gross stock compensation expense actual forfeitures recognized occur well certain classifications statement cash flows asu 201609 effective interim annual reporting periods beginning december 15 2016 early adoption permitted company currently intends adopt asu 201609 january 1 2017 magnitude impact consolidated financial statements disclosures dependent upon company’s future grants stockbased compensation company’s future stock price relation fair value awards grant date exercise behavior company’s option holders august 2016 fasb issued accounting standards update 201615 “statement cash flows topic 230 classification certain cash receipts cash payments” “asu 201615” amendments update provide clarification regarding certain cash receipts cash payment presented classified statement cash flows asu 201615 addresses eight specific cash flow issues objective reducing existing diversity practice asu 201615 effective interim annual reporting periods beginning december 15 2017 including interim periods within fiscal years early adoption permitted company adopted asu 201615 third quarter 2016 early adoption asu 201615 material impact consolidated financial statements disclosures october 2016 fasb issued accounting standards update 201616 “intraentity transfers assets inventory” asu 201616 amendments update eliminate exception recognizing time transfer current deferred income taxes intraentity asset transfers inventory asu 201616 effective interim annual reporting periods beginning december 15 2017 applied modified retrospective transition basis early adoption permitted company currently intends adopt asu 201609 january 1 2018 currently evaluating potential impact adopting provisions asu 201616 january 2017 fasb issued accounting standards update 201701 business combinations topic 805 clarifying definition business asu 201701 amendments update clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses asu 201701 effective interim annual reporting periods beginning december 15 2017 company currently intends adopt asu 201701 january 1 2018 expect adoption asu 201701 material impact consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements continued january 2017 fasb issued accounting standards updated 201704 “intangibles goodwill topic 350 simplifying test goodwill impairment” “asu 201704” amendments update simplify subsequent measurement goodwill removing second step twostep impairment test amendment requires entity perform annual interim goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting units fair value however loss recognized exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendment applied prospective basis asu 201704 effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 company currently intends adopt asu 201704 january 1 2017 note 2 fair value financial instruments factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk observable market prices identical instruments traded less active markets level 3 significant inputs generally less observable objective sources including assumptions determining fair value factors methodology used valuing securities necessarily indication risk associated investing securities company 83 million 290 million cash equivalents december 31 2016 2015 respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair value company’s forward currency contracts interest rate swap contracts december 31 2016 2015 disclosed note 3 derivative financial instruments based level 2 inputs fair value company’s senior unsecured notes described note 11 longterm debt approximately 4263 million based upon level 2 inputs december 31 2016 fair value companys credit agreements borrowings also described note 11 approximates carrying value due variable market rate used calculate interest payments company significant financial assets liabilities measured fair value note 3 derivative financial instruments foreign currency exchange rate risk company enters foreign currency forward contracts formally designated hedges manage consolidated exchange rate risk associated remeasurement nonfunctional currency denominated monetary assets liabilities nonfunctional currency denominated monetary assets liabilities consist primarily cash receivables payables intercompany loans company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts changes fair value foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount gains losses related derivative instruments recorded expense income net year ended december 31 2016 2015 2014 loss 53 million 67 million 83 million respectively flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued foreign currency exchange rate risk continued general gains losses offset consolidated statements income reciprocal gains losses underlying assets liabilities originally gave rise exposure notional amounts used measure volume foreign currency forward contracts represent companys total exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2016 2015 thousands december 31 2016 company’s foreign currency forward contracts general maturities three months less carrying amount foreign exchange contracts included consolidated balance sheets follows thousands interest rate swap contracts companys outstanding debt december 31 2016 consists fixed rate notes floating rate unsecured credit facility company maintains floating rate revolver flexibility fund working capital needs uses cash interest expense companys floating rate debt typically calculated based fixed spread reference rate libor also known eurocurrency rate therefore fluctuations market interest rates cause interest expense increases decreases given amount floating rate debt company managing interest rate risk related floating rate debt interest rate swaps company receives floating rate payments makes fixed rate payments impact interest rate swaps fix floating rate basis calculation interest unsecured credit facility levels indicated table effective interest rate paid equal fixed rates shown plus credit spread effect december 31 2016 effective interest rate borrowings made companys revolving credit facility 237 percent december 31 2016 following interest rate swaps outstanding flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued interest rate swap contracts continued interest rate swaps designated effective cash flow hedges recorded asset liability companys consolidated balance sheets fair value fair value adjustments recorded adjustment accumulated comprehensive earnings loss except gains losses ineffectiveness interest rate swaps would recorded adjustment income expense net fair value carrying amount companys interest rate swaps 03 million recorded assets consolidated balance sheet december 31 2016 note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2016 2015 2014 thousands note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2016 2015 2014 378 million 325 million 346 million respectively flir systems inc notes consolidated financial statementscontinued note 7 goodwill carrying value goodwill activity two year period ending december 31 2016 follows thousands year ended december 31 2016 company recorded 2208 million goodwill connection purchase price allocation associated acquisitions armasight inc armasight point grey research inc point grey innovative security designs llc isd dvtel inc dvtel year ended december 31 2015 company recorded 580 million goodwill connection purchase price allocation associated dvtel purchase price allocation point grey preliminary see note 18 business acquisitions additional information company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value reporting unit exceeds fair value third quarter 2016 company completed annual review goodwill determined impairment recorded goodwill necessary december 31 2016 triggering events indicators impairment would require updated impairment review note 8 intangible assets intangible assets summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets continued year ended december 31 2016 company acquired 474 million identifiable intangible assets part acquisitions armasight point grey year ended december 31 2015 company acquired 274 million identifiable intangible assets part acquisition dvtel described note 18 business acquisitions aggregate amortization expense recorded 2016 2015 2014 184 million 164 million 211 million respectively intangible assets recorded december 31 2016 estimated future aggregate amortization expense years ending december 31 2017 2021 approximately thousands note 9 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rate spreads company right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 200 million may 31 2021 credit agreement allows company certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined based type borrowing interest associated borrowings based prime lending rate bank america na published eurocurrency rate ie libor borrowings applicable margin 0125 percent 2125 percent depending applicable base rate consolidated total leverage ratio including respective spreads ignoring effects hedging onemonth libor interest rate 2145 percent per annum prime lending rate 4125 percent per annum december 31 2016 credit agreement requires company pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio ranges 0150 percent 0300 percent unused revolving commitments december 31 2016 commitment fee rate 0175 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2016 credit facilities available credit agreement unsecured may 31 2016 company drew 105 million revolving credit facility repaid term loan facility full december 31 2016 company 975 million outstanding credit agreement 179 million letters credit outstanding reduces total available revolving credit agreement flir systems inc notes consolidated financial statementscontinued note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2016 2015 2014 thousands note 11 longterm debt longterm debt consists following thousands august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” 2011 notes repaid july 5 2016 company recorded 13 million loss extinguishment 2011 notes interest expense june 2016 company issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “2016 notes” net proceeds issuance 2016 notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest 2016 notes payable semiannually arrears december 15 june 15 proceeds 2016 notes used repay principal amount 2011 notes outstanding july 2016 used general corporate purposes including working capital expenditure needs business acquisitions repurchases company’s common stock credit agreement discussed note 9 credit agreement notes consolidated financial statements consisted 150 million term loan facility revolving credit facility may 31 2016 company repaid term loan drew 1050 million revolving credit facility interest amounts outstanding revolving credit facility accrues onemonth libor rate plus applicable margin amount outstanding paid monthly arrears see note 5 derivative financial instruments interest rate swap contracts notes consolidated financial statements additional information effective interest rate revolving credit facility december 31 2016 flir systems inc notes consolidated financial statementscontinued note 11 longterm debt continued april 5 2013 company borrowed 150 million term loan facility incorporated credit agreement discussed note 9 credit agreement notes consolidated financial statement may 31 2016 company repaid term loan drew 1050 million revolving credit facility interest amounts outstanding revolving credit facility accrues onemonth libor rate plus applicable scheduled spread amount outstanding paid monthly arrears see note 3 derivative financial instruments interest rate swap contracts notes consolidated financial statements additional information effective interest rate revolving credit facility december 31 2016 note 12 commitments company leases primary facilities various operating leases expire 2017 2022 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2016 2015 2014 amounted 90 million 122 million 140 million respectively future minimum obligations noncancelable leases contractual obligations follows thousands note 13 contingencies flir systems inc subsidiary flir commercial systems inc formerly known indigo systems corporation together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas raytheons complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer complaint september 2 2008 denied material allegations october 27 2010 flir parties raytheon entered settlement agreement resolved patent infringement claims patent claims pursuant flir parties paid 3 million raytheon entitles flir parties certain license rights patents subject patent claims october 28 2014 fourweek trial began respect raytheons remaining claims misappropriations trade secrets claims related 31 alleged trade secrets november 24 2014 jury united states district court eastern district texas rejected raytheon’s claims determined 27 alleged trade secrets fact trade secrets neither flir parties infringed trade secrets claimed awarded raytheon damages march 31 2016 united states district court eastern district texas issued final judgment denying raytheon’s claims awarding flir court costs denying raytheon’s flir’s renewed motions judgment matter law denying flir’s amended rule 54d motion attorneys’ fees costs texas theft liability act flir systems inc notes consolidated financial statementscontinued note 13 contingencies continued april 29 2016 raytheon filed notice appeal united states court appeals federal circuit denial united states district court eastern district texas raytheon’s renewed motion judgment matter law alternative motion new trial may 11 2016 flir parties filed notice appeal united states court appeals federal circuit order united states district court eastern district texas denying flir parties’ amended rule 54d motion attorneys’ fees costs texas theft liability act order denying flir parties’ renewed motion judgment matter law final judgment extent denied flir parties attorneys’ fees costs texas theft liability act matter remains ongoing subject appeal company unable estimate amount range potential loss recovery might result final determination matter favorable unfavorable adverse ruling merits original claims flir parties remote could material october 22 2014 company initially contacted united states department state office defense trade controls compliance “ddtc” pursuant international traffic arms regulation “itar” § 12712c regarding unauthorized export technical data defense services dual third country nationals least four facilities company april 27 2015 company submitted initial report ddtc regarding details issues raised october 22 2014 submission ddtc subsequently notified company considering administrative proceedings part 128 itar requested tolling agreement company executed june 16 2015 june 6 2016 company executed subsequent tolling agreement extending tolling period matters potentially included administrative proceeding additional 18 months december 2017 ddtc continues review company unable reasonably estimate time may take resolve matter amount range potential loss penalty government action may incurred connection matter however unfavorable outcome could result fines penalties loss modification exporting privileges could potentially material financial condition results operations cash flows company following period outcome becomes estimable known march 2016 company learned potential quality concerns respect many 312 level iii level iv skywatch surveillance towers sold flir companies acquired flir 2002 2014 quarter ended september 30 2016 company identified cause quality issues tested certain remedial solutions may required repair affected skywatch towers testing remedial solution ongoing company notified customers purchased affected skywatch towers potential concerns precautionary measure also temporarily suspended production level iii level iv skywatch towers pending completion review implementation necessary remedial measures still remains uncertainty related estimating costs associated potential remedy number units may require remedy company currently estimates range potential loss 25 million 15 million single amount within range better estimate amount within range company recorded liability 25 million december 31 2016 factors underlying estimated range loss may change time actual results may vary significantly estimate company also subject legal administrative proceedings investigations claims litigation arising ordinary course business specifically identified matters others specifically identified company makes provision liability respect matter probable liability incurred amount loss reasonably estimated matter company believes recorded adequate provisions probable estimable losses matters existence date hereof outcome matters currently determinable company expect ultimate resolution matter individually material adverse effect company’s financial position results operations cash flows costs resolve matters may aggregate material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands net deferred tax assets liabilities classified balance sheet follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences companys foreign tax rate differential 2015 2014 primarily result threeyear agreement belgium expired july 31 2015 well impact lower statutory rates foreign tax rate differential 2016 mainly due impact amortization lower statutory rates european union state aid recovery 2016 relates european commission’s decision regarding threeyear agreement belgium discussed detail december 31 2016 company united states tax net operating loss carryforwards totaling approximately 42 million expire 2019 2031 addition company various state net operating loss carryforwards totaling approximately 278 million expire 2017 2033 federal state net operating losses primarily generated icx technologies prior acquisition company 2010 finally company various foreign net operating loss carryforwards totaling approximately 743 million portion expire 2018 2033 portion indefinite carryforward period flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued tax benefits described accounted using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities extent management assesses realization assets likely valuation allowance required recorded december 31 2016 company determined valuation allowance deferred tax assets 29 million required primarily related certain acquired net operating losses review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company intends reinvest earnings operations outside united states indefinitely december 31 2016 cumulative amount earnings upon united states income taxes provided approximately 785 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2016 relate united states belgium united kingdom various foreign jurisdictions would affect company’s effective tax rate recognized january 11 2016 european commission announced decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid impacts one company’s international subsidiaries belgian government announced appealed decision filed action annulment general court european union july 2016 company filed separate appeal general court european union accordance fasb asc topic 740 “income taxes” company recorded discrete tax expense 396 million 2016 related matter january 10 2017 received tax assessments belgium government similar amount company classified current taxes payable consolidated balance sheet december 31 2016 company filed complaint belgian tax assessments result complaint appeal general court european union new information received belgian government future events may cause income tax provision associated decision entirely partially reversed company classifies interest penalties related unrecognized tax benefits income tax provision december 31 2016 company 26 million accrued interest penalties related unrecognized tax benefits recorded current noncurrent accrued income taxes consolidated balance sheet flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued company files united states federal state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted two plans flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 2002 plan previously granted awards 2002 plan remain outstanding company granted timebased options timebased restricted stock unit awards marketbased restricted stock unit awards performancebased restricted stock unit awards options generally expire ten years grant date timebased options restricted stock unit awards generally vest three year period marketbased restricted stock unit awards may earned based upon companys total shareholder return compared total shareholder return component company 60th percentile level sp 500 index three year period performancebased restricted stock unit awards may earned based upon companys return invested capital two year period shares vested performancebased restricted stock unit awards marketbased restricted stock unit awards must held participant period one year vest date shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options restricted stock unit awards issued replacement awards connection acquisition icx technologies 2010 information respect stock option activity 2016 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation continued stock incentive plans continued information respect restricted stock unit activity 2016 follows december 31 2016 11906000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date espp provides sixmonth offerings commencing may 1 november 1 year purchases april 30 october 31 year shares purchased espp must held employees period least 18 months date purchase company reserved 5000000 shares common stock issuance espp 174000 shares issued average purchase price 2461 2016 3136000 shares remained available espp december 31 2016 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 81 million 75 million 69 million years ended december 31 2016 2015 2014 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded changes minimum pension liability accumulated comprehensive earnings loss estimated benefit paid 2017 reported current liabilities remaining obligations recorded pension longterm liabilities measurement date used pension plans december 31 flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued amounts recognized comprehensive income loss years ended december 31 2016 2015 2014 net tax follows thousands components accumulated comprehensive loss related company’s pension plans december 31 2016 2015 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 26 million 28 million december 31 2016 2015 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2017 follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related information operating segments company six reportable operating segments follows surveillance segment develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms services related systems instruments segment develops manufactures devices image measure assess thermal energy gases environmental elements industrial commercial scientific applications products include thermal imaging cameras gas detection cameras firefighting cameras process automation cameras environmental test measurement devices security segment develops manufactures cameras video recording systems use commercial critical infrastructure home security applications products include thermal visiblespectrum cameras digital networked video recorders related software accessories enable efficient effective safeguarding assets hours day adverse weather conditions oem emerging markets oem emerging markets segment develops manufactures thermal visiblespectrum imaging camera cores components utilized third parties create thermal industrial types imaging systems segment also develops manufactures intelligent traffic monitoring signal control systems well thermal imaging solutions use consumers smartphone mobile devices markets maritime segment develops manufactures electronics imaging instruments recreational commercial maritime market segment provides full suite networked electronic systems including multifunction helm displays navigational instruments autopilots radars sonar systems thermal visible imaging systems communications equipment boats sizes detection segment develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives threats military force protection homeland security commercial applications accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded cost eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segments continued operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segments continued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions dvtel inc november 30 2015 company acquired 100 outstanding stock dvtel inc dvtel provider software hardware technologies advanced video surveillance approximately 975 million cash december 31 2015 company initially reported net tangible assets 121 million respective balance sheet accounts 274 million identified intangible assets 580 million goodwill recorded within companys security segment fourth quarter 2016 company finalized purchase price allocation resulting 13 million decrease tangible assets 12 million decrease net deferred taxes corresponding 25 million increase goodwill allocation purchase price dvetel follows thousands company made election section 338 internal revenue code 1986 amended resulted taxdeductible goodwill related acquisition dvtel company estimates taxdeductible goodwill intangibles resulting election approximately 248 million amortized united states tax purposes 15year period value taxdeductible goodwill intangibles differs amounts listed purchase price allocation impact elections made section 338 affects united states income taxes goodwill intangibles owned companys united states subsidiaries connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships inprocess research development developed technology represents completed software related internal external software platforms inprocess research development represents value assigned acquired research development projects acquisition date established technological feasibility alternative future use inprocess research development intangible assets capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project launch product make separate determination useful life inprocess research development intangible assets related amortization recorded expense estimated useful life specific projects average 10year useful life customer relationships estimated based projected economic benefits associated asset average 10year estimated useful life represents approximate point projection period majority asset’s cash flows expected realized based assumed attrition rates developed technology customer relationships inprocess research development valued using multiperiod excess earnings method flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions continued innovative security designs llc june 6 2016 company acquired assets innovative security designs llc isd developer embedded firmware advanced camera surveillance platforms approximately 18 million cash june 30 2016 company initially reported 16 million excess purchase price preliminary net tangible assets acquired assets company since performed purchase price allocation resulted allocation 16 million goodwill conjunction isd acquisition recorded company’s security segment armasight inc june 28 2016 company acquired 100 outstanding stock armasight inc armasight developer sporting military optics products approximately 435 million cash june 30 2016 company initially reported 360 million excess purchase price preliminary net tangible assets acquired recorded assets third quarter 2016 company performed preliminary purchase price allocation resulted allocation 76 million identifiable intangible assets 311 million goodwill recorded companys surveillance segment fourth quarter 2016 company finalized purchase price allocation resulting recording 09 million deferred tax asset 28 million deferred tax liability corresponding 19 million increase goodwill 330 million goodwill represents future economic benefits expected arise synergies combining operations ability armasight provide company domain knowledge distribution channels adjacent markets allocation purchase price armasight follows thousands connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived customer relationships trade names trademarks trade secrets customer relationships represents armasights ability consistently offer compelling products appeal consumer preferences critical factor impacting decisions retailers carry armasight products trade name represents value armasight name within outdoor tactical weapons sight industry trade secrets represents knowledge institutionalized within employees former shareholders armasight relationships key suppliers customer relationships valued using income approach lost income multiperiod excess earnings method trade name trade secrets valued using income approach relief royalty method flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions continued point grey research inc november 4 2016 company closed transaction acquire assets point grey research inc “point grey” global leader development advanced visible imaging cameras solutions used industrial automation systems medical diagnostic equipment people counting systems intelligent traffic systems military defense products advanced mapping systems approximately 2592 million cash subject customary postclosing adjustments company performed preliminary purchase price allocation resulted allocation 398 million identifiable intangible assets 1837 million goodwill recorded company’s oem emerging markets segment preliminary allocation purchase price point grey follows thousands allocation purchase price related acquisition preliminary based management’s judgments evaluating several factors including preliminary valuation assessments tangible intangible assets preliminary estimates fair value liabilities assumed primary areas preliminary purchase price allocation yet finalized relate valuation identifiable intangible assets property equipment certain tangible assets liabilities preliminary goodwill 1837 million represents future economic benefits expected arise synergies combining operations ability point grey provide company domain knowledge distribution channels adjacent markets connection preliminary allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets preliminary estimated fair values preliminary estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships backlog noncompetition agreements developed technology represents economic advantage certain technologies place lowers manufacturing operating costs drives higher margins customer relationships represents relationships point grey established oem people counting markets date acquisition backlog represents “presold” business date acquisition provides positive earning streams post acquisition exceed required provide return assets employed noncompetition agreements represent economic benefit agreements certain current former employees shareholders point grey restrict ability compete directly company developed technology valued using income approach relief royalty method customer relationships backlog valued using income approach multiperiod excess earnings method noncompetition agreements valued using income approach withandwithout method flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions continued prox dynamics november 30 2016 company acquired 100 outstanding stock prox dynamics “prox dynamics” leading developer manufacturer nanoclass uas military paramilitary intelligence surveillance reconnaissance applications approximately 1341 million cash subject customary postclose adjustments tangible assets acquired including accounts receivable inventories included consolidated balance sheet december 31 2016 recorded company’s surveillance segment allocation purchase price identifiable intangible assets goodwill subject final determination valuation assets acquired liabilities assumed accordingly excess purchase price approximately 1228 million recorded assets december 31 2016 acquisitions dvtel isd armasight point grey prox dynamics significant defined regulation sx securities exchange act 1934 significant compared companys overall results operations consequently pro forma financial information provided note 19 shareholders’ equity february 5 2013 company’s board directors authorized repurchase 250 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expired february 6 2015 february 5 2015 companys board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expired february 5 2017 february 8 2017 company’s board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expires february 8 2019 authorizations company repurchased 2132000 shares total 661 million 4169000 shares total 1232 million 4243000 shares total 1392 million years ended december 31 2016 2015 2014 respectively year ended december 31 2016 company paid dividends quarterly rate 012 per share total 659 million year ended december 31 2015 company paid dividends quarterly rate 011 per share total 614 million year ended december 31 2014 company paid dividends quarterly rate 010 per share total 565 million note 20 restructuring costs years ended december 31 2016 2015 2014 company recorded net pretax restructuring expenses totaling 14 million 14 million 170 million respectively 2013 company initiated realignment plan included closing six nottoscale sites united states europe transfer operations companys larger facilities company also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas company recorded restructuring expenses segments follows thousands year ended december 31 2016 company also incurred immaterial restructuring charges representing severance costs associated cost reduction initiatives executed second half year related realignment plan initiated 2013 flir systems inc notes consolidated financial statementscontinued note 20 restructuring costs continued restructuring expenses recorded consolidated statements income follows thousands following table summarizes activity cost type thousands note 21 subsequent events february 8 2017 companys board directors authorized repurchase 150 million shares companys outstanding shares common stock open market privately negotiated transactions authorization expire february 8 2019 february 9 2017 company’s board directors declared quarterly dividend 015 per share common stock payable march 10 2017 shareholders record close business february 24 2017 total cash payment dividend approximately 205 million 1 2016 net earnings includes restructuring expenses 02 million reported first quarter 01 million reported second quarter 09 million reported third quarter 02 million reported fourth quarter 2 net earnings first quarter 2016 includes discrete tax charge certain tax legislation belgium 396 million 3 2015 net earnings includes restructuring expenses 03 million reported first quarter 05 million reported second quarter 03 million reported third quarter 03 million reported fourth quarter sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm shareholders board directors flir systems inc opinion consolidated financial statements audited accompanying consolidated balance sheets flir systems inc subsidiaries company december 31 2017 2016 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2017 related notes collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows years threeyear period ended december 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 23 2018 expressed unqualified opinion effectiveness company’s internal control financial reporting basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion kpmg llp served company’s auditor since 2002 portland oregon february 23 2018 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years financial statements conform presentation year ended december 31 2017 reclassifications effect consolidated financial position net earnings shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income expense net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss 1130 million 1646 million december 31 2017 2016 respectively transaction gains losses included income expense net losses 02 million 22 million 25 million years ended december 31 2017 2016 2015 respectively revenue recognition revenue recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated contractual terms fulfillment significant obligations flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued revenue recognition continued company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available company uses estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined collectability reasonably assured company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents restricted cash company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2017 2016 1407 million 83 million respectively primarily investments money market funds overnight deposits restricted cash includes cash subject legal contractual restriction third party restricted withdrawal use including restrictions require funds used specified purpose restrictions limit purpose funds used company restricted cash balances december 31 2017 2016 respectively accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers inventories stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued inventories continued inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 376 million 369 million december 31 2017 2016 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed third quarter year frequently warranted impairment determine events changes business conditions indicate carrying value may recoverable company recognize impairment charges goodwill years ended december 31 2017 2016 2015 see note 7 goodwill additional information intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required company recognize impairment charges intangible assets indefinite lives years ended december 31 2017 2016 2015 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges longlived assets years ended december 31 2017 2016 2015 advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2017 2016 2015 192 million 193 million 187 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated required carrying value investments 31 million 32 million december 31 2017 2016 respectively investments included assets consolidated balance sheets flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals disclosures adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance shares upon vesting restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2017 2016 2015 aggregated 39000 233000 354000 shares respectively excluded purposes diluted earnings per share since effect inclusion would antidilutive supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued based fair market value companys stock discounted expected dividends date grant restricted stock units containing performancebased vesting criteria valued date grant based fair value companys stock discounted expected dividends estimate illiquidity fair value marketbased restricted stock units determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation discount illiquidity estimated discount illiquidity relevant share based awards require plan participant hold shares specified period time award vests estimated using protective put method company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation continued following table sets forth stockbased compensation expense recognized consolidated statements income years ended december 31 2017 2016 2015 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2017 2016 2015 follows thousands december 31 2017 company approximately 420 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 209 years fair value stockbased awards granted years ended december 31 2017 2016 2015 estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation continued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2017 2016 2015 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2017 2016 2015 company granted approximately 773000 865000 804000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2017 2016 2015 3620 2948 2630 per share respectively year ended december 31 2016 2015 company granted approximately 64000 128000 marketbased restricted stock units respectively units may earned based upon companys total shareholder return compared total shareholder return three year period component company 60th percentile level sp 500 index shares vested marketbased restricted stock unit awards must held participant period one year vest date fair value marketbased restricted stock units granted year ended december 31 2016 2015 2289 2555 per share respectively years ended december 31 2017 2016 company granted approximately 283000 62000 performancebased restricted stock units respectively units earned based upon companys return invested capital three year period fair value performancebased restricted units granted years ended december 31 2017 2016 3508 2641 per share respectively total fair value restricted stock unit awards granted year ended december 31 2017 table 379 million includes 99 million grant date fair value associated performancebased restricted stock units total fair value restricted stock unit awards granted year ended december 31 2016 table 286 million includes 15 million grant date fair value associated marketbased restricted stock units 16 million grant date fair value associated performancebased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2017 2016 2015 535 million 77 million 208 million respectively related tax benefits realized exercise stock options years ended december 31 2017 2016 2015 30 million 13 million 39 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments fair value adjustments interest rate swap contracts unrealized gains losses availableforsale securities changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive earnings loss year ended december 31 2017 amounts reclassified accumulated comprehensive earnings loss interest rate swap contracts recorded interest expense companys consolidated statement income year ended december 31 2017 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recent accounting pronouncements effective january 1 2017 company adopted financial accounting standards board fasb accounting standards update 201609 improvements employee sharebased payment accounting asu 201609 standard update simplifies several aspects accounting employee sharebased payment transactions including accounting income taxes forfeitures statutory withholding requirements well classification consolidated statements cash flows result adoption prospective basis company recognized 45 million excess tax benefits stockbased compensation discrete item income tax provision year ended december 31 2017 historically amount recorded additional paidin capital upon adoption company elected apply change retrospectively consolidated statement cash flows resulted reclassification excess tax benefits stockbased compensation 15 million 82 million cash flows financing activities cash flows operating activities year ended december 31 2016 2015 respectively additionally 60 million 94 million paid cash satisfy withholding requirements net settlement restricted stock unit shares vested stock options exercised reclassified cash flows operating activities cash flows financing activities conform presentation required new standard consolidated statement cash flows year ended december 31 2016 2015 respectively asu 201609 also requires excess tax benefits deficiencies excluded assumed future proceeds calculation diluted shares change resulted increase diluted weighted average shares outstanding 492000 shares year ended december 31 2017 company elected change policy accounting forfeitures continue estimate requisite forfeiture rate additional amendments accounting income taxes minimum statutory withholding requirements impact companys results operations may 2014 fasb issued accounting standards update 201409 revenue contracts customers asu 201409 topic 606 establishes new guidance companies recognize revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 also provides additional disclosure requirements subsequently fasb issued several amendments new standard clarify implementation asu 201409 effective interim annual reporting periods beginning december 15 2017 may applied retrospectively modified retrospective transition basis company currently intends adopt asu 201609 january 1 2018 using modified retrospective approach company substantially completed review accounting systems processes required adopting new standard including application modified retrospective method adoption additionally company completed assessment phase documentation new policies evaluation internal controls framework currently process gathering data new disclosure requirements company expect significant change control environment due adoption new standard upon adoption company expect material impact opening balance sheet january 1 2018 related modified retrospective effect although impact new standard greatly increase amount required disclosures company expects revenue recognition broad portfolio products services offerings remain largely unchanged however guidance expected change timing revenue recognition certain area including accounting complex highly customized systems integrations alternative use assets produced termination convenience clauses entitle company receive cost plus reasonable margin event early termination contracts represent minor subset companys total portfolio however arrangements may represent significant amount revenue given period contracts aspects new standard expected impact company described detail •integration engineering services highly customized products topic 606 requires revenue recognition company satisfies performance obligation transferring control promised good service customer companys performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date including fees representing reasonable profit revenue would recognized time performance obligation satisfied rather point time final delivery acceptance occurs though expected impact vast majority companys contracts customers overtime revenue recognition may required certain contracts would recognized point time current standards flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recent accounting pronouncements continued •contract acquisition costs topic 606 requires deferral amortization incremental costs incurred obtain contract primary contract acquisition cost company sales commissions majority companys sales commissions earned upon contract acquisition commissions currently expensed earned change required topic 606 may result creation asset opening balance sheet january 1 2018 impact expected material company limited agreements providing commissions earned upon contract acquisition also intends elect practical expedient omit recognition contract acquisition assets amortization period asset otherwise would recognized one year less •variable consideration companys contracts customers include notification acceptance provisions preclude revenue recognition requirement amounts fixed determinable current standards topic 606 requires company estimate account variable consideration using either probabilityweighted expected amount likely amount estimate transaction price recognize control transferred customer though applicable vast majority companys contracts revenue certain customer contracts may recognized earlier would current standards transaction prices estimated upon transfer control rather point price considered fixed determinable •allocation transaction price similar current standards topic 606 requires allocation arrangement consideration deliverables within transaction current gaap restricts allocation revenue contingent future deliverables current deliverables however topic 606 removes restriction though expected rare change could result company recognizing portion contract earlier performance period even payment contingent upon future deliverables company continue assess impact adoption completes processes internal controls necessary gather information required new disclosures beginning first quarter ending march 31 2018 discussed adoption new standard expected material impact opening balance sheet january 1 2018 however expectation based many variables subject change february 2016 fasb issued accounting standards update 201602 “leases topic 842” “asu 201602” amendments update require identification arrangements accounted leases lessees general lease arrangements exceeding twelve month term arrangements must recognized assets liabilities balance sheet lessee asu 201602 requires use modified retrospective method require adjustment comparative periods presented consolidated financial statements asu 201609 effective interim annual reporting periods beginning december 15 2018 early adoption permitted company currently intends adopt asu 201602 january 1 2019 company assessing impact asu 201602 consolidated financial statements expects primary impact upon adoption recognition discounted basis minimum commitments noncancelable operating leases consolidated balance sheets resulting recording right use assets lease obligations companys current minimum commitments noncancelable operating leases disclosed note 12 october 2016 fasb issued accounting standards update 201616 “intraentity transfers assets inventory” asu 201616 amendments update eliminate exception recognizing time transfer current deferred income taxes intraentity asset transfers inventory asu 201616 effective interim annual reporting periods beginning december 15 2017 applied modified retrospective transition basis company currently planning adopt asu 201616 january 1 2018 december 31 2017 company remaining deferred tax benefit 70 million recorded prepaid expenses current assets represents tax benefit deferred accordance current gaap upon adoption company recognize amount cumulativeeffect adjustment retained earnings flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recent accounting pronouncements continued november 2016 fasb issued accounting standards update 201618 statement cash flows topic 230 restricted cash asu 201618 update clarifies guidance classification presentation restricted cash statement cash flows amendment requires restricted cash included entitys cash cashequivalent balances statement cash flows also requires entity disclose information nature restrictions reconciliation statement financial position statement cash flows must disclosed statement financial position includes one line item cash equivalents restricted cash restricted cash equivalents asu 201618 applied retrospective basis effective interim annual reporting periods beginning december 15 2017 company currently intends adopt asu 201618 january 1 2018 expect adoption material impact consolidated financial statements january 2017 fasb issued accounting standards update 201701 business combinations topic 805 clarifying definition business asu 201701 amendments update clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses asu 201701 effective interim annual reporting periods beginning december 15 2017 company currently intends adopt asu 201701 january 1 2018 expect adoption material impact consolidated financial statements january 2017 fasb issued accounting standards updated 201704 “intangibles goodwill topic 350 simplifying test goodwill impairment” “asu 201704” amendments update simplify subsequent measurement goodwill removing second step twostep impairment test amendment requires entity perform annual interim goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting units fair value however loss recognized exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendment applied prospective basis asu 201704 effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 amendments asu 201704 applied prospective basis expected material impact companys consolidated financial statements note 2 fair value financial instruments factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk observable market prices identical instruments traded less active markets level 3 significant inputs generally less observable objective sources including assumptions determining fair value factors methodology used valuing securities necessarily indication risk associated investing securities company 1407 million 83 million cash equivalents december 31 2017 2016 respectively primarily investments money market funds overnight deposits company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair value company’s foreign currency contracts december 31 2017 2016 disclosed note 3 derivative financial instruments based level 2 inputs fair value company’s senior unsecured notes described note 11 longterm debt approximately 4275 million based upon level 2 inputs december 31 2017 company significant financial assets liabilities measured fair value flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments foreign currency exchange rate risk company enters foreign currency forward contracts formally designated hedges manage consolidated exchange rate risk associated remeasurement nonfunctional currency denominated monetary assets liabilities nonfunctional currency denominated monetary assets liabilities consist primarily cash receivables payables intercompany loans company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts changes fair value foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate general gains losses offset consolidated statements income reciprocal gains losses underlying assets liabilities originally gave rise exposure net amount gains losses related derivative instruments recorded income expense net year ended december 31 2017 2016 2015 loss 94 million 79 million gain 12 million respectively notional amounts used measure volume foreign currency forward contracts represent companys total exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2017 2016 thousands december 31 2017 company’s foreign currency forward contracts general maturities three months less carrying amount foreign exchange contracts included consolidated balance sheets follows thousands interest rate swap contracts may 31 2016 company drew 105 million revolving credit facility described note 9 credit agreement repaid term loan originally issued credit agreement dated april 5 2013 interest accrued paid monthly based onemonth libor rate manage interest rate risk arising variability monthly interest expense attributable original term loan amounts drawn revolver company entered two amortizing interest rate swaps aggregate notional amount 105 million interest rate swaps designated effective cash flow hedges flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued interest rate swap contracts continued year ended december 31 2017 company repaid amounts outstanding revolving credit facility concurrently company exited interest rate swaps combined notional amount time 863 million discontinued cash flow hedge company reclassified gain 05 million accumulated comprehensive income interest expense probable forecasted variable monthly liborbased interest rate payments would longer occur note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2017 2016 2015 thousands note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2017 2016 2015 423 million 378 million 325 million respectively flir systems inc notes consolidated financial statementscontinued note 7 goodwill carrying value goodwill activity two year period ending december 31 2017 follows thousands year ended december 31 2017 company recorded 964 million goodwill primarily connection purchase price allocation associated prox dynamics prox dynamics company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value reporting unit exceeds fair value third quarter 2017 company completed annual review goodwill determined impairment recorded goodwill necessary fourth quarter 2017 company allocated goodwill totaling approximately 131 million assets held sale related planned divestiture consumer small mediumsized smb portion security business see note 18 business acquisitions divestitures discussion result reallocation goodwill disposal group company assessed whether potential triggers indicators impairment retained portion security segment company concluded significant changes reporting unit assessment would result significant change future expected cash flows generated retained asset groups december 31 2017 company concluded goodwill impaired note 8 intangible assets intangible assets summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets continued year ended december 31 2017 company recorded 314 million identified intangibles assets connection purchase price allocation associated prox dynamics reclassed 84 million assets held sale net consolidated balance sheets related companys planned divestiture consumer smb portion security business year ended december 31 2016 company acquired 474 million identifiable intangible assets part acquisitions armasight point grey year ended december 31 2015 company acquired 274 million identifiable intangible assets part acquisition dvtel refer note 18 business acquisitions divestitures discussion aggregate amortization expense recorded 2017 2016 2015 275 million 184 million 164 million respectively intangible assets recorded december 31 2017 estimated future aggregate amortization expense years ending december 31 2018 2022 approximately thousands note 9 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provided 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rate spreads company right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 200 million may 31 2021 credit agreement allows company certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined based type borrowing interest associated borrowings based prime lending rate bank america na published eurocurrency rate ie libor borrowings applicable margin 0125 percent 2125 percent depending applicable base rate consolidated total leverage ratio including respective spreads onemonth libor interest rate 2944 percent per annum prime lending rate 4875 percent per annum december 31 2017 credit agreement requires company pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio ranges 0150 percent 0300 percent unused revolving commitments december 31 2017 commitment fee rate 0175 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2017 credit facilities available credit agreement unsecured may 31 2016 company drew 105 million revolving credit facility repaid term loan originally issued credit agreement dated april 5 2013 year ended december 31 2017 company repaid amounts outstanding revolving credit facility december 31 2017 company 184 million letters credit outstanding reduces total available revolving credit agreement flir systems inc notes consolidated financial statementscontinued note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2017 2016 2015 thousands note 11 longterm debt longterm debt consists following thousands august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” 2011 notes repaid july 5 2016 company recorded 13 million loss extinguishment 2011 notes interest expense june 2016 company issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “2016 notes” net proceeds issuance 2016 notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest 2016 notes payable semiannually arrears december 15 june 15 proceeds 2016 notes used repay principal amount 2011 notes outstanding july 2016 used general corporate purposes including working capital expenditure needs business acquisitions repurchases company’s common stock april 5 2013 company borrowed 150 million term loan facility incorporated credit agreement discussed note 9 credit agreement notes consolidated financial statements may 31 2016 company repaid term loan drew 1050 million revolving credit facility interest amounts outstanding revolving credit facility accrued onemonth libor rate plus applicable margin amount outstanding paid monthly arrears year ended december 31 2017 company repaid amounts outstanding revolving credit facility flir systems inc notes consolidated financial statementscontinued note 12 commitments company leases primary facilities various operating leases expire 2018 2027 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2017 2016 2015 amounted 139 million 90 million 122 million respectively future minimum obligations noncancelable leases contractual obligations follows thousands note 13 contingencies raytheon litigation flir systems inc subsidiary flir commercial systems inc formerly known indigo systems corporation together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas raytheons complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer complaint september 2 2008 denied material allegations october 27 2010 flir parties raytheon entered settlement agreement resolved patent infringement claims patent claims pursuant flir parties paid 3 million raytheon entitles flir parties certain license rights patents subject patent claims october 28 2014 fourweek trial began respect raytheons remaining claims misappropriations trade secrets claims related 31 alleged trade secrets november 24 2014 jury united states district court eastern district texas rejected raytheon’s claims determined 27 alleged trade secrets fact trade secrets neither flir parties infringed trade secrets claimed awarded raytheon damages march 31 2016 united states district court eastern district texas issued final judgment denying raytheon’s claims awarding flir court costs denying raytheon’s flir’s renewed motions judgment matter law denying flir’s amended rule 54d motion attorneys’ fees costs texas theft liability act april 29 2016 raytheon filed notice appeal united states court appeals federal circuit denial united states district court eastern district texas raytheon’s renewed motion judgment matter law alternative motion new trial may 11 2016 flir parties filed notice appeal united states court appeals federal circuit order united states district court eastern district texas denying flir parties’ amended rule 54d motion attorneys’ fees costs texas theft liability act order denying flir parties’ renewed motion judgment matter law final judgment extent denied flir parties attorneys’ fees costs texas theft liability act united states court appeals federal circuit heard matter january 12 2018 decision expected later year matter remains ongoing subject appeal company unable estimate amount range potential loss recovery might result final determination matter favorable unfavorable adverse ruling merits original claims flir parties remote could material flir systems inc notes consolidated financial statementscontinued note 13 contingencies continued matters involving united states department state department commerce october 22 2014 company initially contacted united states department state office defense trade controls compliance “ddtc” pursuant international traffic arms regulation “itar” § 12712c regarding unauthorized export technical data defense services dual third country nationals least four facilities company april 27 2015 company submitted initial report ddtc regarding details issues raised october 22 2014 submission ddtc subsequently notified company considering administrative proceedings part 128 itar requested tolling agreement company executed june 16 2015 referenced certain company disclosures addition submissions made conjunction october 24 2014 initial notification june 6 2016 company executed subsequent tolling agreement extending tolling period matters potentially included administrative proceeding additional 18 months request ddtc december 1 2017 extended tolling agreement additional six months may 9 2018 ddtc continues review company’s activities company continues engage actively united states government matters may 2017 company submitted initial notification ddtc regarding potential violations related certain export classifications obtained commodity jurisdiction process final voluntary disclosure august 2017 ddtc acknowledged notification request ddtc company executed tolling agreement matter suspending statute limitations july 2018 june 2017 united states department commerce bureau industry security informed company additional export licensing requirements restrict company’s ability sell 9hz thermal products without license customers china identified list maintained united states department commerce action precipitated concerns potential diversion companys products prohibited end users countries subject economic sanctions implemented united states united states department commerce bureau industry security subsequently favorably modified restrictions reduce applicability restrictions sales flirs tau camera cores opposed finished products containing tau camera cores customers china identified list maintained united states department commerce persons country ear country group a5 supplement 1 part 740 ear company found violated applicable rules regulations respect customers limitations end use company’s products company could subject substantial fines penalties suspension existing licenses authorizations andor loss suspension export privileges company unable reasonably estimate time may take resolve matters amount range potential loss penalty government action may incurred connection matters however unfavorable outcome could result substantial fines penalties loss suspension export privileges particular authorizations could material company’s financial position results operations cash flows following period outcome becomes estimable known skywatch product quality matters march 2016 company learned potential quality concerns respect many 313 level iii level iv skywatch surveillance towers sold flir companies acquired flir 2002 2014 company notified customers purchased affected skywatch towers potential concerns precautionary measure also temporarily suspended production level iii level iv skywatch towers pending completion review implementation necessary remedial measures quarter ended june 30 2017 company identified cause quality issues began testing certain remedial solutions repair affected skywatch towers testing remedial solution certain product variations affected also completed quarter ended june 30 2017 subsequent aforementioned identification testing customers purchased product configurations remedial solution identified tested notified options request modifications fielded units still remains uncertainty related estimating costs associated potential remedy number units may require remedy company currently estimates range potential loss 69 million 146 million single amount within range better estimate amount within range company recorded liability 69 million december 31 2017 factors underlying estimated range loss may change time actual results may vary significantly estimate flir systems inc notes consolidated financial statementscontinued note 13 contingencies continued matters company also subject legal administrative proceedings investigations claims litigation arising ordinary course business specifically identified matters others specifically identified company records liability respect matter management believes probable liability incurred company reasonably estimate amount loss company believes recorded adequate provisions probable estimable losses matters existence date hereof company reviews provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular matter outcome matters currently determinable company expect ultimate resolution matter individually material adverse effect company’s financial position results operations cash flows costs resolve matters may aggregate material adverse effect company’s financial position results operations cash flows note 14 income taxes new tax legislation commonly referred tax cuts jobs act “tax act” enacted december 22 2017 tax act made broad complex changes united states tax code including limited reducing united states federal corporate tax rate requiring onetime transition tax undistributed earnings foreign subsidiaries fasb accounting standards codification 740 accounting income taxes requires companies recognize effect tax law changes period enactment even though effective date provisions tax years beginning december 31 2017 case certain provisions january 1 2018 given significance legislation sec staff issued staff accounting bulletin 118 allows registrants record provisional amounts one year “measurement period” similar used accounting business combinations however measurement period deemed ended earlier registrant obtained prepared analyzed information necessary finalize accounting measurement period impacts law expected recorded time reasonable estimate portion effects made provisional amounts recognized adjusted information becomes available prepared analyzed connection companys initial analysis impact tax act company recorded discrete net tax expense 944 million period ended december 31 2017 amount consists net expense 665 million transition tax net expense 128 million remeasurement companys net deferred tax assets using reduced united states tax rate addition also recorded discrete net tax expense 151 million state income foreign taxes estimated due upon distribution approximately 10 billion previously undistributed foreign earnings longer permanently reinvested december 31 2017 items company able make reasonable estimates impact tax act recorded provisional amounts estimates may impacted need analysis future clarification guidance regarding available tax accounting methods elections earnings profits computations foreign tax credit calculations state tax conformity federal tax changes significant provisions yet effective may impact income taxes future years include exemption us tax dividends future foreign earnings limitation current deductibility net interest expense excess 30 percent adjusted taxable income limitation net operating losses generated fiscal year 2018 80 percent taxable income incremental tax base erosion antiabuse tax beat excessive amounts paid foreign related parties minimum tax certain foreign earnings excess 10 percent foreign subsidiaries tangible assets ie global intangible lowtaxed income gilti company still evaluating whether make policy election treat gilti tax period expense provide us deferred taxes foreign temporary differences expected generate gilti income reverse future years flir systems inc notes consolidated financial statementscontinued note 14 income taxes continued pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse net deferred tax assets liabilities classified balance sheet follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxes continued tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences companys effective tax rate 2017 higher united states federal tax rate 35 percent mainly due companys estimate impact tax act unrecognized tax benefits intercompany pricing increased various jurisdictions 2017 partially offset excess tax benefits stock compensation mix lower foreign tax rates foreign tax rate differential 2016 mainly due impact amortization lower statutory rates european union state aid recovery 2016 relates european commission’s decision regarding threeyear agreement belgium discussed companys foreign tax rate differential 2015 primarily result threeyear agreement belgium expired july 31 2015 well impact lower statutory rates flir systems inc notes consolidated financial statementscontinued note 14 income taxes continued december 31 2017 company united states tax net operating loss carryforwards totaling approximately 39 million expire 2019 2031 subject annual limitation section 382 internal revenue code addition company various state net operating loss carryforwards totaling approximately 09 million expire 2023 2036 finally company various foreign net operating loss carryforwards totaling approximately 1111 million portion expire 2018 2036 portion indefinite carryforward period tax benefits described accounted using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities extent management assesses realization assets likely valuation allowance required recorded december 31 2017 company determined valuation allowance deferred tax assets 34 million required primarily related certain foreign deductions carried forward acquired net operating losses review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2017 relate united states belgium united kingdom various foreign jurisdictions would affect company’s effective tax rate recognized january 11 2016 european commission announced decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid impacts one company’s international subsidiaries belgian government announced appealed decision filed action annulment general court european union july 2016 company filed separate appeal general court european union accordance fasb asc topic 740 “income taxes” company recorded discrete tax expense 396 million 2016 related matter january 10 2017 received tax assessments belgium government similar amount company classified current taxes payable consolidated balance sheet december 31 2017 company filed complaint belgian tax assessments result complaint appeal general court european union new information received belgian government future events may cause income tax provision associated decision entirely partially reversed company classifies interest penalties related unrecognized tax benefits income tax provision december 31 2017 company 70 million accrued interest penalties related unrecognized tax benefits recorded current noncurrent accrued income taxes consolidated balance sheet flir systems inc notes consolidated financial statementscontinued note 14 income taxes continued company files united states federal state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted two plans flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 2002 plan previously granted awards 2002 plan remain outstanding company granted timebased options timebased restricted stock unit awards marketbased restricted stock unit awards performancebased restricted stock unit awards options generally expire ten years grant date timebased options restricted stock unit awards generally vest three year period marketbased restricted stock unit awards may earned based upon companys total shareholder return compared total shareholder return component company 60th percentile level sp 500 index three year period performancebased restricted stock unit awards granted year ended december 31 2016 may earned based upon companys return invested capital three year period performancebased restricted stock unit awards granted year ended december 31 2017 may earned based upon companys operating margin performance three year period certain shares vested performancebased restricted stock unit awards marketbased restricted stock unit awards must held participant period one year vest date shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options issued replacement awards connection acquisition icx technologies 2010 information respect stock option activity 2017 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation continued information respect restricted stock unit activity 2017 follows december 31 2017 9222000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date espp provides sixmonth offerings commencing may 1 november 1 year purchases april 30 october 31 year shares purchased espp must held employees period least 18 months date purchase company reserved 5000000 shares common stock issuance espp 158000 shares issued average purchase price 2749 2017 2978000 shares remained available espp december 31 2017 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 89 million 81 million 75 million years ended december 31 2017 2016 2015 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company previously provided supplemental executive retirement plan “serp” certain officers company based united states december 31 2017 last remaining serp participant retired consequently year ended december 31 2017 company recorded actuarial gain approximately 17 million primarily associated change projected benefit obligation associated adjusted date expected retirement related actuarial compensation estimates final serp participant company recorded changes minimum pension liability accumulated comprehensive earnings loss estimated benefit paid 2018 reported current liabilities remaining obligations recorded pension longterm liabilities measurement date used pension plans december 31 flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued amounts recognized comprehensive income loss years ended december 31 2017 2016 2015 net tax follows thousands components accumulated comprehensive loss related company’s pension plans december 31 2017 2016 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued weighted average assumptions used follows result change serps projected benefit payouts estimated duration company changed discount rate determined december 31 2017 discount rate determined using yield curve applying individual spot rates appropriate maturities future expected benefit payouts year better match plans duration discounted back measurement date determine appropriate single level equivalent discount rate prior years discount rates used based upon publicly listed bond indices durations estimated consistent respective projected benefit obligations change material impact financial statements active participants left plan december 31 2017 rate increase compensation levels included december 31 2017 projected benefit obligation defined benefit pension plan outside united states discount rate determined reference market yields end reporting period high quality corporate bonds similar maturities matching duration projected benefit obligation pension liability 08 million 26 million december 31 2017 2016 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2018 follows thousands note 17 operating segments related information operating segments company six reportable operating segments follows surveillance segment develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms services related systems instruments segment develops manufactures devices image measure assess thermal energy gases environmental elements industrial commercial scientific applications products include thermal imaging cameras gas detection cameras firefighting cameras process automation cameras environmental test measurement devices security segment develops manufactures cameras video recording systems use commercial critical infrastructure home security applications products include thermal visiblespectrum cameras digital networked video recorders related software accessories enable efficient effective safeguarding assets hours day adverse weather conditions oem emerging markets oem emerging markets segment develops manufactures thermal visiblespectrum imaging camera cores components utilized third parties create thermal industrial types imaging systems segment also develops manufactures intelligent traffic monitoring signal control systems well thermal imaging solutions use consumers smartphone mobile devices markets maritime segment develops manufactures electronics imaging instruments recreational commercial maritime market segment provides full suite networked electronic systems including multifunction helm displays navigational instruments autopilots radars sonar systems thermal visible imaging systems communications equipment boats sizes detection segment develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives threats military force protection homeland security commercial applications flir systems inc notes consolidated financial statementscontinued note 17 operating segments related information continued operating segments continued company’s chief operating decision maker codm chief executive officer evaluates segment’s performance allocates resources based revenue segment operating income intersegment revenues recorded cost eliminated consolidation company segments employ consistent accounting policies following tables present revenue operating income assets six segments operating income reviewed codm revenue less cost goods sold operating expense excluding general corporate expenses acquisition related costs executive transition costs amortization purchased intangible assets amortization acquisitionrelated inventory stepup costs associated skywatch product remediation restructuring charges loss net assets held sale accounts receivable inventories operating segments regularly reviewed management reported segment assets years ended december 31 2017 2016 remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related information continued operating segments continued reconciliation companys consolidated segment operating income consolidated earnings income taxes follows thousands unallocated corporate expenses include general corporate expenses acquisition related costs executive transition costs flir systems inc notes consolidated financial statementscontinued note 17 operating segments related information continued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 18 business acquisitions divestitures dvtel inc 2015 company acquired 100 outstanding stock dvtel inc dvtel provider software hardware technologies advanced video surveillance approximately 975 million cash 2016 company finalized purchase price allocation change previously recorded allocation 274 million identified intangible assets amounts recorded within companys security segment allocation purchase price dvetel follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions divestitures continued company made election section 338 internal revenue code 1986 amended resulted taxdeductible goodwill related acquisition dvtel company estimates taxdeductible goodwill intangibles resulting election approximately 248 million amortized united states tax purposes 15year period value taxdeductible goodwill intangibles differs amounts listed purchase price allocation impact elections made section 338 affects united states income taxes goodwill intangibles owned companys united states subsidiaries connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships inprocess research development developed technology represents completed software related internal external software platforms inprocess research development represents value assigned acquired research development projects acquisition date established technological feasibility alternative future use inprocess research development intangible assets capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project launch product make separate determination useful life inprocess research development intangible assets related amortization recorded expense estimated useful life specific projects average 10year useful life customer relationships estimated based projected economic benefits associated asset average 10year estimated useful life represents approximate point projection period majority asset’s cash flows expected realized based assumed attrition rates developed technology customer relationships inprocess research development valued using multiperiod excess earnings method innovative security designs llc 2016 company acquired assets innovative security designs llc isd developer embedded firmware advanced camera surveillance platforms approximately 18 million cash resulted allocation 16 million goodwill amounts recorded company’s security segment armasight inc 2016 company acquired 100 outstanding stock armasight inc armasight developer sporting military optics products approximately 435 million cash allocation purchase price armasight follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions divestitures continued 330 million goodwill represents future economic benefits expected arise synergies combining operations ability armasight provide company domain knowledge distribution channels adjacent markets connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived customer relationships trade names trademarks trade secrets customer relationships represents armasights ability consistently offer compelling products appeal consumer preferences critical factor impacting decisions retailers carry armasight products trade name represents value armasight name within outdoor tactical weapons sight industry trade secrets represent knowledge institutionalized within employees former shareholders armasight relationships key suppliers customer relationships valued using income approach lost income multiperiod excess earnings method trade name trade secrets valued using income approach relief royalty method point grey research inc 2016 company completed transaction acquire assets point grey research inc “point grey” global leader development advanced visible imaging cameras solutions used industrial automation systems medical diagnostic equipment people counting systems intelligent traffic systems military defense products advanced mapping systems approximately 2592 million cash 2017 company finalized purchase price allocation change previously recorded allocation 398 million identifiable intangible assets 1837 million goodwill amounts recorded company’s oem emerging markets segment allocation purchase price point grey follows thousands allocation purchase price related acquisition based management’s judgments evaluating several factors including valuation assessments tangible intangible assets estimates fair value liabilities assumed goodwill 1837 million represents future economic benefits expected arise synergies combining operations ability point grey provide company domain knowledge distribution channels adjacent markets flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions divestitures continued connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships backlog noncompetition agreements developed technology represents economic advantage certain technologies place lowers manufacturing operating costs drives higher margins customer relationships represents relationships point grey established oem people counting markets date acquisition backlog represents “presold” business date acquisition provides positive earning streams post acquisition exceed required provide return assets employed noncompetition agreements represent economic benefit agreements certain current former employees shareholders point grey restrict ability compete directly company developed technology valued using income approach relief royalty method customer relationships backlog valued using income approach multiperiod excess earnings method noncompetition agreements valued using income approach withandwithout method prox dynamics 2016 company acquired 100 outstanding stock prox dynamics “prox dynamics” leading developer manufacturer nanoclass uas military paramilitary intelligence surveillance reconnaissance applications approximately 1344 million cash resulted allocation 113 million net tangible asset excess purchase price approximately 1231 million longterm assets 2017 company finalized purchase price allocation recorded company’s surveillance business segment allocation purchase price prox dynamics follows thousands goodwill 964 million represents future economic benefits expected arise synergies combining operations ability prox dynamics provide company domain knowledge distribution channels adjacent markets flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions divestitures continued connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships patents trade name developed technology patents represent economic advantage certain technologies place lower manufacturing operating costs drive higher margins customer relationships represents relationships prox dynamics established military defense ministries countries throughout world trade name represents black hornet name well recognized within industry known leading product within nanoclass uas segment developed technology customer relationships valued using income approach multiperiod excess earnings method patents trade name valued using income approach relief royalty method acquisitions dvtel isd armasight point grey prox dynamics significant defined regulation sx securities exchange act 1934 significant compared companys overall results operations consequently pro forma financial information provided planned divestiture consumer small mediumsized security business fourth quarter 2017 company committed plan sell consumer small mediumsized smb security business carrying amount 513 million december 31 2017 fourth quarter 2017 held sale criteria met assets liabilities disposal group classified held sale consolidated balance sheets accordingly company estimates fair value disposal group 288 million costs sell disposal group including legal fees brokers commissions closing costs estimated approximately 11 million consequently company recorded pretax loss net assets held sale 236 million december 31 2017 representing excess 513 million carrying value 277 million estimated fair value less costs sell estimated loss sale recorded loss net assets held sale consolidated statements income anticipated disposal qualify discontinued operations therefore included company’s continuing operations periods presented carrying amounts major classes assets liabilities held sale included following thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions divestitures continued ceased recording depreciation amortization property plant equipment identified intangibles assets respectively date assets triggered held sale accounting assets liabilities classified held sale december 31 2016 february 6 2018 company completed sale business see note 21 subsequent events discussion note 19 shareholders’ equity february 5 2015 companys board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expired february 5 2017 february 8 2017 company’s board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expires february 8 2019 year ended december 31 2017 company repurchase shares year ended december 31 2017 company paid dividends quarterly rate 015 per share total 826 million year ended december 31 2016 company paid dividends quarterly rate 012 per share total 659 million year ended december 31 2015 company paid dividends quarterly rate 011 per share total 614 million note 20 restructuring costs years ended december 31 2017 2016 2015 company recorded net pretax restructuring expenses totaling 06 million 14 million 14 million respectively 2013 company initiated realignment plan included closing six nottoscale sites united states europe transfer operations companys larger facilities 2013 realignment program company also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas company recorded restructuring expenses associated 2013 realignment program segments follows thousands year ended december 31 2017 2016 company also incurred immaterial restructuring charges representing severance costs associated cost reduction initiatives executed within security segment related 2013 realignment program restructuring expenses associated 2013 realignment program recorded consolidated statements income follows thousands flir systems inc notes consolidated financial statementscontinued note 20 restructuring costs continued following table summarizes restructuring activity associated 2013 realignment program cost type thousands note 21 subsequent events january 5 2018 company entered definitive agreement sell security segments consumer smb business transaction closed february 6 2018 total cash consideration approximately 290 million see note 18 business acquisitions divestitures additional information february 8 2018 company’s board directors declared quarterly dividend 016 per share common stock payable march 9 2018 shareholders record close business february 23 2018 total cash payment dividend approximately 222 million 1 net earnings fourth quarter 2017 includes discrete tax charge 944 million associated us tax cuts jobs act enacted december 2017 loss net assets held sale 236 million 2 net earnings first quarter 2016 includes discrete tax charge certain tax legislation belgium 396 million sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm shareholders board directors flir systems inc opinion consolidated financial statements audited accompanying consolidated balance sheets flir systems inc subsidiaries company december 31 2018 2017 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2018 related notes collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows years threeyear period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 27 2019 expressed unqualified opinion effectiveness company’s internal control financial reporting change accounting principle discussed note 1 consolidated financial statements company changed method accounting revenue income tax impact intraentity transfers 2018 due adoption accounting standards codification topic 606 revenue contracts customers accounting standards update 201616 income taxes topic 740 intraentity transfers assets inventory respectively basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion kpmg llp served company’s auditor since 2002 portland oregon february 27 2019 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements 1 see note 1 nature business significant accounting policies recently adopted accounting pronouncements additional information adoption impacts asc 606 asu 201616 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years financial statements conform presentation year ended december 31 2018 reclassifications effect consolidated financial position net earnings shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income expense net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss 1484 million 1130 million december 31 2018 2017 respectively transaction gains losses included income expense net losses 13 million 02 million 22 million years ended december 31 2018 2017 2016 respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued revenue recognition company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers revenue recognized upon transfer control promised products services customers amount reflects consideration company expects receive exchange products services company regularly enters contracts include various combinations products services generally capable distinct accounted separate performance obligations situations contract values allocated performance obligation based relative estimated standalone selling price vast majority companys revenues recognized point time goods transferred customer however certain contracts include highly customized components performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date revenue recognized time performance obligation satisfied revenue includes certain shipping handling costs stated net third party agency fees shipping handling costs associated outbound freight control product transferred customer accounted fulfillment cost included cost goods sold revenue recognized net allowances returns net taxes collected customers subsequently remitted governmental authorities company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided see note 18 operating segments related information revenue longlived assets geographic area information related company’s revenues disaggregated significant geographical region operating segment cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents restricted cash company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2018 2017 2000 million 1407 million respectively primarily investments money market funds overnight deposits restricted cash includes cash subject legal contractual restriction third party restricted withdrawal use including restrictions require funds used specified purpose restrictions limit purpose funds used company restricted cash balances december 31 2018 2017 respectively accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued inventories stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 352 million 376 million december 31 2018 2017 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed third quarter year frequently warranted impairment determine events changes business conditions indicate carrying value may recoverable company recognize impairment charges goodwill years ended december 31 2018 2017 2016 see note 8 goodwill additional information intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required company recognize impairment charges intangible assets indefinite lives years ended december 31 2018 2017 2016 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges longlived assets years ended december 31 2018 2017 2016 advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2018 2017 2016 125 million 192 million 193 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued minority interest equity investments company holds certain investments equity instruments nonpublicly traded companies equity investments company control ability exercise significant influence operating financial policies accounted using equity method companys proportionate share income loss recorded interest income net consolidated statement income nonmarketable equity investments measured cost less impairment adjusted changes resulting qualifying observable price changes prior 2018 nonmarketable equity investments accounted using cost method company periodically reviews equity investments impairment years ended december 31 2018 2017 2016 company recognize impairments minority interest equity investments carrying values minority interest equity investments 171 million 31 million december 31 2018 2017 respectively included assets consolidated balance sheets contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals disclosures adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance shares upon vesting restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2018 2017 2016 aggregated 10000 39000 233000 shares respectively excluded purposes diluted earnings per share since effect inclusion would antidilutive flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued based fair market value companys stock discounted expected dividends date grant restricted stock units containing performancebased vesting criteria valued date grant based fair value companys stock discounted expected dividends estimate illiquidity fair value marketbased restricted stock units determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation discount illiquidity estimated discount illiquidity relevant share based awards require plan participant hold shares specified period time award vests estimated using protective put method company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award following table sets forth stockbased compensation expense recognized consolidated statements income years ended december 31 2018 2017 2016 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2018 2017 2016 follows thousands december 31 2018 company approximately 481 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period approximately two years flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation continued fair value stockbased awards granted years ended december 31 2018 2017 2016 estimated following weightedaverage assumptions company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2017 2016 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2018 2017 2016 company granted approximately 594000 773000 865000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2018 2017 2016 5293 3620 2948 per share respectively year ended december 31 2016 company granted approximately 64000 marketbased restricted stock units may earned based upon companys total shareholder return compared total shareholder return three year period component company 60th percentile level sp 500 index shares vested marketbased restricted stock unit awards must held participant period one year vest date fair value marketbased restricted stock units granted year ended december 31 2016 2289 per share respectively years ended december 31 2018 2017 2016 company granted approximately 177000 283000 62000 performancebased restricted stock units respectively units earned based upon companys return invested capital three year period fair value performancebased restricted units granted years ended december 31 2018 2017 2016 5232 3508 2641 per share respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation continued total fair value restricted stock unit awards granted year ended december 31 2018 table 407 million includes 92 million grant date fair value associated performancebased restricted stock units total fair value restricted stock unit awards granted year ended december 31 2017 table 379 million includes 99 million grant date fair value associated performancebased restricted stock units total fair value restricted stock unit awards granted year ended december 31 2016 table 286 million includes 15 million grant date fair value associated marketbased restricted stock units 16 million grant date fair value associated performancebased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2018 2017 2016 237 million 535 million 77 million respectively related tax benefits realized exercise stock options years ended december 31 2018 2017 2016 87 million 30 million 13 million respectively concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 18 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments fair value adjustments interest rate swap contracts unrealized gains losses availableforsale securities changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive earnings loss year ended december 31 2018 recently adopted accounting pronouncements financial accounting standards board fasb accounting standards update asu 201618 statement cash flows topic 230 restricted cash asu 201618 effective january 1 2018 company adopted asu 201618 retrospective basis update clarifies guidance classification presentation restricted cash statement cash flows amendment requires restricted cash included entitys cash cashequivalent balances statement cash flows also requires entity disclose information nature restrictions reconciliation statement financial position statement cash flows must disclosed statement financial position includes one line item cash equivalents restricted cash restricted cash equivalents companys adoption asu 201618 material impact consolidated financial statements fasb asu 201601 financial instrumentsoverall subtopic 82510 recognition measurement financial assets financial liabilities asu 201601 effective january 1 2018 company adopted asu 201601 update requires changes accounting financial instruments primarily affect equity securities financial liabilities measured using fair value option presentation disclosure requirements instruments companys adoption asu 201601 impact consolidated financial statements significant impact companys nonmarketable equity securities formerly classified cost method investments measured recorded using measurement alternative addition existing impairment model replaced new onestep qualitative impairment model initial adoption adjustment recorded instruments since standard required applied prospectively securities measured using measurement alternative flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recently adopted accounting pronouncements continued fasb asu 201701 business combinations topic 805 clarifying definition business asu 201701 effective january 1 2018 company adopted asu 201701 amendments update clarify definition business objective adding guidance assist entities evaluating whether transactions accounted acquisitions disposals assets businesses companys adoption asu 201701 material impact consolidated financial statements fasb asu 201409 revenue contracts customers effective january 1 2018 company adopted asu 201409 related amendments new revenue standard asc 606 using modified retrospective method contracts yet completed january 1 2018 result company recognized cumulative effect initially applying new revenue standard adjustment opening balance retained earnings amount approximately 10 million january 1 2018 comparative information restated continues reported accounting standards effect periods company expects impact adoption new standard immaterial net income ongoing basis fasb asu 201616 intraentity transfers assets inventory asu 201616 effective january 1 2018 company adopted asu 201616 eliminates exception recognizing time transfer current deferred income taxes intraentity asset transfers inventory new standard applied modified retrospective transition basis adjustment opening balance retained earnings amount approximately 793 million january 1 2018 cumulative effect changes made companys consolidated january 1 2018 balance sheet adoption asc 606 revenue contracts customers asu 201616 intraentity transfers assets inventory follows thousands flir systems inc notes consolidated financial statementscontinued note 1 basis presentation continued recently adopted accounting pronouncements continued accordance new revenue standard requirements disclosure impact adoption consolidated income statement balance sheet follows thousands see note 2 revenue additional disclosures required new revenue standard recently issued accounting pronouncements february 2016 financial accounting standards board fasb established topic 842 leases issuing accounting standards update asu 201602 “asu 201602” among things asu 201602 requires recognition rightofuse asset liability future lease payments contracts meet definition lease requires disclosure certain information leasing arrangements asu 201602 effective january 1 2019 july 30 2018 fasb issued asu 201811 leases topic 842 targeted improvements among things allows companies elect optional transition method apply new lease standard cumulativeeffect adjustment period adoption company adopted new standard january 1 2019 used effective date initial application pursuant optional transition method company made substantial progress executing implementation plan company revised controls processes address lease standard currently finalizing implementation validation data input lease accounting software tool company elect package practical expedients permitted transition guidance within new standard among things allows company carry forward historical lease classification company make accounting policy election keep leases initial term 12 months less balance sheet adoption standard expected impact approximately 40 million consolidated balance sheets addition lease assets liabilities related operating leases asu 201602 also requires expanded disclosure regarding amounts timing uncertainties cash flows related company’s lease portfolio company evaluating disclosure requirements incorporating collection relevant data processes preparation disclosure 2019 company expect asu 201602 material impact consolidated statements income consolidated statements cash flows flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recently issued accounting pronouncements continued january 2017 fasb issued asu 201704 “intangibles goodwill topic 350 simplifying test goodwill impairment” “asu 201704” amendments update simplify subsequent measurement goodwill removing second step twostep impairment test amendment requires entity perform annual interim goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting units fair value however loss recognized exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary amendment applied prospective basis asu 201704 effective annual interim goodwill impairment tests fiscal years beginning december 15 2019 early adoption permitted interim annual goodwill impairment tests performed testing dates january 1 2017 amendments asu 201704 applied prospective basis company adopted standard january 1 2019 adoption expected material impact companys consolidated financial statements february 2018 fasb issued asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income asu 201802 standard permit entities reclassify tax effects stranded accumulated comprehensive income aoci result us tax reform retained earnings standard effective january 1 2019 company adopted standard january 1 2019 adoption expected material impact consolidated financial statements june 2018 fasb issued asu 201807 improvements nonemployee sharebased payment accounting asu 201807 standard closely aligns accounting employee nonemployee sharebased payments standard effective january 1 2019 company adopted standard january 1 2019 adoption expected material impact consolidated financial statements disclosures august 2018 fasb issued asu 201815 “customer’s accounting implementation costs incurred cloud computing arrangement service contract” “asu 201815” amendments update align requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software hosting arrangements include internaluse software license accounting service element hosting arrangement service contract affected amendments update standard effective fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted amendments applied either retrospectively prospectively implementation costs incurred date adoption company adopted standard january 1 2019 adoption expected material impact company’s consolidated financial statements november 2018 fasb issued asu 201818 collaborative arrangements topic 808 clarifying interaction topic 808 topic 606 asu 201818 standard clarifies certain transactions collaborative arrangement participants accounted asc 606 one participant customer specifies distinct good service unit account evaluating whether transaction customer standard also provides guidance presentation transactions scope asc 606 standard effective fiscal years beginning december 15 2019 early adoption permitted long company already adopted guidance asc 606 company plans adopt standard january 1 2020 currently evaluating guidance determine impact may consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 2 revenue contract balances timing revenue recognition billings cash collections results billed accounts receivable unbilled receivables deferred revenue advance payments customers consolidated balance sheets contract assets liabilities reported contractbycontract basis company material deferred contract costs recorded consolidated balance sheet december 31 2018 contract assets company recognizes unbilled receivables contract assets company rights consideration work completed yet billed reporting date unbilled receivables included within accounts receivable net consolidated balance sheets balance unbilled receivables december 31 2018 date adoption asc 606 105 million 141 million respectively contract liabilities company records contract liabilities cash payments received due advance companys performance contract liabilities include deferred revenue advance payments customers contract liabilities classified either current longterm consolidated balance sheets based timing company expects recognize revenue december 31 2018 date adoption asc 606 companys contract liability balances totaled 664 million 601 million respectively balances included amounts classified longterm december 31 2018 date adoption asc 606 140 million 138 million respectively included within pension longterm liabilities accompanying consolidated balance sheets approximately 422 million revenue recognized twelve month period ended december 31 2018 included combined opening contract liability balances adjusted asc 606 adoption impacts remaining performance obligations remaining performance obligations related asc 606 represent aggregate transaction price allocated performance obligations original contract term greater one year fully partially unsatisfied end period remaining performance obligation disclosure similar concept backlog definition remaining performance obligations excludes contracts provide customer right cancel terminate convenience substantial penalty even historical experience indicates likelihood cancellation termination remote company elected exclude contracts customers original term one year less remaining performance obligations contracts included within backlog december 31 2018 aggregate amount transaction price allocated remaining performance obligations approximately 1544 million company expects recognize revenue approximately 85 percent remaining performance obligations next twelve months remainder recognized thereafter note 3 fair value financial instruments factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk observable market prices identical instruments traded less active markets level 3 significant inputs generally less observable objective sources including assumptions determining fair value factors methodology used valuing securities necessarily indication risk associated investing securities flir systems inc notes consolidated financial statementscontinued note 3 fair value financial instruments continued company 2000 million 1407 million cash equivalents december 31 2018 2017 respectively primarily investments money market funds overnight deposits company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair value company’s foreign currency contracts december 31 2018 2017 disclosed note 4 derivative financial instruments based level 2 inputs fair value company’s senior unsecured notes described note 12 longterm debt approximately 4188 million 4275 million based upon level 2 inputs december 31 2018 2017 respectively company significant financial assets liabilities measured fair value note 4 derivative financial instruments foreign currency exchange rate risk company enters foreign currency forward contracts formally designated hedges manage consolidated exchange rate risk associated remeasurement nonfunctional currency denominated monetary assets liabilities nonfunctional currency denominated monetary assets liabilities consist primarily cash receivables payables intercompany loans company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts changes fair value foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate general gains losses offset consolidated statements income reciprocal gains losses underlying assets liabilities originally gave rise exposure net amount gains losses related derivative instruments recorded income expense net year ended december 31 2018 2017 2016 loss 91 million 94 million 79 million respectively notional amounts used measure volume foreign currency forward contracts represent companys total exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2018 2017 thousands december 31 2018 company’s foreign currency forward contracts general maturities three months less flir systems inc notes consolidated financial statementscontinued note 4 derivative financial instruments continued foreign currency exchange rate risk continued carrying amounts foreign exchange contracts included consolidated balance sheets follows thousands interest rate swap contracts may 31 2016 company drew 105 million revolving credit facility described note 10 credit agreement repaid term loan originally issued credit agreement dated april 5 2013 interest accrued paid monthly based onemonth libor rate manage interest rate risk arising variability monthly interest expense attributable original term loan amounts drawn revolver company entered two amortizing interest rate swaps aggregate notional amount 105 million interest rate swaps designated effective cash flow hedges year ended december 31 2017 company repaid amounts outstanding revolving credit facility concurrently company exited interest rate swaps combined notional amount time 863 million discontinued cash flow hedge company reclassified gain 05 million accumulated comprehensive income interest expense probable forecasted variable monthly liborbased interest rate payments would longer occur note 5 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2018 2017 2016 thousands note 6 inventories consist following thousands flir systems inc notes consolidated financial statementscontinued note 7 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2018 2017 2016 406 million 423 million 378 million respectively note 8 goodwill august 2017 company announced realignment business operations three reportable operating segments effective january 1 2018 realignment company reassigned reported goodwill january 1 2018 new reportable segments based relative fair value respective reporting units time goodwill reallocated follows thousands reassignment goodwill company performed impairment test new reporting units january 1 2018 result analysis impairment identified reassignment impairment test completed three months ended june 30 2018 see note 18 operating segments related information notes consolidated financial statements additional information three new reportable operating segments carrying value goodwill activity two year period ending december 31 2018 follows thousands year ended december 31 2017 company recorded 964 million goodwill primarily connection purchase price allocation associated prox dynamics prox dynamics year ended december 31 2018 company recorded 47 million 46 million goodwill primarily connection purchase price allocation associated fishing hot spots fishidy respectively flir systems inc notes consolidated financial statementscontinued note 8 goodwill continued company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value reporting unit exceeds fair value third quarter 2018 company completed annual review goodwill determined impairment recorded goodwill necessary note 9 intangible assets intangible assets summarized follows thousands year ended december 31 2018 company recorded 22 million 38 million identified intangibles assets connection purchase price allocation associated fishing hot spot fishidy respectively year ended december 31 2017 company recorded 314 million identified intangibles assets connection purchase price allocation associated prox dynamics reclassified 84 million assets held sale net consolidated balance sheets related companys planned divestiture consumer smb security businesses within commercial business unit year ended december 31 2016 company acquired 474 million identifiable intangible assets part acquisitions armasight point grey refer note 19 business acquisitions divestitures discussion aggregate amortization expense recorded 2018 2017 2016 247 million 275 million 184 million respectively intangible assets recorded december 31 2018 estimated future aggregate amortization expense years ending december 31 2019 2023 approximately thousands flir systems inc notes consolidated financial statementscontinued note 10 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provided 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 may 31 2016 credit agreement amended increase borrowing capacity 500 million extend maturity revolving credit facility april 5 2018 may 31 2021 amendment also incorporated revised schedule fees interest rate spreads company right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 200 million may 31 2021 credit agreement allows company certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined based type borrowing interest associated borrowings based prime lending rate bank america na published eurocurrency rate ie libor borrowings applicable margin 0125 percent 2125 percent depending applicable base rate consolidated total leverage ratio including respective spreads onemonth libor interest rate 3897 percent per annum prime lending rate 5875 percent per annum december 31 2018 credit agreement requires company pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio ranges 0150 percent 0300 percent unused revolving commitments december 31 2018 commitment fee rate 0175 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2018 credit facilities available credit agreement unsecured may 31 2016 company drew 105 million revolving credit facility repaid term loan originally issued credit agreement dated april 5 2013 year ended december 31 2017 company repaid amounts outstanding revolving credit facility december 31 2018 company 108 million letters credit outstanding reduces total available revolving credit agreement note 11 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2018 2017 2016 thousands flir systems inc notes consolidated financial statementscontinued note 12 longterm debt longterm debt consists following thousands august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” 2011 notes repaid july 5 2016 company recorded 13 million loss extinguishment 2011 notes interest expense june 2016 company issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “2016 notes” net proceeds issuance 2016 notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest 2016 notes payable semiannually arrears december 15 june 15 proceeds 2016 notes used repay principal amount 2011 notes outstanding july 2016 used general corporate purposes including working capital expenditure needs business acquisitions repurchases company’s common stock april 5 2013 company borrowed 150 million term loan facility incorporated credit agreement discussed note 10 credit agreement notes consolidated financial statements may 31 2016 company repaid term loan drew 1050 million revolving credit facility interest amounts outstanding revolving credit facility accrued onemonth libor rate plus applicable margin amount outstanding paid monthly arrears year ended december 31 2017 company repaid amounts outstanding revolving credit facility note 13 commitments company leases primary facilities various operating leases expire 2019 2028 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2018 2017 2016 amounted 133 million 139 million 90 million respectively future minimum obligations noncancelable leases contractual obligations follows thousands flir systems inc notes consolidated financial statementscontinued note 14 contingencies matters involving united states department state department commerce april 24 2018 company entered consent agreement united states department state office defense trade controls compliance “ddtc” resolve allegations regarding unauthorized export technical data defense services dual third country nationals certain company facilities failure properly use manage export licenses export authorizations failures report certain payments 22 cfr part 130 potential violation international traffic arms regulation “itar” consent agreement fouryear term provides civil penalty 300 million 150 million amount suspended condition funds used departmentapproved consent agreement remedial compliance measures ii appointment external special compliance official oversee compliance consent agreement itar iii two external audits company’s itar compliance program iv continued implementation ongoing remedial compliance measures additional remedial compliance measures related automated systems itar compliance policies procedures training threemonth period ended march 31 2018 company recorded 150 million charge portion penalty subject suspension april 2018 company paid 10 million 150 million charge december 31 2018 remaining amount payable 35 million 105 million recorded current liabilities pension longterm liabilities respectively remaining 14 million payable annual installments 35 million april 2022 company expects recent future investments remedial compliance measures sufficient cover 150 million suspension amount part consent agreement ddtc acknowledged company voluntarily disclosed certain alleged arms export control act itar violations resolved pursuant consent agreement cooperated ddtcs review instituted number compliance program improvements may 2017 company submitted initial notification ddtc regarding potential violations related certain export classifications obtained commodity jurisdiction process final voluntary disclosure august 2017 ddtc acknowledged notification request ddtc company executed tolling agreement matter suspending statute limitations january 13 2019 matter resolved pursuant consent agreement identified remains review june 2017 united states department commerce bureau industry security informed company additional export licensing requirements restrict company’s ability sell certain thermal products without license customers china identified list maintained united states department commerce action precipitated concerns sale without license potential diversion companys products prohibited end users countries subject economic sanctions implemented united states united states department commerce bureau industry security subsequently favorably modified restrictions reduce applicability restrictions sales flirs tau camera cores opposed finished products containing tau camera cores customers china identified list maintained united states department commerce persons country ear country group a5 supplement 1 part 740 ear company found violated applicable rules regulations respect customers limitations export end use company’s products company could subject substantial fines penalties suspension existing licenses authorizations andor loss suspension export privileges company unable reasonably estimate time may take resolve matters amount range potential loss penalty government action may incurred connection matters however unfavorable outcome could result substantial fines penalties loss suspension export privileges particular authorizations could material company’s financial position results operations cash flows following period outcome becomes estimable known flir systems inc notes consolidated financial statementscontinued note 14 contingencies continued skywatch product quality matters march 2016 company learned potential quality concerns respect many 315 level iii level iv skywatch surveillance towers sold flir companies acquired flir 2002 2014 company notified customers purchased affected skywatch towers potential concerns precautionary measure also temporarily suspended production level iii level iv skywatch towers pending completion review implementation necessary remedial measures company identified cause quality issues notified customers option request repair modification infield units begun infield repairs identified affected units still remains uncertainty related estimating costs associated potential remedy number units may require remedy company currently estimates range potential loss remaining units 49 million 121 million single amount within range better estimate amount within range company recorded accrual 49 million current liabilities december 31 2018 factors underlying estimated range loss may change time actual results may vary significantly estimate matters company also subject legal administrative proceedings investigations claims litigation arising ordinary course business specifically identified matters others specifically identified company records liability respect matter management believes probable liability incurred company reasonably estimate amount loss company believes recorded adequate provisions probable estimable losses matters existence date hereof company reviews provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular matter outcome matters currently determinable company expect ultimate resolution matter individually material adverse effect company’s financial position results operations cash flows costs resolve matters may aggregate material adverse effect company’s financial position results operations cash flows note 15 income taxes new tax legislation commonly referred tax cuts jobs act “tax act” enacted december 22 2017 connection companys initial analysis impact tax act company recorded provisional net tax expense 944 million period ended december 31 2017 amount consists net expense 665 million transition tax net expense 128 million remeasurement companys net deferred tax assets using reduced united states tax rate addition company also recorded net tax expense 151 million state income foreign taxes estimated due upon distribution approximately 10 billion previously undistributed foreign earnings longer permanently reinvested december 31 2017 company completed accounting tax effects tax act year ended december 31 2018 recognized measurement period adjustment resulting 99 million reduction tax expense addition company reduced 63 million estimated state foreign liability tax due upon distribution approximately 9024 million previously undistributed foreign earnings longer permanently reinvested december 31 2017 december 31 2018 2017 accrued income tax liabilities 429 million 665 million respectively related transition tax decrease liability primarily attributed transition tax payments 90 million 2017 2018 application united states internal revenue service 47 million overpayment 99 million reduction initial liability described amounts accrued none expected due within one year due overpayment discussed transition tax paid installments eightyear period accrue interest significant provisions tax act include exemption united states tax dividends future foreign earnings deduction related foreign derived intangible income fdii limitation current deductibility net interest expense excess 30 percent adjusted taxable income incremental tax base erosion antiabuse tax beat excessive amounts paid foreign related parties minimum tax certain foreign earnings excess 10 percent foreign subsidiaries tangible assets ie global intangible lowtaxed income gilti company elected treat period expense flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued 2016 company accordance fasb asc topic 740 income taxes recorded discrete tax charges totaling 396 million related january 11 2016 announcement european commission decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid impacted one company’s international subsidiaries belgian government announced appealed decision filed action annulment general court european union july 2016 company filed separate appeal general court european union january 10 2017 company received tax assessments belgium government approximating discrete tax charge recorded 2016 company filed complaint belgian tax assessments october 23 2018 belgian government canceled 331 million tax assessments accrued interest result company reversed similar amount previously accrued income tax plus interest associated assessments threemonth period ending december 31 2018 addition euro equivalent 357 million held restricted cash account september 30 2018 became unrestricted threemonth period ending december 31 2018 company believes matter effectively settled adverse opinion european commission regards cancellation tax assessments could cause accrual tax future period threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3345 million swedish kroner 30 billion company believes sta’s assertions reassessment accordance swedish tax regulations plans defend companys positions sta swedish court system necessary consequently adjustment companys unrecognized tax benefits recorded relation matter management believes companys recorded tax liabilities adequate aggregate income tax exposures pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse net deferred tax assets liabilities classified balance sheet follows thousands tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences companys effective tax rate 2018 lower united states federal tax rate 210 percent mainly due recognition previously unrecognized tax benefits relating european union state aid recovery discussed excess tax benefits stock compensation reduction accrual united states transition tax offset partially state taxes higher tax rates applied income earned certain foreign jurisdictions discrete items companys effective tax rate 2017 higher united states federal tax rate 35 percent mainly due companys estimate impact tax act unrecognized tax benefits intercompany pricing increased various jurisdictions 2017 partially offset excess tax benefits stock compensation mix lower foreign tax rates foreign tax rate differential 2016 mainly due impact amortization lower statutory rates european union state aid recovery 2016 relates european commission’s decision regarding threeyear agreement belgium discussed december 31 2018 company united states tax net operating loss carryforwards totaling approximately 35 million expire 2019 2031 subject annual limitation section 382 internal revenue code addition company various state net operating loss carryforwards totaling approximately 09 million expire 2023 2036 finally company various foreign net operating loss carryforwards totaling approximately 1117 million portion expire 2019 2036 portion indefinite carryforward period tax benefits described accounted using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities extent management assesses realization assets likely valuation allowance required recorded december 31 2018 company determined valuation allowance deferred tax assets 32 million required primarily related certain foreign deductions carried forward acquired net operating losses review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets provided united states state foreign income taxes earnings generated january 1 2018 certain subsidiaries outside united states currently intend reinvest earnings operations activities outside united states indefinitely subsequently elect repatriate foreign earnings would need accrue pay state foreign income taxes thereby reducing amount cash united states taxes would generally payable due changes made tax act flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2018 relate united states belgium united kingdom france various foreign jurisdictions would affect company’s effective tax rate recognized company anticipates approximately 51 million net unrecognized tax benefits recognized within 12 months result settlements effective settlements various tax authorities closure certain audits lapse applicable statute limitations company classifies interest penalties related unrecognized tax benefits income tax provision december 31 2018 company 61 million accrued interest penalties related unrecognized tax benefits recorded current noncurrent accrued income taxes consolidated balance sheet company files united states federal state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions flir systems inc notes consolidated financial statementscontinued note 16 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted two plans flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 2002 plan previously granted awards 2002 plan remain outstanding company granted timebased options timebased restricted stock unit awards marketbased restricted stock unit awards performancebased restricted stock unit awards options generally expire ten years grant date timebased options restricted stock unit awards generally vest three year period marketbased restricted stock unit awards may earned based upon companys total shareholder return compared total shareholder return component company 60th percentile level sp 500 index three year period performancebased restricted stock unit awards granted year ended december 31 2016 may earned based upon companys return invested capital three year period performancebased restricted stock unit awards granted year ended december 31 2017 may earned based upon companys operating margin performance three year period performancebased restricted stock unit awards granted year ended december 31 2018 may earned based upon combination companys revenue operating performance three year period certain shares vested performancebased restricted stock unit awards marketbased restricted stock unit awards must held participant period one year vest date shares issued result stock option exercises distribution vested restricted stock units new shares information respect stock option activity 2018 follows information respect restricted stock unit activity 2018 follows included restricted stock units outstanding december 31 2018 approximately 216000 vested restricted stock units distributed december 31 2018 7451000 shares common stock reserved future issuance stock incentive plans flir systems inc notes consolidated financial statementscontinued note 16 stockbased compensation continued employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date espp provides sixmonth offerings commencing may 1 november 1 year purchases april 30 october 31 year shares purchased espp must held employees period least 18 months date purchase company reserved 5000000 shares common stock issuance espp 140000 shares issued average purchase price 3947 2018 2838000 shares remained available espp december 31 2018 future issuance shares issued espp purchases new shares note 17 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 98 million 89 million 81 million years ended december 31 2018 2017 2016 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company previously provided supplemental executive retirement plan “serp” certain officers company based united states december 31 2017 last remaining serp participant retired consequently year ended december 31 2018 2017 company recorded settlement gain approximately 06 million actuarial gain approximately 17 million respectively primarily associated change projected benefit obligation associated adjusted date expected retirement related actuarial compensation estimates final serp participant company recorded changes minimum pension liability accumulated comprehensive earnings loss estimated benefit paid 2019 reported current liabilities remaining obligations recorded pension longterm liabilities measurement date used pension plans december 31 amounts recognized comprehensive income loss years ended december 31 2018 2017 2016 net tax follows thousands components accumulated comprehensive loss related company’s pension plans december 31 2018 2017 follows thousands flir systems inc notes consolidated financial statementscontinued note 17 employee benefit plans continued pension plans continued summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows serp discount rate used determined using yield curve applying individual spot rates appropriate maturities future expected benefit payouts year better match plans duration company discounted back measurement date determine appropriate single level equivalent discount rate active participants left plan rate increase compensation levels included december 31 2018 2017 yearend projected benefit obligations defined benefit pension plan outside united states discount rate determined reference market yields end reporting period high quality corporate bonds similar maturities matching duration projected benefit obligation pension liability 12 million 08 million december 31 2018 2017 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs flir systems inc notes consolidated financial statementscontinued note 17 employee benefit plans continued pension plans continued benefits expected paid plans approximately thousands components net periodic benefit income cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2019 48000 note 18 operating segments related information operating segments august 2017 company announced realignment business resulted reducing number operating segments six three effective january 1 2018 companys three reportable operating segments follows industrial business unit industrial business unit develops manufactures thermal visiblespectrum imaging camera cores components utilized third parties create thermal industrial types imaging systems segment also develops manufactures devices image measure assess thermal energy gases environmental elements industrial commercial scientific applications imaging payloads unmanned aerial systems uas machine vision cameras people counting tracking thermal imaging solutions use consumers smartphone mobile devices markets products include thermal imaging cameras gas detection cameras firefighting cameras process automation cameras environmental test measurement devices government defense business unit government defense business unit develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare segment also develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives cbrne threats military force protection homeland security commercial applications offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms cbrne detectors nanoclass uas solutions services related systems flir systems inc notes consolidated financial statementscontinued note 18 operating segments related information continued operating segments continued commercial business unit commercial business unit develops manufactures cameras video recording systems video management systems use commercial critical infrastructure electronics imaging instruments recreational commercial maritime market intelligent traffic monitoring signal control systems handheld weaponmounted thermal imaging systems use variety applications products include thermal visiblespectrum security cameras digital networked video recorders related software accessories full suite networked marine electronic systems including multifunction helm displays navigational instruments autopilots radars sonar systems thermal visible imaging systems communications equipment boats sizes traffic cameras sensors associated traffic management software thermal scopes handheld thermal cameras company’s chief operating decision maker codm chief executive officer evaluates segment’s performance allocates resources based revenue segment operating income intersegment revenues recorded cost eliminated consolidation company segments employ consistent accounting policies following tables present revenue operating income assets three segments operating income reviewed codm revenue less cost goods sold operating expense excluding general corporate expenses acquisition related costs executive transition costs amortization purchased intangible assets amortization acquisitionrelated inventory stepup costs associated skywatch product remediation restructuring charges loss sale business accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation periods presented managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 18 operating segments related information continued operating segments continued reconciliation companys consolidated segment operating income consolidated earnings income taxes follows thousands unallocated corporate expenses include general corporate expenses acquisition related costs executive transition costs 1 due realignment companys business operations effective january 1 2018 goodwill december 31 2017 presented asset allocated operating segments table see note 8 goodwill additional information goodwill operating segments january 1 2018 flir systems inc notes consolidated financial statementscontinued note 18 operating segments related information continued operating segments continued information related revenue significant geographical location determined end customer follows thousands revenue longlived assets geographic area longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 19 business acquisitions divestitures point grey research inc 2016 company completed transaction acquire assets point grey research inc “point grey” global leader development advanced visible imaging cameras solutions used industrial automation systems medical diagnostic equipment people counting systems intelligent traffic systems military defense products advanced mapping systems approximately 2592 million cash 2017 company finalized purchase price allocation change previously recorded allocation 398 million identifiable intangible assets 1837 million goodwill amounts recorded company’s oem emerging markets segment flir systems inc notes consolidated financial statementscontinued note 19 business acquisitions divestitures continued point grey research inc continued allocation purchase price point grey follows thousands allocation purchase price related acquisition based management’s judgments evaluating several factors including valuation assessments tangible intangible assets estimates fair value liabilities assumed goodwill 1837 million represents future economic benefits expected arise synergies combining operations ability point grey provide company domain knowledge distribution channels adjacent markets connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships backlog noncompetition agreements developed technology represents economic advantage certain technologies place lowers manufacturing operating costs drives higher margins customer relationships represents relationships point grey established oem people counting markets date acquisition backlog represents “presold” business date acquisition provides positive earning streams post acquisition exceed required provide return assets employed noncompetition agreements represent economic benefit agreements certain current former employees shareholders point grey restrict ability compete directly company developed technology valued using income approach relief royalty method customer relationships backlog valued using income approach multiperiod excess earnings method noncompetition agreements valued using income approach withandwithout method prox dynamics 2016 company acquired 100 outstanding stock prox dynamics “prox dynamics” leading developer manufacturer nanoclass uas military paramilitary intelligence surveillance reconnaissance applications approximately 1344 million cash resulted allocation 113 million net tangible asset excess purchase price approximately 1231 million longterm assets 2017 company finalized purchase price allocation recorded company’s surveillance business segment flir systems inc notes consolidated financial statementscontinued note 19 business acquisitions divestitures continued prox dynamics continued allocation purchase price prox dynamics follows thousands goodwill 964 million represents future economic benefits expected arise synergies combining operations ability prox dynamics provide company domain knowledge distribution channels adjacent markets connection allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships patents trade name developed technology patents represent economic advantage certain technologies place lower manufacturing operating costs drive higher margins customer relationships represents relationships prox dynamics established military defense ministries countries throughout world trade name represents black hornet name well recognized within industry known leading product within nanoclass uas segment developed technology customer relationships valued using income approach multiperiod excess earnings method patents trade name valued using income approach relief royalty method fishing hot spots inc march 26 2018 company completed transaction acquire 100 outstanding stock fishing hot spots inc privately held technology company approximately 71 million cash third quarter 2018 company finalized purchase price allocation recorded 22 million identified intangible assets goodwill 47 million commercial business unit fishidy inc april 3 2018 company completed transaction acquire 100 outstanding stock fishidy inc privately held startup technology company approximately 71 million cash fourth quarter 2018 company finalized purchase price allocation recorded 38 million identified intangible assets goodwill 46 million commercial business unit flir systems inc notes consolidated financial statementscontinued note 19 business acquisitions divestitures continued acyclica inc september 10 2018 company completed transaction acquire 100 outstanding stock acyclica inc privately held software developer automotive roadway intersection data generation analysis allocation purchase price identified intangible assets goodwill subject final determination valuation assets acquired liabilities assumed primary areas purchase price allocation yet finalized relate valuation intangible assets related taxes final allocation purchase price assets acquired liabilities assumed completed final assessments intangible assets related taxes completed first half 2019 goodwill intangibles recorded commercial business unit preliminary unallocated purchase price approximately 103 million including estimate contingent consideration pursuant stock purchase agreement reported assets december 31 2018 seapilot ab october 16 2018 company acquired substantially outstanding shares seapilot ab privately held technology company allocation purchase price identified intangible assets goodwill subject final determination valuation assets acquired liabilities assumed primary areas purchase price allocation yet finalized relate valuation intangible assets related taxes final allocation purchase price assets acquired liabilities assumed completed final assessments intangible assets related taxes completed first half 2019 goodwill intangibles recorded commercial business unit preliminary unallocated purchase price approximately 46 million reported assets december 31 2018 business acquisitions listed significant defined regulation sx securities exchange act 1934 significant compared companys overall results operations consequently pro forma financial information provided divestitures consumer small mediumsized security businesses february 6 2018 company sold consumer small mediumsized smb security businesses within commercial business unit total cash consideration approximately 288 million result combined sale subsequent negotiations buyer company recognized incremental pretax loss 137 million 2018 group assets previously classified held sale fourth quarter 2017 company recorded estimated pretax loss net assets held sale 236 million disposal qualify discontinued operations therefore operating results included company’s continuing operations periods presented date sale carrying amounts assets liabilities expected included sale classified held sale december 31 2017 follows thousands flir systems inc notes consolidated financial statementscontinued note 20 shareholders’ equity february 5 2015 companys board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expired february 5 2017 february 8 2017 company’s board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expired february 8 2019 year ended december 31 2018 company repurchased approximately 50 million shares year ended december 31 2018 company paid dividends quarterly rate 016 per share total 881 million year ended december 31 2017 company paid dividends quarterly rate 015 per share total 826 million year ended december 31 2016 company paid dividends quarterly rate 012 per share total 659 million note 21 restructuring costs years ended december 31 2018 2017 2016 company recorded net pretax restructuring expenses totaling 82 million 06 million 14 million respectively 2013 company initiated realignment plan included closing six nottoscale sites united states europe transfer operations companys larger facilities 2013 realignment program company also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas 2013 realignment program concluded 2018 years ended december 31 2018 2017 2016 company also incurred restructuring charges associated cost reduction initiatives related 2013 realignment program note 22 subsequent events effective january 11 2019 standby letter credit totaling approximately 245 million swedish kroner 22 billion issued new bilateral letter credit reimbursement agreement lc agreement secure payment guarantee required swedish tax authorities order grant respite paying tax reassessment described note 15 income taxes outstanding amounts lc agreement reduce available revolving credit agreement described note 10 credit agreement january 28 2019 company completed acquisition 100 outstanding stock aeryon labs inc privately held aerospace company total cash consideration approximately 200 million aeryon labs leading developer highperformance uas global military public safety critical infrastructure markets final purchase price allocation completed 2019 recorded companys government defense business unit february 7 2019 companys board directors authorized repurchase 15 million shares companys outstanding common stock authorization expire february 7 2021 february 7 2019 companys board directors declared quarterly dividend 017 per share companys common stock payable march 8 2019 shareholders record close business february 22 2019 total cash payment dividend approximately 23 million february 11 2019 company announced entered definitive agreement acquire endeavor robotics holdings inc endeavor arlington capital partners total cash consideration approximately 385 million endeavor robotics leading developer battletested tactical unmanned ground vehicles global military public safety critical infrastructure markets upon closing acquisition expected first quarter 2019 endeavor part companys government defense business unit 1 net earnings fourth quarter 2018 includes 150 million costs regulatory settlement discrete tax benefit 331 million cancellation belgium tax assessments issued part european commissions decision regarding state aid 2 net earnings fourth quarter 2017 includes discrete tax charge 944 million associated us tax cuts jobs act enacted december 2017 loss net assets held sale 236 million sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm shareholders board directors flir systems inc opinion consolidated financial statements audited accompanying consolidated balance sheets flir systems inc subsidiaries company december 31 2019 2018 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2019 related notes collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows years threeyear period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 27 2020 expressed unqualified opinion effectiveness company’s internal control financial reporting change accounting principles discussed note 1 consolidated financial statements company changed method accounting leases 2019 due adoption accounting standards codification topic 842 leases also discussed note 1 consolidated financial statements company changed method accounting revenue income tax impact intraentity transfers assets 2018 due adoption accounting standards codification topic 606 revenue contracts customers accounting standards update 201616 intraentity transfers assets inventory respectively basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee 1 relate accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate contingencies associated compliance matters discussed note 15 consolidated financial statements company involved various ongoing compliance matters including compliance international traffic arms regulations export laws regulations matters required judgment determine likelihood potential loss consideration whether contingent liability andor disclosure necessary identified evaluation contingencies associated compliance matters critical audit matter evaluation company’s judgments regarding compliance matter including required recognition liability andor associated disclosure involved high degree subjective auditor judgment particular subjective auditor judgments required related consideration communication relevant government agencies precedent similar matters impact expected outcome primary procedures performed address critical audit matter included following tested certain internal controls company’s evaluation contingencies related disclosures including controls uncertainties impacting assessment expected outcome compliance matter addition assessed amounts recorded disclosures made inquiring company including members company’s legal department obtained read letters directly company’s internal external legal counsel described nature outstanding compliance matters inspected relevant correspondence company governmental agencies related compliance matters considered relevant publicly available information company competitors industry regard compliance matters similar nature identify precedence evaluation expected outcome evaluated company’s disclosures consistency knowledge ongoing compliance matters identification evaluation uncertain tax positions certain foreign taxing jurisdictions discussed notes 1 16 consolidated financial statements company operates multiple foreign tax jurisdictions tax position recorded determination made likely position sustainable upon examination based technical merits position identified company’s identification evaluation uncertain tax positions certain foreign taxing jurisdictions critical audit matter critical audit matter required challenging auditor judgment due nature subjectivity applicable tax rules andor interpretation foreign jurisdiction primary procedures performed address critical audit matter included following tested certain internal controls company’s tax process including controls related identification uncertain tax positions determination meeting likely threshold inspected external information correspondence foreign tax authorities open tax examinations tax assessments issued inquired external counsel confirmations understand matters status facts relevant tax positions also involved international tax professionals specialized skills knowledge foreign tax law assisted inspecting management prepared tax positions external tax opinion documentation comparing interpretation tax law inspecting relevant cases evaluating impact company’s positions performing independent evaluation tax positions assumptions comparing results company’s position includes assessing need uncertain tax position liability disclosure inquiring external counsel meetings current status facts matters may impact probability outcome uncertain tax positions evaluation fair value certain intangible assets acquired discussed note 20 consolidated financial statements january 28 2019 company acquired aeryon labs inc aeryon march 4 2019 company acquired endeavor robotics holdings inc endeavor transactions accounted business combinations result transactions company acquired acquisition date fair value intangible assets 1470 million including 927 million developed technology intangible assets 280 million endeavor’s inprocess research development iprd intangible asset identified evaluation fair value developed technology intangible assets acquisitions endeavor’s iprd intangible asset critical audit matter high degree subjectivity evaluating projected financial information due significant estimation assumptions future performance acquired businesses specifically fair value sensitive changes certain assumptions discrete period projected cash flows projected revenue attributable specific technology iprd technology obsolescence curve royalty rate weightedaverage cost capital wacc including discount rates primary procedures performed address critical audit matter included following tested certain internal controls company’s acquisitiondate valuation process develop relevant assumptions listed including controls related review assumptions evaluated company’s projected revenue analyzing actual results industry data including market spend expectations evaluated forecasted expenses comparing historic actual results compared revenue attributable intangibles obsolescence curve historic lives company’s technology products compared industry data addition involved valuation professionals specialized skills knowledge assisted evaluating royalty rate comparing set comparable licensing agreements implying royalty rate could supported based projected margin acquired companies evaluating wacc developing independent calculation using publicly available market data comparing result company’s wacc evaluating discount rates independently developing internal rate return irr weighted average cost capital wacc reconciling results weighted average return assets wara calculation kpmg llp served company’s auditor since 2002 portland oregon february 27 2020 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements 1 see note 1 nature business significant accounting policies recently adopted accounting pronouncements additional information adoption impacts accounting standards update 201409 revenue contracts customers asc 606 201616 intraentity transfers assets inventory asu 201616 2 company recorded immaterial correction increased retained earnings deferred income taxes related companys adoption asu 201616 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers improving personal public safety security providing advanced intelligence surveillance reconnaissance tactical defense capabilities facilitating air ground maritimebased situational awareness detecting electrical mechanical building envelope problems displaying process irregularities detecting volatile organic gas emissions enhancing advanced driverassistance systems autonomous driving solutions well variety uses thermal sensing technologies companys business model range solutions allow sell products various end markets including industrial original equipment manufacturing military homeland security enterprise infrastructure environmental company sells offtheshelf products configurations suit specific customer requirements efficient timely affordable manner support customers training ongoing support services centered design products lowcost manufacturing highvolume distribution companys commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years financial statements conform presentation year ended december 31 2019 reclassifications effect consolidated financial position net earnings shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income expense net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss 1644 million 1484 million december 31 2019 2018 respectively transaction gains losses included expense income net losses 08 million 13 million 02 million years ended december 31 2019 2018 2017 respectively revenue recognition effective january 1 2018 company adopted requirements accounting standards update asu 201409 related amendments revenue contracts customers asc 606 superseded prior revenue recognition methods industryspecific guidance flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued revenue recognition continued company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers revenue recognized upon transfer control promised products services customers amount reflects consideration company expects receive exchange products services company regularly enters contracts include various combinations products services generally capable distinct accounted separate performance obligations situations contract values allocated performance obligation based relative estimated standalone selling price vast majority companys revenues recognized point time goods transferred customer however certain contracts include highly customized components performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date revenue recognized time performance obligation satisfied revenue includes certain shipping handling costs stated net thirdparty agency fees shipping handling costs associated outbound freight control product transferred customer accounted fulfillment cost included cost goods sold revenue recognized net allowances returns net taxes collected customers subsequently remitted governmental authorities companys products sold warranty provisions require remedy deficiencies quality performance companys products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent companys estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified service revenue deferred recognized contract period case extended warranty contracts recognized services provided see note 19 operating segments related information revenue longlived assets geographic area information related company’s revenues disaggregated significant geographical region operating segment cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents restricted cash company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2019 2018 07 million 2000 million respectively primarily investments money market funds overnight deposits restricted cash includes cash subject legal contractual restriction third party restricted withdrawal use including restrictions require funds used specified purpose restrictions limit purpose funds used company restricted cash balances december 31 2019 2018 respectively accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition certain instances company also records allowance based certain factors including length time receivables past due historical collection experience individual customers flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued fair value financial instruments fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market asset liability would transact necessary considers assumptions market participants would use pricing asset liability accounting guidance fair value measurements establishes threelevel fair value hierarchy prioritizes inputs used measuring fair value follows observable inputs quoted prices active markets level 1 inputs quoted prices active markets observable either directly indirectly level 2 unobservable inputs little market data requires company develop assumptions level 3 assets liabilities classified entirety within fair value hierarchy based lowest level input significant fair value measurement inventories stated lower cost net realizable value include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income see note 6 inventories additional information discussion inventory writedowns associated outdoor tactical systems ots restructuring within commercial business unit cbu operating segment recorded year ended december 31 2019 well inventory writedowns associated restructuring actions year ended december 31 2018 demonstration units company’s products used demonstration units stated lower cost net realizable value included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 304 million 352 million december 31 2019 2018 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill effective january 1 2019 company adopted requirements asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment goodwill represents excess purchase price acquired enterprise estimated fair value identifiable net assets acquired company assesses goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value company may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process result adoption asu 201704 determined goodwill impaired longer required compare implied fair value reporting unit goodwill associated carrying amount goodwill commonly referred step 2 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued goodwill continued company elects first assess qualitative factors determine whether likely fair value reporting unit less carrying value performing qualitative assessment company considers factors including limited current macroeconomic conditions industry market conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance events relevant entity reporting unit evaluation based review qualitative factors likely fair value reporting unit less carrying value company elected bypass assessing qualitative factors company would perform quantitative impairment test identify goodwill impairment measure amount goodwill impairment loss recognized comparing fair value reporting unit carrying amount impairment charge would recognized amount carrying amount exceeds reporting unit’s fair value however loss recognized exceed total amount goodwill allocated reporting unit impairment tests performed current year indicate impairment goodwill reporting units exception ots reporting unit part cbu operating segment based assessment qualitative factors fourth quarter determined likely fair value less carrying value ots reporting unit quantitative impairment test performed determined fair value ots reporting unit approximately 63 carrying value result company recorded goodwill impairment charges cbu operating segment fourth quarter fiscal year 2019 represents difference carrying value fair value ots reporting unit company recognize impairment charges goodwill years ended december 31 2018 2017 see note 9 goodwill additional information discussion goodwill impairments associated ots restructuring within cbu operating segment recorded year ended december 31 2019 intangible assets intangible assets amortized using method best reflects economic benefits utilized pattern economic benefits cannot reliably determined amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required see note 10 intangibles assets additional information discussion impairment charges associated ots restructuring within cbu operating segment recognized year ended december 31 2019 company recognize impairment charges intangible assets indefinite lives years ended december 31 2018 2017 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value advertising costs advertising costs including social media included selling general administrative expenses expensed incurred advertising costs years ended december 31 2019 2018 2017 107 million 130 million 195 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued minority interest equity investments company holds certain investments equity instruments nonpublicly traded companies equity investments company control ability exercise significant influence operating financial policies accounted using equity method companys proportionate share income loss recorded expense income net consolidated statement income nonmarketable equity investments measured cost less impairment adjusted changes resulting qualifying observable price changes prior 2018 nonmarketable equity investments accounted using cost method company periodically reviews equity investments impairment year ended december 31 2019 company recognized impairments 41 million associated equity investments included expense income net consolidated statement income years ended december 31 2018 2017 company recognize impairments minority interest equity investments carrying values minority interest equity investments 199 million 171 million december 31 2019 2018 respectively included assets consolidated balance sheets contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals disclosures adjusted income taxes company accounts income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis company estimates future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control company subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain company records benefit tax position likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained company measures tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available reporting date company reviews tax positions circumstances warrant update liability additional taxes changes available facts arise earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance shares upon vesting restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued earnings per share continued effect stockbased compensation awards years ended december 31 2019 2018 2017 aggregated 33000 10000 39000 shares respectively excluded purposes diluted earnings per share since effect inclusion would antidilutive supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued based fair market value companys stock discounted expected dividends date grant restricted stock units containing performancebased vesting criteria valued date grant based fair value companys stock discounted expected dividends estimate illiquidity estimated discount illiquidity relevant share based awards require plan participant hold shares specified period time award vests estimated using protective put method company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award following table sets forth stockbased compensation expense recognized consolidated statements income years ended december 31 2019 2018 2017 thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation continued stockbased compensation expense capitalized consolidated balance sheets december 31 2019 2018 2017 follows thousands december 31 2019 company approximately 595 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period approximately two years fair value stockbased awards granted years ended december 31 2019 2018 2017 estimated following weightedaverage assumptions company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2017 2016 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2019 2018 2017 company granted approximately 867000 594000 773000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2019 2018 2017 5045 5293 3620 per share respectively years ended december 31 2019 2018 2017 company granted approximately 158000 177000 283000 performancebased restricted stock units respectively units earned based upon companys return invested capital three year period fair value performancebased restricted units granted years ended december 31 2019 2018 2017 4957 5232 3508 per share respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation continued total fair value restricted stock unit awards granted year ended december 31 2019 table 516 million includes 78 million grant date fair value associated performancebased restricted stock units total fair value restricted stock unit awards granted year ended december 31 2018 table 407 million includes 92 million grant date fair value associated performancebased restricted stock units total fair value restricted stock unit awards granted year ended december 31 2017 table 379 million includes 99 million grant date fair value associated performancebased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2019 2018 2017 212 million 237 million 535 million respectively related tax benefits realized exercise stock options years ended december 31 2019 2018 2017 48 million 87 million 30 million respectively concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 19 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments fair value adjustments interest rate swap contracts unrealized gains losses availableforsale securities changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive earnings loss year ended december 31 2019 recently adopted accounting pronouncements financial accounting standards board fasb accounting standards update asu 201602 leases asc 842 effective january 1 2019 company adopted asc 842 related amendments using modified retrospective method using permitted practical expedients contracts still outstanding january 1 2019 comparative information restated continues reported accounting standards effect periods significant impact recognition discounted basis rightofuse rou assets totaling approximately 319 million lease liabilities totaling approximately 342 million noncancelable operating leases january 1 2019 related new required disclosures standard impact companys consolidated income statements consolidated statements cash flows additional disclosures required new standard see note 7 leases fasb asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment asu 201704 effective january 1 2019 company adopted asu 201704 amendments update simplify subsequent measurement goodwill removing second step twostep impairment test amendment also requires entity perform annual interim goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting units fair value however loss recognized exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary standard material impact companys consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recently adopted accounting pronouncements continued fasb asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income asu 201802 effective january 1 2019 company adopted asu 201802 standard allows companies reclassify stranded tax effects accumulated comprehensive earnings loss caused tax cuts jobs act 2017 act retained earnings period effect change us federal corporate income tax rate recorded however fasb made reclassification optional result company assessed impact asu financial statements exercise option reclassify stranded tax effects caused act fasb asu 201807 improvements nonemployee sharebased payment accounting asu 201807 effective january 1 2019 company adopted asu 201807 standard closely aligns accounting employee nonemployee sharebased payments standard material impact companys consolidated financial statements disclosures fasb asu 201815 “customer’s accounting implementation costs incurred cloud computing arrangement service contract” “asu 201815” effective january 1 2019 company adopted asu 201815 amendments update align requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software hosting arrangements include internaluse software license accounting service element hosting arrangement service contract affected amendments update standard material impact company’s consolidated financial statements fasb asu 201409 revenue contracts customers effective january 1 2018 company adopted asu 201409 related amendments new revenue standard asc 606 using modified retrospective method contracts yet completed january 1 2018 result company recognized cumulative effect initially applying new revenue standard adjustment opening balance retained earnings amount approximately 10 million january 1 2018 comparative information restated continues reported accounting standards effect periods company expects impact adoption new standard immaterial net income ongoing basis see note 2 revenue additional disclosures required new revenue standard fasb asu 201616 intraentity transfers assets inventory asu 201616 effective january 1 2018 company adopted asu 201616 eliminates exception recognizing time transfer current deferred income taxes intraentity asset transfers inventory new standard applied modified retrospective transition basis adjustment opening balance retained earnings amount approximately 793 million 34 million january 1 2018 2019 respectively recently issued accounting pronouncements june 2016 fasb issued asu 201613 measurement credit losses financial instruments asu 201613 topic 326 significantly changes way entities recognize impairment many financial assets requiring immediate recognition estimated credit losses expected occur remaining life subsequently fasb issued several amendments new standard clarify implementation asu 201613 related amendments effective interim annual reporting periods beginning december 15 2019 using modifiedretrospective approach company adopted standard january 1 2020 material impact consolidated financial statements november 2018 fasb issued asu 201818 collaborative arrangements topic 808 clarifying interaction topic 808 topic 606 asu 201818 standard clarifies certain transactions collaborative arrangement participants accounted asc 606 one participant customer specifies distinct good service unit account evaluating whether transaction customer standard also provides guidance presentation transactions scope asc 606 standard effective fiscal years beginning december 15 2019 company adopted standard january 1 2020 material impact consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recently issued accounting pronouncements continued december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes standard simplifies accounting income taxes removing certain exceptions general principles topic 740 recognizing deferred taxes investments performing intraperiod allocations calculating taxes interim periods asu 201912 also improves consistent application simplifies gaap areas topic 740 clarifying amending existing guidance reduce complexity certain areas including recognizing deferred taxes tax goodwill allocating taxes members consolidated group standard effective fiscal years beginning december 15 2020 early adoption permitted company plans adopt standard january 1 2021 currently evaluating guidance determine impact may consolidated financial statements note 2 revenue contract balances timing revenue recognition billings cash collections results billed accounts receivable unbilled receivables deferred revenue advance payments customers consolidated balance sheets contract assets liabilities reported contractbycontract basis company material deferred contract costs recorded consolidated balance sheet december 31 2019 contract assets company recognizes unbilled receivables contract assets company rights consideration work completed yet billed reporting date unbilled receivables included within accounts receivable net consolidated balance sheets balance unbilled receivables december 31 2019 2018 94 million 105 million respectively contract liabilities company records contract liabilities cash payments received due advance companys performance contract liabilities include deferred revenue advance payments customers contract liabilities classified either current longterm consolidated balance sheets based timing company expects recognize revenue december 31 2019 2018 contract liability balances totaled 691 million 664 million respectively balances included amounts classified longterm december 31 2019 2018 125 million 140 million respectively included within longterm liabilities accompanying consolidated balance sheets approximately 666 million revenue recognized twelve month period ended december 31 2019 included combined contract liability balances december 31 2018 remaining performance obligations remaining performance obligations represent aggregate transaction price allocated performance obligations original contract term greater one year fully partially unsatisfied end period remaining performance obligation disclosure similar concept backlog definition remaining performance obligations excludes contracts provide customer right cancel terminate convenience substantial penalty even historical experience indicates likelihood cancellation termination remote company elected exclude contracts customers original term one year less remaining performance obligations contracts included within backlog december 31 2019 aggregate amount transaction price allocated remaining performance obligations approximately 2352 million company expects recognize revenue approximately 74 percent remaining performance obligations next twelve months remainder recognized thereafter flir systems inc notes consolidated financial statementscontinued note 3 fair value financial instruments factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk observable market prices identical instruments traded less active markets level 3 significant inputs generally less observable objective sources including assumptions determining fair value factors methodology used valuing securities necessarily indication risk associated investing securities company 07 million 2000 million cash equivalents december 31 2019 2018 respectively primarily investments money market funds overnight deposits company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair value company’s derivative contracts december 31 2019 2018 disclosed note 4 derivative financial instruments based level 2 inputs fair value companys borrowings credit agreement described note 11 credit agreement december 31 2019 approximates carrying value fair value company’s senior unsecured notes described note 13 longterm debt approximately 4301 million 4188 million based upon level 2 inputs december 31 2019 2018 respectively fair value qualifying observable price changes related companys minority interest equity investments discussed note 1 nature business significant accounting policies based level 3 inputs company significant financial assets liabilities measured fair value note 4 derivative financial instruments companys financial position results operations subject certain financial market risks company regularly assesses risks established risk management practices designed mitigate impact certain foreign currency exchange rate interest rate risk exposures company engage speculative trading financial market foreign currency contracts company uses currency forward contracts formally designated hedges manage consolidated exchange rate risk associated remeasurement certain nonfunctional currency denominated monetary assets liabilities primarily subsidiaries use us dollars european euros canadian dollars swedish kronor norwegian kroner brazilian real british pound sterling functional currency changes fair value foreign currency forward contracts recognized expense income net end reporting period general gains losses offset consolidated statements income reciprocal gains losses underlying assets liabilities originally gave rise exposure december 31 2019 company’s foreign currency forward contracts formally designated hedges maturities three months less flir systems inc notes consolidated financial statementscontinued note 4 derivative financial instruments continued foreign currency contracts continued addition company manages risk changes fair value certain monetary liabilities attributable changes exchange rates company manages risks using currency forward contracts formally designated effective fair value hedges hedge effectiveness generally determined evaluating alignment hedging instruments critical terms critical terms hedged item forward points attributable hedging instruments excluded assessment effectiveness amortized expense income net using systematic rational methodology differences change fair value excluded component amounts recognized systematic rational method recognized comprehensive income change fair value hedging instruments attributable hedged risk reported expense income net change fair value hedged item attributable hedged risk reported adjustment carrying value also included expense income net december 31 2019 company’s foreign currency forward contracts formally designated fair value hedges maturities three years less interest rate swap companys outstanding debt december 31 2019 consists fixed rate notes unsecured credit facility consisting unsecured revolving loan facility unsecured us dollar term loan unsecured swedish kronor term loan accrue interest floating rate discussed note 11 credit agreement interest expense companys floating rate debt calculated based fixed spread applicable eurocurrency rate eg libor subject floor zero percent therefore fluctuations market interest rates cause interest expense increases decreases given amount floating rate debt company managing interest rate risk related certain floating rate debt interest rate swap “swap” company receives floating rate payments subject floor zero percent makes fixed rate payments impact swap fix floating rate basis calculation interest unsecured swedish kronor term loan 0590 percent swap designated effective cash flow hedge individual swap cash flows recorded asset liability companys consolidated balance sheets fair value hedge effectiveness generally determined evaluating alignment hedging instruments critical terms critical terms hedged item fair value adjustments recorded adjustment accumulated comprehensive income loss companys derivative counterparties investment grade credit ratings company party master netting arrangements contain features allow counterparties net settle amounts arising multiple separate derivative transactions net settle case certain triggering events bankruptcy major default one counterparties transaction company pledged assets posted collateral requirement entering maintaining derivative positions following table presents gross notional amounts outstanding derivative instruments thousands flir systems inc notes consolidated financial statementscontinued note 4 derivative financial instruments continued interest rate swap continued following table presents balance sheet classification fair value derivative instruments thousands following table presents statement income classification derivative instruments thousands flir systems inc notes consolidated financial statementscontinued note 4 derivative financial instruments continued interest rate swap continued carrying amounts foreign exchange contracts included consolidated balance sheets follows thousands note 5 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2019 2018 2017 thousands note 6 inventories consist following thousands years ended december 31 2019 2018 company recognized inventory writedowns 59 million 33 million respectively associated restructuring activities discussed note 22 “restructuring ” inventory writedowns included cost goods sold consolidated statements income flir systems inc notes consolidated financial statementscontinued note 7 leases company determines arrangement lease inception operating leases included assets current liabilities longterm liabilities consolidated balance sheets company finance leases december 31 2019 operating lease rightofuse assets rou assets represent company’s right use underlying asset lease term operating lease liabilities represent obligation make lease payments arising lease rou assets liabilities recognized commencement date lease based present value minimum fixed lease payments lease term leases provide implicit rate company uses incremental borrowing rate based information available commencement date determining present value lease payments rou assets also include prepaid lease payments made prior commencement lease plus initial capitalized direct costs exclude tenant improvement allowances lease terms may include options extend terminate lease reasonably certain option exercised lease expense minimum fixed lease payments recognized straightline basis lease term company elected apply shortterm lease exemption accordance guidance therefore shortterm leases term twelve months less recorded balance sheet company small number leases qualify exemption amount remaining shortterm lease commitments significant company’s operating leases buildings warehouses office space leases remaining lease terms approximately one year ten years components lease expense follows thousands supplemental cash flow information related operating leases thousands supplemental balance sheet information related operating leases thousands december 31 2019 weighted average remaining lease term operating leases 50 years weighted average discount rate 402 flir systems inc notes consolidated financial statementscontinued note 7 leases continued maturities lease liabilities december 31 2019 follows thousands companys future minimum lease commitments net sublease rental income december 31 2018 accounting standard codification topic 840 predecessor topic 842 follows thousands note 8 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2019 2018 2017 442 million 406 million 423 million respectively flir systems inc notes consolidated financial statementscontinued note 9 goodwill carrying value goodwill activity two year period ending december 31 2019 follows thousands year ended december 31 2019 company recorded 4694 million goodwill connection purchase price allocation associated acyclica inc acylica seapilot ab seapilot aeryon endeavor new england optical systems inc year ended december 31 2018 company recorded 92 million goodwill primarily connection purchase price allocation associated fishing hot spots fishidy see note 20 business acquisitions divestitures additional information goodwill acquisitions company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value reporting unit exceeds fair value third quarter 2019 company completed annual review goodwill determined impairment recorded goodwill necessary fourth quarter fiscal year 2019 company approved plan restructure ots reporting unit within commercial business unit cbu operating segment restructuring discontinue operations thermal night vision business refocus strategy personal vision system “pvs” product line law enforcement public safety markets result company revised outlook lowered financial forecast ots business company determined factors likely significant adverse impact ots reporting unit therefore interim goodwill impairment quantitative analysis performed utilizing income market approach determine reporting units fair value income approach discounted cash flow method performed calculating fair value based future forecasted cash flows discounted back present value including significant judgments related risk adjusted discount rates terminal growth rates weighted average cost capital “wacc” projected cash flows developed company planning purposes based current known business market conditions well future anticipated industry trends terminal value growth rate 25 wacc 16 utilized based industry macroeconomic indicators well estimated risk premiums market approach guideline public company method performed calculate fair value ots reporting unit applying pricing multiples derived selected publicly traded guideline companies company utilized enterpriseearnings interest taxes depreciation amortization ebitda multiples enterpriserevenue multiples ranged low 50 high 206 low 06 high 46 respectively based quantitative goodwill impairment test company determined fair value ots reporting unit determined using equal weighting income market approaches approximately 63 carrying value result company recorded goodwill impairment charges 65 million cbu operating segment fourth quarter fiscal year 2019 represents difference carrying value fair value ots reporting unit company recorded goodwill impairment charge selling general administrative companys consolidated statements income flir systems inc notes consolidated financial statementscontinued note 10 intangibles assets intangible assets summarized follows thousands year ended december 31 2019 company recorded 1597 million identified intangibles assets connection purchase price allocation associated acyclica seapilot aeryon endeavor new england optical systems inc year ended december 31 2018 company recorded 60 million identified intangibles assets connection purchase price allocation associated fishing hot spot fishidy refer note 20 business acquisitions divestitures discussion fourth quarter fiscal year 2019 company recognized intangible asset impairment charge 12 million assets included customer relationships determined recoverable due change expected future economic benefit associated ots restructuring strategic shift discussed note 9 goodwill company recorded intangible asset impairment charge selling general administrative companys consolidated statements income aggregate amortization expense recorded 2019 2018 2017 575 million 247 million 275 million respectively intangible assets recorded december 31 2019 estimated future aggregate amortization expense years ending december 31 2020 2024 approximately thousands flir systems inc notes consolidated financial statementscontinued note 11 credit agreement march 29 2019 company entered second amended restated credit agreement “restated credit agreement” bank america na jpmorgan chase bank na us bank national association citibank na mufg union bank na lenders party thereto restated credit agreement amended restated companys original credit agreement dated may 31 2016 restated credit agreement provides 6500 million unsecured revolving credit facility 1000 million unsecured term loan facility available us dollars amortizing 5000 percent per annum 1500 million unsecured term loan facility available swedish kronor amortizing 5000 percent per annum restated credit agreement term five years matures march 29 2024 connection closing restated credit agreement company made initial borrowing 1000 million revolving loans 1000 million term loans us dollars equivalent 1500 million term loans swedish kronor additionally company repaid full outstanding amounts consisting revolving loans aggregate principal amount 3750 million original credit agreement company right subject certain conditions including approval additional commitments qualified lenders increase availability revolving credit facility additional 2000 million march 29 2024 restated credit agreement allows company certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates restated credit agreement determined type tenor borrowing includes loans based published term eurocurrency rate eg libor loan denominated eurocurrency rate loans floor zero percent applicable margin ranges 1000 percent 1375 percent depending company’s consolidated total leverage ratio december 31 2019 borrowing rate revolving loan 3049 percent per annum borrowing rate us dollar term loan 3195 percent per annum borrowing rate swedish kronor term loan 1348 percent per annum unadjusted hedging restated credit agreement requires company pay commitment fee amount unused revolving commitments rate based consolidated total leverage ratio ranges 0125 percent 0200 percent unused revolving commitments december 31 2019 commitment fee amount unused revolving credit 0175 percent per annum restated credit agreement contains one financial covenant requires maintenance consolidated total leverage ratio company compliance december 31 2019 facilities available restated credit agreement unsecured restated credit agreement also contains language providing adoption libor successor rate consistent market practice company engaged regular dialogue lenders derivatives counterparties keep apprised proposed successor rates jurisdictions might need execute financial transaction although progress made various working groups company believes early accurately assess financial impact libor benchmark reform december 31 2019 company 108 million letters credit outstanding reduces total available revolving credit restated credit agreement january 11 2019 standby letter credit exceed swedish kronor 22 billion issued new bilateral letter credit reimbursement agreement lc agreement secure payment guarantee required swedish tax authorities order grant respite paying tax reassessment described note 16 income taxes outstanding amount lc agreement equivalent approximately 2372 million december 31 2019 outstanding amounts lc agreement reduce available revolving credit restated credit agreement described flir systems inc notes consolidated financial statementscontinued note 12 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2019 2018 2017 thousands note 13 longterm debt longterm debt consists following thousands june 2016 company issued 425 million aggregate principal amount 3125 percent senior unsecured notes due june 15 2021 “2016 notes” net proceeds issuance 2016 notes approximately 4210 million deducting underwriting discounts offering expenses amortized period five years interest 2016 notes payable semiannually arrears december 15 june 15 proceeds 2016 notes used repay principal amount notes outstanding july 2016 used general corporate purposes including working capital expenditure needs business acquisitions repurchases company’s common stock discussed note 11 credit agreement march 29 2019 company made initial borrowing 1000 million term loans us dollars equivalent 1500 million term loans swedish kronor restated credit agreement entered march 29 2019 term loans amortize 5000 percent per annum current portion included current liabilities note 14 commitments total net rent expense years ended december 31 2019 2018 2017 amounted 148 million 133 million 139 million respectively additional information future minimum obligations noncancelable leases refer note 7 leases flir systems inc notes consolidated financial statementscontinued note 15 contingencies matters involving united states department state department commerce april 24 2018 company entered consent agreement united states department states directorate defense trade controls “ddtc” resolve allegations regarding unauthorized export technical data defense services dual third country nationals certain company facilities failure properly use manage export licenses export authorizations failures report certain payments 22 cfr part 130 potential violation international traffic arms regulation “itar” consent agreement fouryear term provides civil penalty 300 million 150 million amount suspended condition funds used departmentapproved consent agreement remedial compliance measures ii appointment external special compliance official oversee compliance consent agreement itar iii two external audits company’s itar compliance program iv continued implementation ongoing remedial compliance measures additional remedial compliance measures related automated systems itar compliance policies procedures training first quarter fiscal 2018 company recorded 150 million charge portion penalty subject suspension april 2018 2019 company paid 10 million 35 million respectively 150 million charge december 31 2019 remaining amount payable 35 million 70 million recorded current liabilities longterm liabilities respectively remaining 105 million payable annual installments 35 million april 2022 company expects recent future investments remedial compliance measures sufficient cover 150 million suspension amount part consent agreement ddtc acknowledged company voluntarily disclosed certain alleged arms export control act itar violations resolved pursuant consent agreement cooperated ddtcs review instituted number compliance program improvements may 2017 company submitted initial notification ddtc regarding potential violations related certain export classifications obtained commodity jurisdiction process final voluntary disclosure august 2017 company also submitted voluntary selfdisclosure regarding matter united states department commerce bureau industry security bis ddtc bis acknowledged submissions request agencies company executed tolling agreements matter ddtc tolling agreement lapsed company executed tolling agreement bis extended agreement suspending statute limitations march 1 2020 company also executed tolling agreement department justice doj extended agreement suspending statute limitations doj march 1 2020 matter remains review ddtc doj bis june 2017 bis informed company additional export licensing requirements restrict company’s ability sell certain thermal products without license customers china identified list maintained united states department commerce action precipitated concerns sale without license potential diversion companys products prohibited end users countries subject economic sanctions implemented united states bis subsequently favorably modified restrictions reduce applicability restrictions sales flirs tau camera cores opposed finished products containing tau camera cores customers china identified list maintained united states department commerce persons country ear country group a5 supplement 1 part 740 ear company found violated applicable rules regulations respect customers limitations export end use company’s products company could subject substantial fines penalties suspension existing licenses authorizations andor loss suspension export privileges time based available information regarding proceeding company unable reasonably estimate time may take resolve matters amount range potential loss penalty government action may incurred connection matters however unfavorable outcome could result substantial fines penalties loss suspension export privileges particular authorizations could material company’s financial position results operations cash flows following period outcome becomes estimable known flir systems inc notes consolidated financial statementscontinued note 15 contingencies continued skywatch product quality matters march 2016 company learned potential quality concerns respect many 315 level iii level iv skywatch surveillance towers sold flir companies acquired flir 2002 2014 company notified customers purchased affected skywatch towers potential concerns precautionary measure also temporarily suspended production level iii level iv skywatch towers pending completion review implementation necessary remedial measures company identified cause quality issues notified customers option request repair modification infield units begun infield repairs identified affected units still remains uncertainty related estimating costs associated potential remedy number units may require remedy company currently estimates range potential loss remaining units 35 million 101 million single amount within range better estimate amount within range company recorded accrual 35 million current liabilities december 31 2019 factors underlying estimated range loss may change time actual results may vary significantly estimate shareholder derivative lawsuit october 2018 shareholder filed derivative lawsuit circuit court state oregon county multnomah caption stein v carter et al case 18cv46824 company nominal defendant certain current former directors company pointing company’s 2015 settlement united states securities exchange commission alleged united states foreign corrupt practices act violations 2018 settlement united states department state alleged export control violations complaint alleges company’s directors breached fiduciary duties failing ensure company internal controls place would prevented alleged underlying misconduct settlements complaint also asserts claims corporate waste unjust enrichment seeks unspecified monetary damages individual defendants injunctive relief disgorgement director compensation attorneys’ fees costs complaint derivative nature seek monetary damages company however company may required advance ultimately responsible legal fees costs incurred individual defendants january 16 2019 defendants moved dismiss complaint march 21 2019 instead opposing defendants motion plaintiff filed amended complaint april 25 2019 defendants moved dismiss amended complaint july 22 2019 complete briefing oral argument court granted defendants’ motion dismiss amended complaint without prejudice leave amend july 29 2019 plaintiff informed court plaintiff would file second amended complaint august 6 2019 court entered order judgment dismissal without prejudice matters company also subject legal administrative proceedings investigations claims litigation arising ordinary course business specifically identified matters others specifically identified company records liability respect matter management believes probable liability incurred company reasonably estimate amount loss company believes recorded adequate provisions probable estimable losses matters existence date hereof company reviews provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular matter outcome matters cannot predicted certainty company believes probability remote outcome matters individually material adverse effect company’s financial position results operations cash flows costs resolve matters may aggregate material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 16 income taxes pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands net deferred tax assets liabilities classified balance sheet follows thousands flir systems inc notes consolidated financial statementscontinued note 16 income taxes continued tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands december 31 2019 company united states tax net operating loss carryforwards totaling approximately 94 million expire 2032 2039 subject annual limitation section 382 internal revenue code company also various foreign net operating loss carryforwards totaling approximately 628 million portion expire 2019 2039 portion indefinite carryforward period december 31 2019 company determined valuation allowance deferred tax assets 28 million required primarily related foreign net operating losses capital losses carried forward review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets flir systems inc notes consolidated financial statementscontinued note 16 income taxes continued provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences companys effective tax rate 2019 higher united states federal tax rate 210 percent mainly due accruals settlements various taxing authorities state taxes additional withholding tax due future distributions foreign earnings included transition tax levied tax cuts jobs act 2017 tax act higher tax rates income earned foreign jurisdictions amounts offset tax credits generated united states foreign jurisdictions well excess tax benefits stock compensation companys effective tax rate 2018 lower united states federal tax rate 210 percent mainly due recognition previously unrecognized tax benefits relating european union state aid recovery discussed excess tax benefits stock compensation reduction accrual united states transition tax offset partially state taxes higher tax rates applied income earned certain foreign jurisdictions discrete items companys effective tax rate 2017 higher united states federal tax rate 350 percent mainly due companys estimate impact tax act unrecognized tax benefits intercompany pricing increased various jurisdictions 2017 partially offset excess tax benefits stock compensation mix lower foreign tax rates threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3213 million swedish kroner 30 billion company believes sta’s assertions reassessment accordance swedish tax regulations plans defend companys positions swedish court system necessary consequently adjustment companys unrecognized tax benefits recorded relation matter threemonth period ended september 30 2019 european commission announced opening separate review assess whether excess profit tax ruling granted belgium one companys international subsidiaries breach european union state aid rules company believes taxes assessed belgium paid adjusted unrecognized tax benefits relation matter december 31 2019 2018 company accrued income tax liabilities 371 million 444 million respectively related tax acts transition tax paid installments eightyear period accrue interest due prior year payments amounts due within next twelve months december 31 2019 company undistributed earnings generated january 1 2018 certain foreign subsidiaries approximately 1830 million company intends indefinitely invest outside united states recognized deferred tax estimating amount potential tax practicable due complexity variety assumptions required flir systems inc notes consolidated financial statementscontinued note 16 income taxes continued management believes companys recorded tax liabilities adequate aggregate income tax exposures following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2019 relate united states belgium united kingdom france various foreign jurisdictions 195 million would affect company’s effective tax rate recognized company anticipates approximately 106 million net unrecognized tax benefits recognized within 12 months result settlements effective settlements various tax authorities closure certain audits lapse applicable statute limitations company classifies interest penalties related unrecognized tax benefits income tax provision december 31 2019 company 39 million accrued interest penalties related unrecognized tax benefits recorded current noncurrent accrued income taxes consolidated balance sheet company files united states federal state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions flir systems inc notes consolidated financial statementscontinued note 17 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted two plans flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan amended “2011 plan” company discontinued issuing awards 2002 plan previously granted awards 2002 plan remain outstanding company granted timebased options timebased restricted stock unit awards marketbased restricted stock unit awards performancebased restricted stock unit awards options generally expire ten years grant date timebased options restricted stock unit awards generally vest threeyear period marketbased restricted stock unit awards granted year ended december 31 2016 earned based upon companys total shareholder return compared total shareholder return component company 60th percentile level sp 500 index threeyear period performancebased restricted stock unit awards granted year ended december 31 2016 earned based upon companys return invested capital threeyear period performancebased restricted stock unit awards granted year ended december 31 2017 may earned based upon companys operating margin performance threeyear period performancebased restricted stock unit awards granted years ended december 31 2019 2018 may earned based upon combination companys revenue operating performance threeyear period certain shares vested performancebased restricted stock unit awards marketbased restricted stock unit awards must held participant period one year vest date information respect stock option activity 2019 follows information respect restricted stock unit activity 2019 follows included restricted stock units outstanding december 31 2019 approximately 137000 vested restricted stock units distributed december 31 2019 5916000 shares common stock reserved future issuance stock incentive plans flir systems inc notes consolidated financial statementscontinued note 17 stockbased compensation continued employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date espp provides sixmonth offerings commencing may 1 november 1 year purchases april 30 october 31 year shares purchased espp must held employees period least 18 months date purchase april 19 2019 companys shareholders approved flir systems inc 2019 employee stock purchase plan 2019 espp final purchase 2009 espp april 30 2019 first offering 2019 espp commenced may 1 2019 company reserved 1500000 shares common stock issuance 2019 espp shares purchased 2019 espp holding period requirements 169000 shares issued average purchase price 4221 2019 1404000 shares remained available 2019 espp december 31 2019 future issuance shares issued 2019 espp purchases new shares note 18 employee benefit plans employee 401k plans company 401k savings retirement plan “401k plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended 401k plan allows contributions company made expensed matching contributions 113 million 98 million 89 million years ended december 31 2019 2018 2017 respectively pension plans company previously provided supplemental executive retirement plan “serp” certain officers company based united states december 31 2017 last remaining serp participant retired consequently year ended december 31 2018 company recorded settlement gain approximately 06 million primarily associated change projected benefit obligation associated adjusted date expected retirement final serp participant addition company previously offered certain employees outside united states participation defined benefit pension plan curtailed projected benefit obligation plans 36 million 37 million december 31 2019 2018 respectively plans funding status underfunded 36 million 37 million december 31 2019 2018 respectively pension liability 13 million 12 million december 31 2019 2018 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs defined benefit pension plan outside united states discount rates 14 percent 19 percent used years ended december 31 2019 2018 respectively determined reference market yields end reporting period high quality corporate bonds similar maturities matching duration projected benefit obligation benefits expected paid plans approximately thousands flir systems inc notes consolidated financial statementscontinued note 18 employee benefit plans continued pension plans continued result benefits longer accruing plans remaining components ongoing pension cost recorded accumulated comprehensive loss income deemed immaterial remaining obligations recorded longterm liabilities note 19 operating segments related information operating segments company’s chief operating decision maker codm chief executive officer evaluates segments’ performance allocates resources based revenue segment operating income intersegment revenues recorded cost eliminated consolidation company segments employ consistent accounting policies companys three reportable operating segments follows industrial business unit industrial business unit develops manufactures thermal visiblespectrum imaging camera cores components utilized third parties create thermal industrial types imaging systems segment also develops manufactures devices image measure assess thermal energy gases environmental elements industrial commercial scientific applications imaging payloads unmanned aerial systems uas machine vision cameras people counting tracking thermal imaging solutions use consumers smartphone mobile devices markets products include thermal imaging cameras gas detection cameras firefighting cameras process automation cameras environmental test measurement devices government defense business unit government defense business unit develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare segment also develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives cbrne threats military force protection homeland security commercial applications offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms cbrne detectors nanoclass uas solutions services related systems commercial business unit commercial business unit develops manufactures wide variety fixedmounted visible thermal imaging cameras related software perimeter security critical infrastructure enterprise smart city vertical markets electronics imaging instruments recreational commercial maritime market automatic incident detection sensors related data analytics traffic monitoring control handheld thermal imaging systems use variety first responder recreational applications products include thermal visiblespectrum security cameras related software accessories full suite networked marine electronic systems including multifunction helm displays navigational instruments autopilots radars sonar systems thermal visible imaging systems communications equipment boats sizes traffic cameras sensors associated traffic management software handheld thermal imagers following tables present revenue operating income assets three segments operating income reviewed codm revenue less cost goods sold operating expenses excluding general corporate expenses acquisition related costs executive transition costs amortization purchased intangible assets purchase accounting adjustments costs associated skywatch product remediation restructuring expenses asset impairment charges export compliance matters loss sale business charges net accounts receivable inventories demonstration assets operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis flir systems inc notes consolidated financial statementscontinued note 19 operating segments related information continued operating segments continued operating segment information follows thousands reconciliation companys consolidated segment operating income consolidated earnings income taxes follows thousands unallocated corporate expenses include general corporate expenses acquisition related costs executive transition costs purchase accounting adjustments costs associated skywatch product remediation export compliance matters flir systems inc notes consolidated financial statementscontinued note 19 operating segments related information continued operating segments continued reconciliation companys consolidated segment operating assets consolidated total assets follows thousands revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands flir systems inc notes consolidated financial statementscontinued note 19 operating segments related information continued revenue longlived assets geographic area continued longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 20 business acquisitions divestitures fishing hot spots inc march 26 2018 company completed transaction acquire 100 outstanding stock fishing hot spots inc privately held technology company approximately 71 million cash third quarter fiscal year 2018 company finalized purchase price allocation recorded 22 million identified intangible assets goodwill 47 million commercial business unit fishidy inc april 3 2018 company completed transaction acquire 100 outstanding stock fishidy inc privately held startup technology company approximately 71 million cash fourth quarter fiscal year 2018 company finalized purchase price allocation recorded 38 million identified intangible assets goodwill 46 million commercial business unit acyclica inc september 10 2018 company completed transaction acquire 100 outstanding stock acyclica inc privately held software developer automotive roadway intersection data generation analysis approximately 97 million cash including estimate contingent consideration pursuant stock purchase agreement third quarter fiscal year 2019 company finalized purchase price allocation recorded 27 million net tangible assets goodwill 70 million commercial business unit seapilot ab october 16 2018 company acquired substantially outstanding shares seapilot ab privately held technology company approximately 47 million cash third quarter fiscal year 2019 company finalized purchase price allocation recorded 17 million net tangible assets goodwill 30 million commercial business unit flir systems inc notes consolidated financial statementscontinued note 20 business acquisitions divestitures continued aeryon labs inc january 28 2019 company completed acquisition 100 outstanding stock aeryon labs inc aeryon privately held developer highperformance uas global military public safety critical infrastructure markets approximately 2059 million cash acquisition enhances company’s domain knowledge unmanned aerial systems expands distribution channels adjacent markets fourth quarter fiscal year 2019 company finalized purchase price allocation recorded 443 million identified intangible assets 1615 million goodwill government defense business unit allocation purchase price aeryon follows thousands goodwill 1615 million represents intellectual capital acquired assembled workforce none qualify recognition separate intangible asset goodwill presented expected deductible tax purposes company identified 443 million intangible assets following table summarizes acquired intangible assets estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology inprocess research development trademarks backlog developed technology represents economic advantage certain technologies place lowers manufacturing operating costs drives higher margins inprocess research development consist unpatented inprocess addon payload hardware trademarks provide value marketing promotion entity products services backlog represents “presold” business date acquisition provides positive earning streams post acquisition exceed required provide return assets employed developed technology inprocess research development valued using income approach relief royalty method trade names backlog valued using income approach method endeavor robotics holdings inc march 4 2019 company completed acquisition 100 outstanding stock endeavor robotics holdings inc endeavor privately held developer tactical unmanned ground vehicles global military public safety critical infrastructure markets approximately 3859 million cash acquisition enhances company’s offerings unmanned ground systems expands distribution channels adjacent markets based companys preliminary purchase price allocation company recorded 1027 million intangible assets 2840 million goodwill government defense business unit final allocation purchase price related tax attributes remains open anticipate finalizing calculations positions included preclosing tax returns first quarter fiscal year 2020 flir systems inc notes consolidated financial statementscontinued note 20 business acquisitions divestitures continued endeavor robotics holdings inc continued preliminary allocation purchase price endeavor follows thousands goodwill 2840 million represents intellectual capital acquired assembled workforce none qualify recognition separate intangible asset preliminary goodwill presented expected deductible tax purposes company identified 1027 million intangible assets following table summarizes acquired intangible assets preliminary estimated fair values estimated useful lives thousands except years acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology inprocess research development trademarks backlog developed technology represents economic advantage certain technologies place lowers manufacturing operating costs drives higher margins inprocess research development consist proprietary robot technology trademarks provide value marketing promotion entity products services backlog represents “presold” business date acquisition provides positive earning streams post acquisition exceed required provide return assets employed developed technology inprocess research development valued using income approach relief royalty method trade names backlog valued using income approach method new england optical systems inc may 1 2019 company acquired outstanding stock new england optical systems inc privatelyheld engineering manufacturing company engaged design production infrared optical assemblies transaction consideration includes 219 million cash payment additional 120 million deferred compensation payable twoyear period based companys preliminary purchase price allocation company recorded 64 million identified intangible assets 140 million goodwill industrial business unit preliminary goodwill expected deductible tax purposes final allocation purchase price identified intangible assets goodwill related tax attributes subject final determination fair value expected finalized second quarter fiscal year 2020 flir systems inc notes consolidated financial statementscontinued note 20 business acquisitions divestitures continued new england optical systems inc continued preliminary allocation purchase price new england optical systems inc follows thousands company identified 64 million intangible assets following table summarizes acquired intangible assets preliminary estimated fair values estimated useful lives thousands except years business acquisitions listed significant defined regulation sx securities exchange act 1934 significant compared companys overall results operations consequently pro forma financial information provided divestitures consumer small mediumsized security businesses february 6 2018 company sold consumer small mediumsized smb security businesses within commercial business unit total cash consideration approximately 288 million result combined sale company recognized approximately pretax loss 137 million year ended december 31 2018 group assets previously classified held sale fourth quarter 2017 company recorded approximately pretax loss net assets held sale 236 million disposal qualify discontinued operations therefore operating results included company’s continuing operations periods presented date sale note 21 shareholders equity february 8 2017 companys board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expired february 8 2019 february 7 2019 company’s board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expire february 7 2021 year ended december 31 2019 company repurchased approximately 25 million shares companys common stock open market transactions 2019 authorization total cash payments repurchase companys common stock year ended december 31 2019 approximately 1250 million year ended december 31 2019 company paid dividends quarterly rate 017 per share total 917 million year ended december 31 2018 company paid dividends quarterly rate 016 per share total 881 million flir systems inc notes consolidated financial statementscontinued note 22 restructuring company various active restructuring programs focused reorganization discontinuation certain businesses targeted workforce reductions facility consolidation actions targeted reductions enable company better align resources areas providing greatest benefit current business environment years ended december 31 2019 2018 2017 company recorded net pretax restructuring charges programs totaling approximately 101 million 49 million 06 million respectively primarily represent employee termination benefits costs consolidate relocate discontinue operations addition year ended december 31 2019 company incurred goodwill intangible asset impairment charges totaling approximately 65 million 12 million respectively related restructuring actions inventory writedowns associated restructuring actions also incurred totaled 59 million 33 million years ended december 31 2019 2018 respectively refer note 9 goodwill note 10 intangibles assets note 6 inventories discussion accrued restructuring balances recorded current liability within “accrued payroll related benefits” consolidated balance sheets deemed material december 31 2019 february 2020 company initiated strategydriven restructuring plan project ready simplify company’s product portfolio better align resources higher growth opportunities reducing costs project ready includes organizational realignment targeted workforce reductions facility optimization initiatives previously approved ongoing restructuring activities consolidated project ready company expects incur total costs approximately 400 million 550 million related project ready including approximately 200 million 250 million employee separation costs approximately 50 million 100 million facility consolidation expenses approximately 150 million 200 million third party costs company estimates majority cumulative pretax costs cash outlays related employee separation facility consolidation thirdparty expenses company expects costs recognized beginning first quarter 2020 continue 2021 note 23 subsequent events february 2020 company committed plan sell raymarine nonthermal maritime electronics business subject certain conditions proposed transaction customary regulatory approvals business designed marketed primarily recreational boaters lightcommercial customers actively marketed company’s intention complete sale within calendar year 2020 company process evaluating overall estimated financial impacts february 21 2020 companys board directors declared quarterly dividend 017 per share companys common stock payable march 20 2020 shareholders record close business march 6 2020 total cash payment dividend approximately 228 million 1 net earnings fourth quarter 2019 includes discrete tax expense 232 million 137 million asset impairment charges associated companys restructuring ots business 2 net earnings fourth quarter 2018 includes 150 million costs regulatory settlement discrete tax benefit 331 million cancellation belgium tax assessments issued part european commissions decision regarding state aid sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm shareholders board directors flir systems inc opinion consolidated financial statements audited accompanying consolidated balance sheets flir systems inc subsidiaries company december 31 2020 2019 related consolidated statements income comprehensive income loss shareholders’ equity cash flows years threeyear period ended december 31 2020 related notes collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows years threeyear period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 25 2021 expressed unqualified opinion effectiveness company’s internal control financial reporting change accounting principle discussed note 1 consolidated financial statements company changed method accounting leases 2019 due adoption accounting standards codification topic 842 leases basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee 1 relate accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate contingencies associated compliance matters discussed note 14 consolidated financial statements company involved various ongoing compliance matters including compliance export laws regulations matters required judgment determine likelihood potential loss consideration whether contingent liability andor disclosure necessary identified evaluation contingencies associated compliance matters critical audit matter evaluation company’s judgments regarding compliance matter including required recognition liability andor associated disclosure involved high degree subjective auditor judgment particular subjective auditor judgment required related evaluating communication relevant government agencies precedent similar matters impact expected outcome following primary procedures performed address critical audit matter evaluated design tested operating effectiveness certain internal control related company’s evaluation contingencies related disclosures specifically uncertainties impacting assessment expected outcome compliance matter evaluated amounts recorded disclosures made •inquiring members company’s legal department external counsel updates ongoing matters •obtaining reading letters directly company’s external legal counsel described nature outstanding compliance matters •inspecting relevant correspondence company governmental agencies related compliance matters •analyzing relevant publicly available information company competitors industry regarding compliance matters similar nature identify precedence evaluation expected outcome uncertain tax positions certain foreign taxing jurisdictions discussed notes 1 15 consolidated financial statements company operates multiple foreign tax jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain tax position recorded determination made likely position sustainable upon examination based technical merits position identified company’s identification assessment uncertain tax positions certain foreign taxing jurisdictions critical audit matter critical audit matter required challenging auditor judgment due nature subjectivity applicable tax rules andor interpretation foreign jurisdiction following primary procedures performed address critical audit matter evaluated design tested operating effectiveness controls related determination meeting likely threshold potential uncertain tax positions evaluate tax positions •inspected external information correspondence foreign tax authorities open tax examinations tax assessments issued •inquired external counsel confirmations understand matters status facts relevant tax positions also involved international tax professionals specialized skills knowledge foreign tax law assisted •inspecting management prepared tax positions external tax opinion documentation comparing interpretation tax law •inspecting relevant cases evaluating impact company’s positions •performing independent evaluation tax positions assumptions comparing results company’s position challenging need uncertain tax position liability disclosure •inquiring external counsel confirmations meetings update current status facts matters relevant probability outcome uncertain tax positions kpmg llp served company’s auditor since 2002 portland oregon february 25 2021 flir systems inc consolidated statements income thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated statements comprehensive income loss thousands 1 tax effects change minimum liability pension plans years ended december 31 2020 2019 immaterial 2018 01 million 2 tax effects interest rate swap contracts years ended december 31 2020 2019 2018 03 million 03 million 00 million respectively accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity thousands except per share amounts 1 see note 1 nature business significant accounting policies recently adopted accounting pronouncements additional information adoption impacts accounting standards update 201616 intraentity transfers assets inventory asu 201616 2 company recorded immaterial correction increased retained earnings deferred income taxes related companys adoption asu 201616 accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications government industrial commercial markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers improving personal public safety security providing advanced intelligence surveillance reconnaissance tactical defense capabilities facilitating air ground maritimebased situational awareness detecting electrical mechanical building envelope problems displaying process irregularities detecting volatile organic gas emissions enhancing advanced driverassistance systems autonomous driving solutions well variety uses thermal sensing technologies companys business model range solutions allow sell products various end markets including industrial original equipment manufacturing military homeland security enterprise infrastructure environmental company sells offtheshelf products customized solutions configurations suit specific customer requirements efficient timely affordable manner supports customers training ongoing support services centered design products lowcost manufacturing highvolume distribution companys commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries significant intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years financial statements conform presentation year ended december 31 2020 reclassifications effect consolidated financial position net earnings shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income expense net consolidated statements income incurred revenue recognition company records revenue accounting standards codification asc topic 606 revenue contracts customers company designs markets sells products primarily offtheshelf products certain customers request different system configurations based standard options accessories company offers revenue recognized upon transfer control promised products services customers amount reflects consideration company expects receive exchange products services flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued revenue recognition continued company regularly enters contracts include various combinations products services generally capable distinct accounted separate performance obligations situations contract values allocated performance obligation based relative estimated standalone selling price vast majority companys revenues recognized point time goods transferred customer however certain contracts include highly customized components performance create asset alternative use termination convenience clauses provide enforceable right payment performance completed date revenue recognized time performance obligation satisfied revenue includes certain shipping handling costs stated net thirdparty agency fees shipping handling costs associated outbound freight control product transferred customer accounted fulfillment costs included cost goods sold revenue recognized net allowances returns net taxes collected customers subsequently remitted governmental authorities companys products sold warranty provisions require remedy deficiencies quality performance companys products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent companys estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified service revenue deferred recognized contract period case extended warranty contracts recognized services provided see note 19 operating segments related information revenue longlived assets geographic area information related company’s revenues disaggregated significant geographical region operating segment cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents restricted cash company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2020 2019 01 million 07 million respectively primarily investments money market funds overnight deposits restricted cash includes cash subject legal contractual restriction third party restricted withdrawal use including restrictions require funds used specified purpose restrictions limit purpose funds used company restricted cash balances december 31 2020 2019 respectively accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition certain instances company also records allowance based certain factors including length time receivables past due historical collection experience individual customers flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued fair value financial instruments fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market asset liability would transact necessary considers assumptions market participants would use pricing asset liability assets liabilities classified entirety within fair value hierarchy based lowest level input significant fair value measurement factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk observable market prices identical instruments traded less active markets level 3 significant inputs generally less observable objective sources including assumptions determining fair value inventories stated lower cost net realizable value include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost net realizable value included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 301 million 304 million december 31 2020 2019 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill effective january 1 2019 company adopted requirements asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment goodwill represents excess purchase price acquired enterprise estimated fair value identifiable net assets acquired company assesses goodwill potential impairment reporting unit level third quarter year whenever events circumstances indicate carrying value assets may exceed fair value company may assess qualitative factors make determination bypass qualitative assessment proceed directly testing goodwill impairment using twostep process result adoption asu 201704 determined goodwill impaired longer required compare implied fair value reporting unit goodwill associated carrying amount goodwill commonly referred step 2 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued goodwill continued company elects first assess qualitative factors determine whether likely fair value reporting unit less carrying value performing qualitative assessment company considers factors including limited current macroeconomic conditions industry market conditions competitive environment changes market products services regulatory political developments entity specific factors strategies financial performance events relevant entity reporting unit evaluation based review qualitative factors likely fair value reporting unit less carrying value company elected bypass assessing qualitative factors company would perform quantitative impairment test identify goodwill impairment measure amount goodwill impairment loss recognized comparing fair value reporting unit carrying amount impairment charge would recognized amount carrying amount exceeds reporting unit’s fair value however loss recognized exceed total amount goodwill allocated reporting unit first quarter 2020 result deterioration macroeconomic conditions driven covid19 well companyspecific events combined resulted declines stock price market capitalization company determined likely factors significant adverse impact reporting units interim quantitative goodwill impairment analysis performed march 31 2020 company determined fair values reporting units greater carrying values third quarter 2020 company performed annual goodwill impairment analysis company performed qualitative analysis reporting units determined likely fair values reporting units excess individual reporting units carrying values result quantitative step one analysis necessary company recognize impairment charges goodwill years ended december 31 2020 2018 respectively impairment tests performed year ended december 31 2019 indicated based assessment qualitative factors fourth quarter likely fair value less carrying value ots reporting unit quantitative impairment test performed determined fair value ots reporting unit approximately 63 carrying value result company recorded goodwill impairment charges industrial technologies segment fourth quarter 2019 represents difference carrying value fair value ots reporting unit see note 9 goodwill additional information discussion impairment charges goodwill recorded year ended december 31 2019 intangible assets intangible assets amortized using method best reflects economic benefits utilized pattern economic benefits cannot reliably determined amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges intangible assets indefinite lives years ended december 31 2020 2018 respectively see note 10 intangibles assets additional information discussion impairment charges associated ots restructuring within industrial technologies segment recognized year ended december 31 2019 advertising costs advertising costs including social media included selling general administrative expenses expensed incurred advertising costs years ended december 31 2020 2019 2018 81 million 107 million 130 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued minority interest equity investments company holds certain investments equity instruments nonpublicly traded companies equity investments company control ability exercise significant influence operating financial policies accounted using equity method companys proportionate share income loss recorded income expense net consolidated statement income nonmarketable equity investments measured cost less impairment adjusted changes resulting qualifying observable price changes company periodically reviews equity investments impairment years ended december 31 2020 2019 company recognized impairments 48 million 41 million respectively associated equity investments included income expense net consolidated statement income year ended december 31 2018 company recognize impairments minority interest equity investments carrying values minority interest equity investments 141 million 199 million december 31 2020 2019 respectively included assets consolidated balance sheets contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals disclosures adjusted income taxes company accounts income taxes using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities measured using enacted tax rates effect years differences expected reverse valuation allowances deferred tax assets recorded determination made deferred tax assets likely realized future making determination jurisdiction basis company estimates future taxable income based upon historical operating results external market data future levels taxable income dependent upon limited general economic conditions competitive pressures factors beyond control company subject income taxes united states numerous foreign jurisdictions ordinary course business many transactions calculations ultimate tax determination uncertain company records benefit tax position likely position sustainable upon examination including resolution related appeals litigation processes based technical merits position tax positions likely sustained company measures tax position largest amount benefit greater 50 percent likelihood realized effectively settled using information available reporting date company reviews tax positions circumstances warrant updates liability additional taxes changes available facts arise supplemental cash flow disclosure thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued stockbased compensation company accounts stockbased compensation grant date based fair value award recognizes compensation expense straightline basis requisite service period generally vesting period net estimated forfeiture rate awards granted beginning 2020 fair value restricted stock unit awards restricted stock units containing performancebased vesting criteria based fair market value closing price companys common stock date grant awards granted prior 2020 fair value restricted stock unit awards restricted stock units containing performancebased vesting criteria valued based fair market value closing price companys common stock discounted expected dividends date grant company uses blackscholes option pricing model estimate fair value shares expected issued companys employee stock purchase plan estimation fair value requires management make estimates judgments among things forfeiture rates expected volatility flir common stock expected term judgments directly affect amount compensation expense ultimately recognized addition fair value discounted estimate illiquidity estimated discount illiquidity relevant share based awards require plan participant hold shares specified period time award vests estimated using protective put method treasury stock company accounts treasury stock cost method treasury stock reissued price higher cost difference recorded component additional paidincapital consolidated balance sheets treasury stock reissued price lower cost difference recorded component additional paidincapital extent previously recorded gains offset losses treasury stock gains additional paidincapital losses upon reissuance treasury stock recorded reduction retained earnings consolidated balance sheets concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 19 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments fair value adjustments interest rate swap contracts fair value adjustments currency forward contracts changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive earnings loss year ended december 31 2020 recently adopted accounting pronouncements financial accounting standards board fasb asu 201613 measurement credit losses financial instruments asu 201613 topic 326 effective january 1 2020 company adopted asu 201613 using modifiedretrospective approach standard changes way entities recognize impairment many financial assets requiring immediate recognition estimated credit losses expected occur remaining life adoption standard material impact companys consolidated financial statements fasb asu 201818 collaborative arrangements topic 808 clarifying interaction topic 808 topic 606 asu 201818 effective january 1 2020 company adopted asu 201818 standard clarifies certain transactions collaborative arrangement participants accounted asc 606 one participant customer specifies distinct good service unit account evaluating whether transaction customer standard also provides guidance presentation transactions scope asc 606 adoption standard material impact companys consolidated financial statements fasb asu 201602 leases asc 842 effective january 1 2019 company adopted asc 842 related amendments using modified retrospective method using permitted practical expedients contracts still outstanding january 1 2019 comparative information restated continues reported accounting standards effect periods significant impact recognition discounted basis rightofuse rou assets totaling approximately 319 million lease liabilities totaling approximately 342 million noncancelable operating leases january 1 2019 related new required disclosures standard impact companys consolidated income statements consolidated statements cash flows additional disclosures required new standard see note 7 leases fasb asu 201704 intangiblesgoodwill topic 350 simplifying test goodwill impairment asu 201704 effective january 1 2019 company adopted asu 201704 amendments update simplify subsequent measurement goodwill removing second step twostep impairment test amendment also requires entity perform annual interim goodwill impairment test comparing fair value reporting unit carrying amount impairment charge recognized amount carrying amount exceeds reporting units fair value however loss recognized exceed total amount goodwill allocated reporting unit entity still option perform qualitative assessment reporting unit determine quantitative impairment test necessary standard material impact companys consolidated financial statements fasb asu 201802 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income asu 201802 effective january 1 2019 company adopted asu 201802 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policies continued recently adopted accounting pronouncements continued standard allows companies reclassify stranded tax effects accumulated comprehensive earnings loss caused tax cuts jobs act 2017 tax act retained earnings period effect change us federal corporate income tax rate recorded however fasb made reclassification optional result company assessed impact asu financial statements exercise option reclassify stranded tax effects caused tax act fasb asu 201807 improvements nonemployee sharebased payment accounting asu 201807 effective january 1 2019 company adopted asu 201807 standard closely aligns accounting employee nonemployee sharebased payments standard material impact companys consolidated financial statements disclosures fasb asu 201815 “customer’s accounting implementation costs incurred cloud computing arrangement service contract” “asu 201815” effective january 1 2019 company adopted asu 201815 amendments update align requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software hosting arrangements include internaluse software license standard material impact company’s consolidated financial statements fasb asu 201616 intraentity transfers assets inventory asu 201616 effective january 1 2018 company adopted asu 201616 eliminates exception recognizing time transfer current deferred income taxes intraentity asset transfers inventory new standard applied modified retrospective transition basis adjustment opening balance retained earnings amount approximately 34 million 793 million january 1 2019 2018 respectively recently issued accounting pronouncements march 2020 fasb issued asu 202004 “reference rate reform topic 848 temporarily simplifies accounting contract modifications including hedging relationships due transition libor interbank offered rates alternative reference interest rates subsequently fasb issued asu 202101 topic 848 clarifies scope asc 848 asu available adoption effective immediately january 1 2020 date thereafter company applies prospectively contract modifications hedging relationships example entities elect remeasure contracts modification date reassess previous accounting determination certain conditions met additionally entities elect continue applying hedge accounting hedging relationships affected reference rate reform certain conditions met asu 202004 guidance effective company beginning march 12 2020 may elect apply amendments prospectively december 31 2022 company yet adopted guidance currently evaluating potential impact adoption companys consolidated financial statements december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes standard simplifies accounting income taxes removing certain exceptions general principles topic 740 including recognizing deferred taxes investments performing intraperiod allocations calculating taxes interim periods asu 201912 also improves consistent application simplifies gaap areas topic 740 clarifying amending existing guidance reduce complexity certain areas including recognizing deferred taxes tax goodwill allocating taxes members consolidated group effective january 1 2021 company adopted asu 201912 adoption standard material impact companys consolidated financial statements note 2 revenue contract balances timing revenue recognition billings cash collections results billed accounts receivable unbilled receivables deferred revenue advance payments customers consolidated balance sheets contract assets liabilities reported contractbycontract basis company material deferred contract costs recorded consolidated balance sheets december 31 2020 2019 flir systems inc notes consolidated financial statementscontinued note 2 revenue continued contract balances continued contract assets company recognizes unbilled receivables contract assets company rights consideration work completed yet billed reporting date unbilled receivables included within accounts receivable net consolidated balance sheets balance unbilled receivables december 31 2020 2019 450 million 94 million respectively contract liabilities company records contract liabilities cash payments received due advance companys performance contract liabilities include deferred revenue advance payments customers contract liabilities classified either current longterm consolidated balance sheets based timing company expects recognize revenue december 31 2020 2019 contract liability balances totaled 488 million 691 million respectively balances included amounts classified longterm december 31 2020 2019 120 million 125 million respectively included within longterm liabilities accompanying consolidated balance sheets approximately 442 million revenue recognized twelve month period ended december 31 2020 included combined contract liability balances december 31 2019 remaining performance obligations remaining performance obligations represent aggregate transaction price allocated performance obligations original contract term greater one year fully partially unsatisfied end period remaining performance obligation disclosure similar concept backlog definition remaining performance obligations excludes contracts provide customer right cancel terminate convenience substantial penalty even historical experience indicates likelihood cancellation termination remote company elected exclude contracts customers original term one year less remaining performance obligations contracts included within backlog december 31 2020 aggregate amount transaction price allocated remaining performance obligations approximately 3131 million company expects recognize revenue majority remaining performance obligations next twelve months note 3 fair value financial instruments company 01 million 07 million cash equivalents december 31 2020 2019 respectively primarily investments money market funds overnight deposits company categorized cash equivalents level 1 financial assets measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair values company’s derivative contracts december 31 2020 2019 disclosed note 4 derivative financial instruments based level 2 inputs fair value companys borrowings credit agreement described note 11 debt december 31 2020 approximates carrying value fair value company’s senior unsecured 2030 notes described note 11 debt approximately 5277 million based upon level 2 inputs december 31 2020 company’s senior unsecured 2021 notes redeemed full connection company’s august 2020 issuance company’s senior unsecured 2030 notes public offering fair value company’s senior unsecured 2021 notes described note 11 debt 4301 million based upon level 2 inputs december 31 2019 fair value observable price changes related companys minority interest equity investments discussed note 1 nature business significant accounting policies based level 3 inputs company significant financial assets liabilities measured fair value see discussion accounting guidance fair value measurements factors used determining fair value financial assets liabilities disclosed note 1 nature business significant accounting policies note 4 derivative financial instruments companys financial position results operations subject certain financial market risks company regularly assesses risks established risk management practices designed mitigate impact certain foreign currency exchange rate interest rate risk exposures company engage speculative trading financial market flir systems inc notes consolidated financial statementscontinued note 4 derivative financial instruments continued foreign currency contracts company uses currency forward contracts formally designated hedges manage consolidated exchange rate risk associated remeasurement certain nonfunctional currency denominated monetary assets liabilities primarily subsidiaries use us dollars european euros canadian dollars swedish kronor norwegian kroner brazilian real british pound sterling functional currency changes fair value foreign currency forward contracts recognized income expense net end reporting period general gains losses offset consolidated statements income reciprocal gains losses underlying assets liabilities originally gave rise exposure december 31 2020 company’s foreign currency forward contracts formally designated hedges maturities three months less addition company manages risk changes fair value certain monetary liabilities attributable changes exchange rates company manages risks using currency forward contracts formally designated effective fair value hedges hedge effectiveness generally determined evaluating alignment hedging instruments critical terms critical terms hedged item forward points attributable hedging instruments excluded assessment effectiveness amortized income expense net using systematic rational methodology differences change fair value excluded component amounts recognized systematic rational method recognized comprehensive income loss change fair value hedging instruments attributable hedged risk reported income expense net change fair value hedged item attributable hedged risk reported adjustment carrying value also included income expense net december 31 2020 company’s foreign currency forward contracts formally designated fair value hedges maturities two years less interest rate swap companys outstanding debt december 31 2020 consists fixed rate notes unsecured credit facility consisting unsecured revolving loan facility unsecured us dollar term loan unsecured swedish kronor term loan accrue interest floating rate discussed note 11 debt interest expense companys floating rate debt calculated based fixed spread applicable eurocurrency rate eg libor subject floor zero percent therefore fluctuations market interest rates cause interest expense increases decreases given amount floating rate debt company managing interest rate risk related certain floating rate debt interest rate swap “swap” company receives floating rate payments subject floor zero percent makes fixed rate payments impact swap fix floating rate basis calculation interest unsecured swedish kronor term loan 0590 percent swap designated effective cash flow hedge individual swap cash flows recorded asset liability companys consolidated balance sheets fair value hedge effectiveness generally determined evaluating alignment hedging instruments critical terms critical terms hedged item fair value adjustments recorded adjustment accumulated comprehensive income loss companys derivative counterparties investment grade credit ratings company party master netting arrangements contain features allow counterparties net settle amounts arising multiple separate derivative transactions net settle case certain triggering events bankruptcy major default one counterparties transaction company pledged assets posted collateral requirement entering maintaining derivative positions following table presents gross notional amounts outstanding derivative instruments thousands flir systems inc notes consolidated financial statementscontinued note 4 derivative financial instruments continued interest rate swap continued following table presents balance sheet classification fair value derivative instruments thousands following table presents statement income classification derivative instruments thousands note 5 accounts receivable accounts receivable net allowance credit losses following table summarizes company’s allowance credit losses activity 2020 2019 2018 thousands flir systems inc notes consolidated financial statementscontinued note 5 accounts receivable continued note 6 inventories consist following thousands company recognized inventory writedowns 59 million associated outdoor tactical systems ots restructuring 33 million associated restructuring actions years ended december 31 2019 2018 respectively see note 21 “restructuring” additional information discussion restructuring actions company recognize inventory writedowns year ended december 31 2020 note 7 leases company determines arrangement lease inception operating leases included assets current liabilities longterm liabilities consolidated balance sheets company finance leases december 31 2020 operating lease rightofuse assets rou assets represent company’s right use underlying asset lease term operating lease liabilities represent obligation make lease payments arising lease rou assets liabilities recognized commencement date lease based present value minimum fixed lease payments lease term leases provide implicit rate company uses incremental borrowing rate based information available commencement date determining present value lease payments rou assets also include prepaid lease payments made prior commencement lease plus initial capitalized direct costs exclude tenant improvement allowances lease terms may include options extend terminate lease reasonably certain option exercised lease expense minimum fixed lease payments recognized straightline basis lease term company elected apply shortterm lease exemption accordance guidance therefore shortterm leases term twelve months less recorded balance sheet company small number leases qualify exemption amount remaining shortterm lease commitments significant company’s operating leases buildings warehouses office space leases remaining lease terms approximately one year ten years components lease expense follows thousands flir systems inc notes consolidated financial statementscontinued note 7 leases continued supplemental cash flow information related operating leases thousands supplemental balance sheet information related operating leases thousands december 31 2020 weighted average remaining lease term operating leases 59 years weighted average discount rate 373 percent maturities lease liabilities december 31 2020 follows thousands note 8 property equipment property equipment summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 8 property equipment continued depreciation expense years ended december 31 2020 2019 2018 451 million 442 million 406 million respectively note 9 goodwill first quarter 2020 company completed business reorganization part “project ready” restructuring plan resulted identification two reportable segments industrial technologies defense technologies company commenced operating reporting new organization structure effective january 1 2020 see note 21 “restructuring” information project ready note 19 operating segments related information additional information two new reportable operating segments goodwill allocated identified reporting units using relative fair value approach conjunction change reportable segments company evaluated goodwill impairment segment change determined goodwill impaired following table presents changes carrying value goodwill activity reportable segment two year period ending december 31 2020 thousands year ended december 31 2020 company recorded 229 million goodwill connection preliminary purchase price allocation associated altavian inc altavian acquisition completed tax assessment shortperiod return connection final purchase price allocation associated endeavor robotics holdings inc endeavor acquisition resulted goodwill adjustment 126 million year ended december 31 2019 company recorded 4694 million goodwill connection purchase price allocation associated following acquisitions acyclica inc acylica seapilot ab seapilot aeryon labs inc aeryon endeavor new england optical systems inc see note 20 business acquisitions additional information goodwill acquisitions company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value reporting unit exceeds fair value first quarter 2020 result deterioration macroeconomic conditions driven covid19 well companyspecific events combined resulted declines stock price market capitalization company determined likely factors significant adverse impact reporting units interim quantitative goodwill impairment analysis performed march 31 2020 company determined fair values reporting units greater carrying values third quarter 2020 company performed annual goodwill impairment analysis company performed qualitative analysis reporting units determined likely fair values reporting units excess individual reporting units carrying values result quantitative step one analysis necessary goodwill impairments year ended december 31 2020 third quarter 2019 company completed annual review goodwill determined impairment recorded goodwill necessary fourth quarter 2019 company approved plan restructure ots reporting unit within industrial technologies segment restructuring discontinued operations thermal night vision business refocused strategy personal vision system product line law enforcement public safety markets result company revised outlook lowered financial forecast ots business company determined factors likely significant adverse impact ots reporting unit therefore interim goodwill impairment quantitative analysis performed utilizing income market approach determine reporting units fair value flir systems inc notes consolidated financial statementscontinued note 9 goodwill continued income approach discounted cash flow method performed calculating fair value based future forecasted cash flows discounted back present value including significant judgments related risk adjusted discount rates terminal growth rates weighted average cost capital “wacc” projected cash flows developed company planning purposes based current known business market conditions well future anticipated industry trends terminal value growth rate 25 wacc 16 utilized based industry macroeconomic indicators well estimated risk premiums market approach guideline public company method performed calculate fair value ots reporting unit applying pricing multiples derived selected publicly traded guideline companies company utilized enterpriseearnings interest taxes depreciation amortization ebitda multiples enterpriserevenue multiples ranged low 50 high 206 low 06 high 46 respectively based quantitative goodwill impairment test company determined fair value ots reporting unit determined using equal weighting income market approaches approximately 63 carrying value result company recorded goodwill impairment charges 65 million industrial technologies segment represents difference carrying value fair value ots reporting unit year ended december 31 2019 company recorded goodwill impairment charge selling general administrative consolidated statements income note 10 intangibles assets intangible assets summarized follows thousands year ended december 31 2020 company recorded 61 million identified intangibles assets connection preliminary purchase price allocation associated altavian acquisition year ended december 31 2019 company recorded 1597 million identified intangibles assets connection purchase price allocation associated following acquisitions acyclica seapilot aeryon endeavor new england optical systems inc refer note 20 business acquisitions discussion company recognize impairment charges intangible assets year ended december 31 2020 year ended december 31 2019 company recognized intangible asset impairment charge 12 million assets included customer relationships determined recoverable due change expected future economic benefit associated ots restructuring strategic shift discussed note 9 goodwill company recorded intangible asset impairment charge selling general administrative consolidated statements income flir systems inc notes consolidated financial statementscontinued note 10 intangibles assets continued aggregate amortization expense recorded 2020 2019 2018 476 million 575 million 247 million respectively intangible assets recorded december 31 2020 estimated future aggregate amortization expense years ending december 31 2021 2025 approximately thousands note 11 debt companys debt consists following thousands 1 2021 notes redeemed full connection company’s august 2020 issuance 2030 notes public offering described “senior unsecured notes” senior unsecured notes august 3 2020 company issued sold 5000 million senior unsecured notes maturing august 1 2030 “2030 notes” underwritten public offering aggregate net proceeds offering approximately 4942 million deducting underwriting fees debt discount transaction issuance costs amortized period ten years interest 2030 notes payable semiannually arrears february 1 august 1 year beginning february 1 2021 net proceeds sale 2030 notes used redeem company’s outstanding 4250 million senior unsecured notes due june 15 2021 “2021 notes” general corporate purposes may include funding working capital investments companys subsidiaries capital expenditures acquisitions stock repurchases connection redemption 2021 notes year ended december 31 2020 company recorded 91 million loss debt extinguishment consolidated statements income consisted 85 million redemption premium payment 06 million unamortized portion original issue discount previously incurred issuance costs flir systems inc notes consolidated financial statementscontinued note 11 debt continued credit agreement march 29 2019 company entered second amended restated credit agreement “credit agreement” bank america na jpmorgan chase bank na us bank national association citibank na mufg union bank na lenders party thereto credit agreement term five years matures march 29 2024 connection closing credit agreement company made initial borrowing 1000 million revolving loans 1000 million term loans us dollars equivalent 1500 million term loans swedish kronor repaid outstanding amounts prior credit agreement company borrowed additional 1750 million made payments 1910 million revolving credit facility year ended december 31 2020 company right subject certain conditions including approval additional commitments qualified lenders increase availability revolving credit facility additional 2000 million march 29 2024 credit agreement allows company certain designated subsidiaries borrow united states dollars european euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies interest rates credit agreement determined type tenor borrowing includes loans based published term eurocurrency rate eg libor loan denominated eurocurrency rate loans floor zero percent applicable margin ranges 1000 percent 1375 percent depending company’s consolidated total leverage ratio credit agreement requires company pay commitment fee amount unused revolving commitments rate based consolidated total leverage ratio ranges 0125 percent 0200 percent unused revolving commitments december 31 2020 commitment fee amount unused revolving credit 0175 percent per annum credit agreement contains one financial covenant requires maintenance consolidated total leverage ratio company compliance december 31 2020 facilities available credit agreement unsecured credit agreement also contains language providing adoption libor successor rate anticipation possibility libor benchmark reform consistent market practice company engaged regular dialogue lenders derivatives counterparties keep apprised proposed successor rates jurisdictions might impacted need execute financial transaction although progress made various working groups company believes early accurately assess financial impact libor benchmark reform disclosed note 3 fair value financial instruments company entered floored interest rate swap swedish kronor notional amount initially equivalent 1500 million hedge cash flows associated interest rate risk arising variability interest expense attributable amounts drawn swedish kronor term loan letters credit december 31 2020 company 141 million letters credit outstanding credit agreement reduced total availability revolving commitments credit agreement january 11 2019 standby letter credit exceed swedish kronor 22 billion issued new bilateral letter credit reimbursement agreement lc agreement secure payment guarantee required swedish tax authority order grant original respite paying tax reassessment described note 15 income taxes outstanding amount lc agreement equivalent approximately 2705 million december 31 2020 outstanding amounts lc agreement reduce available revolving credit agreement considered indebtedness influence incremental debt capacity governed credit agreement covenants standby letter credit amended april 24 2020 reflect new respite note 12 accrued product warranties following table summarizes company’s warranty liability activity 2020 2019 2018 thousands flir systems inc notes consolidated financial statementscontinued note 12 accrued product warranties continued company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized longterm accrued product warranties included longterm liabilities consolidated balance sheets note 13 commitments total net rent expense years ended december 31 2020 2019 2018 amounted 148 million 148 million 133 million respectively additional information future minimum obligations noncancelable leases refer note 7 leases note 14 contingencies matters involving united states department state department commerce april 24 2018 company entered consent agreement united states department states directorate defense trade controls “ddtc” resolve allegations regarding unauthorized export technical data defense services dual third country nationals certain company facilities failure properly use manage export licenses export authorizations failures report certain payments 22 cfr part 130 potential violation international traffic arms regulation “itar” consent agreement fouryear term provides civil penalty 300 million 150 million amount suspended condition funds used departmentapproved consent agreement remedial compliance measures ii appointment external special compliance official oversee compliance consent agreement itar iii two external audits company’s itar compliance program iv continued implementation ongoing remedial compliance measures additional remedial compliance measures related automated systems itar compliance policies procedures training threemonth period ended march 31 2018 company recorded 150 million charge portion penalty subject suspension april 2018 2019 2020 company paid 10 million 35 million 35 million respectively 150 million charge december 31 2020 remaining 70 million payable annual installments 35 million april 2022 recorded current liabilities longterm liabilities accordingly companys investments remedial compliance measures date sufficient cover 150 million suspension amount part consent agreement ddtc acknowledged company voluntarily disclosed certain alleged arms export control act itar violations resolved pursuant consent agreement cooperated ddtcs review instituted several compliance program improvements may 2017 company submitted initial notification ddtc regarding potential violations related certain export classifications obtained commodity jurisdiction process final voluntary disclosure august 2017 company also submitted voluntary selfdisclosure regarding matter united states department commerce bureau industry security bis matter remains review ddtc bis department justice doj ddtc bis acknowledged submissions company executed tolling agreements matter ddtc bis doj ddtc tolling agreement lapsed bis doj tolling agreements extended march 1 2021 march 15 2021 respectively flir systems inc notes consolidated financial statementscontinued note 14 contingencies continued matters involving united states department state department commerce continued june 2017 bis informed company additional export licensing requirements restrict company’s ability sell certain thermal products without license customers china identified list maintained united states department commerce action precipitated concerns sale without license potential diversion companys products prohibited end users countries subject economic sanctions implemented united states bis subsequently favorably modified restrictions reduce applicability restrictions sales flirs tau camera cores opposed finished products containing tau camera cores customers china identified list maintained united states department commerce persons country export administration regulations ear country group a5 supplement 1 part 740 ear company found violated applicable rules regulations respect customers limitations export end use company’s products company could subject substantial fines penalties suspension existing licenses authorizations andor loss suspension export privileges time based available information regarding proceedings company unable reasonably estimate time may take resolve matters amount range potential loss penalty government action may incurred connection matters however unfavorable outcome could result substantial fines penalties loss suspension export privileges particular authorizations could material company’s financial position results operations cash flows following period outcome becomes estimable known shareholder derivative lawsuit june 2020 shareholder filed derivative lawsuit court chancery state delaware case 20200464 company nominal defendant certain current former directors company pointing company’s 2015 settlement united states securities exchange commission alleged united states foreign corrupt practices act violations 2018 settlement united states department state alleged export control violations complaint alleges company’s directors breached fiduciary duties failing ensure company internal controls place would prevented alleged underlying misconduct settlements complaint also asserts claims among matters corporate waste unjust enrichment seeks unspecified monetary damages individual defendants injunctive relief disgorgement director compensation attorneys’ fees costs complaint derivative nature seek monetary damages company however company may required advance ultimately responsible legal fees costs incurred individual defendants company filed motion dismiss third quarter 2020 due announcement teledyne technologies acquisition company january 4 2021 parties stipulated stay action pending close transaction termination transaction june 30 2021 whichever occurs first matters company also subject legal administrative proceedings investigations claims litigation arising ordinary course business specifically identified matters others specifically identified company records liability respect matter management believes probable liability incurred company reasonably estimate amount loss company believes recorded adequate provisions probable estimable losses matters existence date hereof company reviews provisions reflect impact negotiations settlements rulings advice legal counsel information events pertaining particular matter outcome matters cannot predicted certainty company believes probability remote outcome matters individually material adverse effect company’s financial position results operations cash flows costs resolve matters may aggregate material adverse effect company’s financial position results operations cash flows note 15 income taxes pretax earnings significant geographical locations follows thousands flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued provisions income taxes follows thousands net deferred tax assets liabilities classified balance sheet follows thousands tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued december 31 2020 company united states tax net operating loss carryforwards totaling approximately 420 million expire 2032 2040 subject annual limitation section 382 internal revenue code company also various foreign net operating loss carryforwards totaling approximately 293 million portion expire 2021 2040 portion indefinite carryforward period december 31 2020 company determined valuation allowance deferred tax assets 44 million required primarily related foreign net operating losses capital losses carried forward review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences companys effective tax rate 2020 higher united states federal tax rate 210 percent mainly due state taxes nondeductible expenses accruals unrecognized tax benefits settlements taxing authorities higher tax rates income earned foreign jurisdictions amounts partially offset tax credits generated united states foreign jurisdictions companys effective tax rate 2019 higher united states federal tax rate 210 percent mainly due accruals settlements various taxing authorities state taxes additional withholding tax due future distributions foreign earnings included transition tax levied tax act higher tax rates income earned foreign jurisdictions companys effective tax rate 2018 lower united states federal tax rate 210 percent mainly due recognition previously unrecognized tax benefits relating european union state aid recovery excess tax benefits stock compensation reduction accrual united states transition tax offset partially state taxes higher tax rates applied income earned certain foreign jurisdictions discrete items threemonth period ending december 31 2018 swedish tax authority “sta” issued reassessment tax year ending december 31 2012 one companys nonoperating subsidiaries sweden reassessment concerns use tax credits applied capital gains pursuant european union council directive 2009133ec commonly referred eu merger directive assesses taxes penalties totaling approximately 3657 million swedish kroner 30 billion march 26 2020 company received adverse judgment first instance court sweden “court” regarding stas reassessment company agree court’s ruling continues believe stas arguments reassessment accordance swedish tax regulations treaty avoidance double taxation sweden belgium appealed decision administrative court appeal stockholm consequently adjustment companys unrecognized tax benefits recorded relation matter flir systems inc notes consolidated financial statementscontinued note 15 income taxes continued company received respite paying reassessment decision administrative court appeal putting place bank guarantee secure possible future payment tax interest assurance companys appeal successful third quarter 2019 european commission announced opening separate review assess whether excess profit tax ruling granted belgium one companys international subsidiaries breach european union state aid rules company believes taxes assessed belgium paid adjusted unrecognized tax benefits relation matter december 31 2020 2019 company accrued income tax liabilities 371 million 371 million respectively related tax acts transition tax paid installments eightyear period accrue interest approximately 39 million due within next twelve months december 31 2020 company undistributed earnings generated january 1 2018 certain foreign subsidiaries approximately 3443 million company intends indefinitely invest outside united states recognized deferred tax estimating amount potential tax practicable due complexity variety assumptions required management believes companys recorded tax liabilities adequate aggregate income tax exposures following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2020 relate united states belgium united kingdom various foreign jurisdictions 244 million would affect company’s effective tax rate recognized company anticipates approximately 32 million net unrecognized tax benefits recognized within 12 months result settlements effective settlements various tax authorities closure certain audits lapse applicable statute limitations company classifies interest penalties related unrecognized tax benefits income tax provision december 31 2020 company 27 million accrued interest penalties related unrecognized tax benefits recorded current noncurrent accrued income taxes consolidated balance sheets company files united states federal state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions flir systems inc notes consolidated financial statementscontinued note 16 stockbased compensation employee stock purchase plan companys 2019 employee stock purchase plan “espp” shareholders approved april 19 2019 employees purchase shares company’s common stock discount fair market value lower either date enrollment purchase date discount may fixed amount 15 percent plan administrator time presently set 10 percent espp provides sixmonth offerings commencing may 1 november 1 year purchases april 30 october 31 year company reserved 1500000 shares common stock issuance espp shares purchased espp holding period requirements years ended december 31 2020 2019 267574 shares issued average purchase price 3319 169000 shares issued average purchase price 4221 respectively shares issued year ended december 31 2019 included purchases made 2009 plan 2019 plan 73415 shares 95585 shares respectively december 31 2020 approximately 1136841 shares remaining available espp future issuance shares issued espp purchases new shares stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted flir systems inc 2011 stock incentive plan amended “2011 plan” company granted timebased options timebased restricted stock unit awards performancebased restricted stock unit awards options generally expire ten years grant date timebased options restricted stock unit awards generally vest threeyear period performancebased restricted stock unit awards granted years ended december 31 2020 2019 2018 may earned based upon combination companys revenue operating performance threeyear period information respect stock option activity year ended december 31 2020 follows information respect restricted stock unit activity year ended december 31 2020 follows included restricted stock units outstanding december 31 2020 approximately 120000 vested restricted stock units distributed december 31 2020 4967000 shares common stock reserved future issuance stock incentive plans following table sets forth stockbased compensation expense recognized consolidated statements income years ended december 31 2020 2019 2018 thousands flir systems inc notes consolidated financial statementscontinued note 16 stockbased compensation continued stock incentive plans continued stockbased compensation expense capitalized consolidated balance sheets december 31 2020 2019 2018 follows thousands fair value stockbased awards granted years ended december 31 2020 2019 2018 estimated following weightedaverage assumptions company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2020 2019 2018 company granted approximately 1018000 867000 594000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2020 2019 2018 4378 5045 5293 per share respectively years ended december 31 2020 2019 2018 company granted approximately 98000 158000 177000 performancebased restricted stock units respectively units earned based upon companys return invested capital three year period fair value performancebased restricted units granted years ended december 31 2020 2019 2018 4251 4957 5232 per share respectively total fair value restricted stock unit awards granted years ended december 31 2020 2019 2018 table 488 million 516 million 407 million includes 42 million 78 million 92 million respectively grant date fair value associated performancebased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts flir systems inc notes consolidated financial statementscontinued note 16 stockbased compensation continued stock incentive plans continued total amount cash received exercise stock options years ended december 31 2020 2019 2018 33 million 212 million 237 million respectively related tax benefits realized exercise stock options years ended december 31 2020 2019 2018 26 million 48 million 87 million respectively stock repurchases company repurchased shares common stock time considering market conditions accordance repurchase limits authorized board directors recent repurchases conducted open market transactions authorization board directors february 7 2019 repurchase 150 million shares companys outstanding common stock authorization expired february 7 2021 year ended december 31 2020 approximately 46 million shares repurchased total cash payments approximately 1663 million year ended december 31 2020 company retired 41 million shares classified 05 million shares treasury stock note 17 net earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance shares upon vesting restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2020 2019 2018 aggregated 189000 33000 10000 shares respectively excluded purposes diluted earnings per share since effect inclusion would antidilutive flir systems inc notes consolidated financial statementscontinued note 18 employee benefit plans employee 401k plans company 401k savings retirement plan “401k plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended 401k plan allows contributions company made expensed matching contributions 121 million 113 million 98 million years ended december 31 2020 2019 2018 respectively pension plans company previously provided supplemental executive retirement plan “serp” certain officers company based united states december 31 2017 last remaining serp participant retired consequently year ended december 31 2018 company recorded settlement gain approximately 06 million primarily associated change projected benefit obligation associated adjusted date expected retirement final serp participant addition company previously offered certain employees outside united states participation defined benefit pension plan curtailed projected benefit obligation plans 38 million 36 million december 31 2020 2019 respectively plans funding status underfunded 38 million 36 million december 31 2020 2019 respectively pension liability 15 million 13 million december 31 2020 2019 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs defined benefit pension plan outside united states discount rates 08 percent 14 percent used years ended december 31 2020 2019 respectively determined reference market yields end reporting period high quality corporate bonds similar maturities matching duration projected benefit obligation benefits expected paid plans approximately thousands result benefits longer accruing plans remaining components ongoing pension cost recorded accumulated comprehensive income loss deemed immaterial remaining obligations recorded longterm liabilities note 19 operating segments related information operating segments company’s chief operating decision maker codm chief executive officer evaluates segments’ performance allocates resources based revenue segment operating income intersegment revenues recorded cost eliminated consolidation company segments employ consistent accounting policies first quarter 2020 company completed business reorganization part project ready restructuring plan resulted identification two reportable segments industrial technologies defense technologies company commenced operating reporting new organization structure effective january 1 2020 see note 21 “restructuring” information project ready flir systems inc notes consolidated financial statementscontinued note 19 operating segments related information continued operating segments continued industrial technologies segment industrial technologies segment develops manufactures thermal visiblespectrum imaging camera cores components utilized third parties create thermal industrial types imaging systems segment also develops manufactures services offerings image measure analyze thermal energy gases environmental elements industrial commercial scientific applications imaging payloads unmanned aerial systems uas machine vision cameras additionally segment develops manufactures services fixedmounted visible thermal imaging cameras related analytics software perimeter security critical infrastructure recreational commercial maritime traffic monitoring control offerings include thermal imaging cameras analytics software gas detection cameras firefighting cameras process automation cameras environmental test measurement devices security cameras marine electronics traffic cameras defense technologies segment defense technologies segment develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare segment also develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives cbrne threats military force protection homeland security commercial applications offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms cbrne detectors nanoclass uas solutions services related systems segment also produces advanced multimission unmanned air ground based systems serving us department defense federal government agencies public safety governmental customers international markets following tables present revenue segment operating income segment assets two segments segment operating income reviewed codm revenue less cost goods sold operating expenses excluding general corporate expenses separation transaction integration costs amortization acquired intangible assets restructuring expenses asset impairment charges discrete legal compliance matters net accounts receivable inventories demonstration assets operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis segment operating income information follows thousands reconciliation companys consolidated segment operating income consolidated earnings income taxes follows thousands flir systems inc notes consolidated financial statementscontinued note 19 operating segments related information continued operating segments continued unallocated corporate expenses include general corporate expenses separation transaction integration costs amortization acquired intangible assets restructuring expenses asset impairment charges discrete legal compliance matters reconciliation companys consolidated segment operating assets consolidated total assets follows thousands revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands flir systems inc notes consolidated financial statementscontinued note 19 operating segments related information continued revenue longlived assets geographic area continued longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 20 business acquisitions acyclica inc september 10 2018 company completed transaction acquire 100 outstanding stock acyclica inc privately held software developer automotive roadway intersection data generation analysis approximately 97 million cash including estimate contingent consideration pursuant stock purchase agreement third quarter 2019 company finalized purchase price allocation recorded 27 million net tangible assets goodwill 70 million industrial technologies segment seapilot ab october 16 2018 company acquired substantially outstanding shares seapilot ab privately held technology company approximately 47 million cash third quarter 2019 company finalized purchase price allocation recorded 17 million net tangible assets goodwill 30 million industrial technologies segment aeryon labs inc january 28 2019 company completed acquisition 100 outstanding stock aeryon labs inc aeryon privately held developer highperformance uas global military public safety critical infrastructure markets approximately 2059 million cash acquisition enhances company’s domain knowledge unmanned aerial systems expands distribution channels adjacent markets fourth quarter 2019 company finalized purchase price allocation recorded 443 million identified intangible assets 1615 million goodwill defense technologies segment flir systems inc notes consolidated financial statementscontinued note 20 business acquisitions continued aeryon labs inc continued allocation purchase price aeryon follows thousands goodwill 1615 million represents intellectual capital acquired assembled workforce none qualify recognition separate intangible asset goodwill presented expected deductible tax purposes company identified 443 million intangible assets following table summarizes acquired intangible assets estimated fair values estimated useful lives thousands except years endeavor robotics holdings inc march 4 2019 company acquired 100 outstanding stock endeavor robotics holdings inc endeavor privately held developer tactical unmanned ground vehicles global military public safety critical infrastructure markets approximately 3859 million cash acquisition enhances company’s offerings unmanned ground systems expands distribution channels adjacent markets first quarter 2020 company completed tax assessment shortperiod return resulted goodwill adjustment 126 million accordingly company finalized purchase price allocation recorded 1027 million identified intangible assets 2714 million goodwill defense technologies segment allocation purchase price endeavor follows thousands goodwill 2714 million represents intellectual capital acquired assembled workforce none qualify recognition separate intangible asset goodwill presented expected deductible tax purposes company identified 1027 million intangible assets following table summarizes acquired intangible assets estimated fair values estimated useful lives thousands except years flir systems inc notes consolidated financial statementscontinued note 20 business acquisitions continued endeavor robotics holdings inc continued new england optical systems inc may 1 2019 company acquired 100 outstanding stock new england optical systems inc privatelyheld engineering manufacturing company engaged design production infrared optical assemblies transaction consideration included 219 million cash payment additional 120 million deferred compensation payable twoyear period first quarter 2020 company finalized purchase price allocation concluded changes previously recorded 64 million identified intangible assets 140 million goodwill industrial technologies segment goodwill expected deductible tax purposes allocation purchase price new england optical systems inc follows thousands company identified 64 million intangible assets following table summarizes acquired intangible assets estimated fair values estimated useful lives thousands except years altavian inc december 2 2020 company acquired 100 outstanding stock altavian privately held manufacturer small unmanned aerial systems suas defense public safety customers transaction consideration 341 million included cash payment 268 million company’s common stock valued 73 million addition transaction consideration 25 million company shares payable sharebased compensation threeyear period acquisition advances companys strategic pillars expands franchise program opportunities defense public safety industrial markets company recorded 61 million identified intangible assets 229 million goodwill conjunction altavian acquisition defense technologies segment goodwill consists largely ability company altavian working together expand company unmanned aerial systems product offering allow company offer customers comprehensive solution portfolio american suas provider none goodwill recognized expected deductible tax purposes flir systems inc notes consolidated financial statementscontinued note 20 business acquisitions continued altavian inc continued final allocation purchase price identified intangible assets goodwill related tax attributes remains open pending final closing working capital determinations tax calculations subject final determination fair value expected finalized second quarter 2021 preliminary allocation purchase price follows thousands identifiable intangible assets preliminary estimated fair values estimated useful lives follows thousands except years business acquisitions listed significant defined regulation sx securities exchange act 1934 significant compared companys overall results operations consequently pro forma financial information provided note 21 restructuring company various active restructuring programs focused reorganization discontinuation certain businesses targeted workforce reductions facility consolidation actions targeted reductions enabled company better align resources areas providing greatest benefit current business environment first quarter 2020 company initiated strategydriven restructuring plan project ready simplify company’s product portfolio better align resources higher growth opportunities reducing costs project ready includes organizational realignment targeted workforce reductions facility optimization initiatives previously approved ongoing restructuring activities process january 1 2020 consolidated project ready company expects incur total costs approximately 400 million 550 million related project ready including approximately 200 million 250 million employee separation costs approximately 50 million 100 million facility consolidation expenses approximately 150 million 200 million third party costs company estimates majority cumulative pretax costs cash outlays related employee separation facility consolidation thirdparty expenses costs continue 2021 restructuring expenses related project ready recorded “restructuring expenses” consolidated statements income follows thousands restructuring liability related project ready follows thousands flir systems inc notes consolidated financial statementscontinued note 21 restructuring continued years ended december 31 2019 2018 company recorded net pretax restructuring charges connection restructuring activities totaling approximately 101 million 49 million respectively primarily represented employee termination benefits costs consolidate relocate discontinue operations addition year ended december 31 2019 company incurred goodwill intangible asset impairment charges totaling approximately 65 million 12 million respectively related restructuring actions inventory writedowns associated restructuring actions also incurred totaled 59 million 33 million years ended december 31 2019 2018 respectively refer note 9 goodwill note 10 intangibles assets note 6 inventories discussion accrued restructuring balances recorded current liability within “accrued payroll related benefits” consolidated balance sheets deemed material december 31 2019 note 22 subsequent events january 4 2021 company entered agreement plan merger “merger agreement” teledyne technologies incorporated delaware corporation “teledyne” firework merger sub inc delaware corporation wholly owned subsidiary teledyne “merger sub i” firework merger sub ii llc delaware limited liability company wholly owned subsidiary teledyne “merger sub ii” upon terms subject conditions set forth merger agreement merger sub merge company surviving merger wholly owned subsidiary teledyne “first merger” immediately thereafter company merge merger sub ii merger sub ii surviving subsequent merger “second merger” together first merger “mergers” subject terms conditions set forth merger agreement upon completion mergers company stockholders receive exchange share common stock held immediately prior mergers 2800 cash ii 00718 shares teledyne common stock merger agreement provides company teledyne certain termination rights certain circumstances may require company teledyne pay termination fee transaction expected close middle 2021 subject receipt required regulatory approvals including expiration termination applicable waiting period hartscottrodino antitrust improvements act approvals teledyne company stockholders customary closing conditions february 16 2021 companys board directors declared quarterly dividend 017 per share companys common stock payable march 19 2021 shareholders record close business march 5 2021 total cash payment dividend approximately 223 million quarterly financial data unaudited flir systems inc thousands except per share data 1 net earnings third quarter 2020 includes 91 million loss debt extinguishment due redemption 2021 notes fourth quarter 2020 includes discrete tax expense 183 million 2 net earnings fourth quarter 2019 includes discrete tax expense 244 million 137 million asset impairment charges associated companys restructuring ots business sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent accountants board directors shareholders flir systems inc opinion accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position flir systems inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp portland oregon april 15 1999 flir systems inc consolidated statement operations thousands except per share amounts accompanying notes integral part financial statements flir systems inc consolidated balance sheet thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement shareholders equity thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement cash flows thousands accompanying notes integral part financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies company world leader design manufacture marketing thermal imaging broadcast camera systems wide variety applications commercial government markets companys thermal imaging systems use advanced infrared technologies detect infrared radiation heat enabling operator measure minute temperature differences see objects daylight total darkness obscurants smoke haze types fog companys products also incorporate visible light cameras proprietary image analysis software gyrostabilized gimbal technology companys products come variety configurations handheld groundbased systems mounted ships helicopters fixedwing aircraft companys products provide stateoftheart imaging technology coupled competitive price performance characteristics existing commercial government applications including condition monitoring research development manufacturing process control airborne observation broadcast search rescue federal drug interdiction surveillance reconnaissance navigation safety border maritime patrol environmental monitoring groundbased security company also developed innovative new products utilizing advanced uncooled thermal imaging technology allows lessexpensive smaller lighter solidstate systems require less power operate addition companys product configurations image analysis software tools increase companys ability provide products tailored meet individual customer requirements principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation recognition revenue commercial sales generally recognized upon shipment government sales often require significant integration aircraft components related revenue generally recognized products shipped companys facilities realization reasonably assured adjustments estimates affect revenues earnings made period information necessary make adjustment becomes available provisions estimated losses sales related receivables recorded identified cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months cash equivalents purposes statement cash flows company generally invests excess cash investment grade shortterm commercial paper held maturity december 31 1998 company hold shortterm investments inventories stated lower average cost market note 1 nature business significant accounting policies continued property equipment property equipment stated cost depreciated using straight line methodology estimated useful lives range three ten years repairs maintenance charged operations incurred software development costs company capitalizes software development costs project reaches technological feasibility ceases capitalization related product ready release research development costs related software development reached technological feasibility expensed incurred software development costs amortized greater ratio number units shipped current anticipated future units shipped b straightline method remaining estimated economic life product generally estimated economic life three years earnings per share earnings per share based weighted average number shares common stock common stock equivalents outstanding periods computed using treasury stock method stock options 1997 company adopted statement financial accounting standards 128 earnings per share following table sets forth reconciliation denominator utilized computation basic diluted earnings loss per share thousands effect stock options 1997 388000 shares excluded purposes diluted earnings per share since effect would antidilutive reclassifications certain reclassifications made prior years data conform current years presentation reclassifications impact previously reported results operations shareholders equity note 1 nature business significant accounting policies continued statement cash flows cash paid interest income taxes amounted following thousands noncash portion agema acquisition december 1997 excluded 1997 statement cash flows see note 16 fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon comparison assets liabilities current market values instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximates fair value december 31 1998 except patent note described note 9 interest imputed patent note 14 exceeds current market rate type note therefore fair value note estimated approximately 14000 excess recorded value december 31 1998 stockbased compensation company adopted disclosure provisions statement financial accounting standards sfas 123 accounting stockbased compensation effective january 1 1996 sfas 123 allows companies choose whether account stockbased compensation method prescribed accounting principles board opinion 25 apb 25 use fair value method described sfas 123 company elected continue follow provisions apb 25 see note 13 concentration credit risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make companys customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs indepth credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary certain risks uncertainties preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories recoverability capitalized software deferred tax assets actual results could differ estimates note 1 nature business significant accounting policies continued comprehensive income june 1997 financial accounting standards board issued sfas 130 reporting comprehensive income company adopted standard january 1 1998 translation adjustment represents companys comprehensive income item translation adjustment represents unrealized gainslosses resulting translation financial statements companys subsidiaries accordance sfas 52 foreign currency translation company intention liquidating assets foreign subsidiaries foreseeable future recent accounting pronouncements 1998 financial accounting standards board issued statement financial accounting standards 133 accounting derivative investments hedging activities company plans adopt sfas 133 1999 however management believes impact adoption significant effect companys financial position results operations note 2 operating costs selling operating costs consist following thousands note 3 income taxes sfas 109 accounting income taxes requires company recognize deferred tax liabilities assets expected future tax consequences events basis differences recognized companys financial statements tax returns method deferred tax liabilities assets determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse note 3 income taxes continued provision benefit income taxes follows thousands deferred tax assets liabilities composed following components thousands note 3 income taxes continued provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 1998 company net operating loss carryforwards aggregated 3795000 expire years 2005 2010 utilization companys acquired net operating loss carryforwards fsi automation formerly known optimas corporation limited future earnings fsi automation limited approximately 350000 per year fsi automation experienced cumulative change ownership 50 within threeyear period addition company various tax credits available aggregating 2673000 december 31 1998 expire years 2007 2013 us foreign withholding taxes provided earnings foreign subsidiaries company required remit earnings foreign subsidiaries order realize benefit acquired inprocess research development deferred tax assets valuation allowance related longterm deferred tax assets decreased 1998 due effects foreign subsidiaries profitability managements assessment amount deferred tax asset likely realized future note 4 accounts receivable accounts receivable net allowance doubtful accounts 2906000 2483000 december 31 1998 1997 respectively note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands property equipment includes cost equipment held company capital lease agreements cost related accumulated depreciation aggregated 2475000 1978000 respectively december 31 1998 3674000 1939000 respectively december 31 1997 note 7 software development costs software development costs summarized follows thousands 1998 company sold optimas software product line 1500000 related sale company wrote capitalized software costs related accumulated amortization aggregated 1710000 1225000 respectively unamortized balance capitalized software sold aggregated 485000 included cost sales amortization expense year ended 1998 amortization capitalized software costs aggregated 794000 459000 300000 years ended december 31 1998 1997 1996 respectively note 8 notes payable company 42000000 line credit bearing interest libor plus 175 70 december 31 1998 secured assets company expires june 1 2000 additionally company one subsidiaries 40000000 swedish kroner approximately 4932000 line credit 47 december 31 1998 december 31 1998 1997 company 37360000 26558000 respectively outstanding lines standby letters credit outstanding december 31 1998 totaling 662000 conjunction completion inframetrics transaction march 30 1999 see note 17 companys line credit increased 70000000 approximately 24000000 million line credit utilized payoff existing inframetrics debt time merger note 9 longterm debt longterm debt summarized follows thousands patent note calls annual payments 1999 70000 plus adjustment changes consumer price index note include stated interest rate interest imputed rate 14 consumer price index estimated assuming average increase 5 per year payments 119000 116000 115000 made years ended december 31 1998 1997 1996 respectively related patent capitalized based present value inception patent note 683000 patent fully amortized december 31 1990 note 10 pension plans company offers employees outside united states participation defined benefit pension plans summary components net periodic pension expense defined benefit plans substantially employees outside united states follows thousands changes benefit obligation amounts reflected 1997 since pension plan employees outside united states acquired agema december 1997 see note 16 assumptions used defined benefit pension plans follows note 10 pension plans continued components net periodic benefit cost follows thousands note 11 commitments contingencies company leases primary facilities various operating leases expire 1999 2004 total rent expense years ended december 31 1998 1997 1996 amounted 3190000 1940000 1471000 respectively minimum rental payments required noncancelable leases equipment facilities december 31 1998 follows thousands company 401k savings retirement plan provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company recorded matching contributions 678000 511000 533000 years ended december 31 1998 1997 1996 respectively note 12 capital stock 1998 company increased number shares common stock reserved future issuance pursuant incentive stock plans 4269400 plans restricted stock incentive stock options nonqualified stock options may granted employees consultants nonemployee directors company exercise price less fair market value stock date grant options granted pursuant plans expire ten years date grant plan terminates 2003 1992 incentive stock plan 430000 shares common stock reserved restricted stock awards shares awarded earned ratably term restricted stock agreement based upon achievement specified performance goals shares granted 1998 1997 aggregated 133500 115000 shares respectively shares granted 53630 57500 shares earned 1998 1997 respectively based upon achievement specified performance goals shares granted issued lapse cease subject award compensation expense related awards amounts 1050000 1747000 398000 recorded 1998 1997 1996 respectively included selling operating costs december 31 1998 81500 shares available future awards note 12 capital stock continued july 6 1998 company completed secondary public offering 2399130 shares common stock including 1638630 shares common stock issued sold company additionally july 24 1998 underwriters exercised overallotment option related secondary offering company issued sold additional 359870 shares common stock net proceeds 32049000 utilized repay full payable related party aggregated approximately 4985000 reduce amounts outstanding companys lines credit note 13 stock options company elected account stockbased compensation apb 25 however required sfas 123 company computed pro forma disclosure purposes value options granted 1998 1997 1996 using blackscholes option pricing model weighted average assumptions used stock option grants 1998 1997 1996 riskfree interest rate 57 60 52 respectively expected dividend yield 0 expected life three years expected volatility 484 402 227 respectively options assumed exercised upon vesting purposes valuation adjustments made options forfeited prior vesting years ended december 31 1998 1997 1996 total value options granted computed 2440000 1879000 819000 respectively would amortized straightline basis vesting period options company accounted plans accordance sfas 123 companys net earnings pro forma net earnings per share would follows thousands except per share data effects applying sfas 123 providing pro forma disclosure 1998 1997 1996 likely representative effects reported net earnings per share future years since options vest several years additional awards may made note 13 stock options continued table summarizes companys stock option activity following table sets forth exercise price range number shares weighted average exercise price remaining contractual lives group similar price grant dates options exercisable december 31 1998 totaled 680127 shares weighted average exercise price 1167 options available grant december 31 1998 totaled 2122687 shares note 14 related party transactions company hughes aircraft company related parties resulting hughes stock interest company 1998 hughes aircraft disposed holdings accordingly longer related party december 31 1998 company purchases inventory parts hughes subsidiaries years ended december 31 1997 1996 company purchased parts aggregating 2243000 1670000 respectively hughes subsidiaries december 31 1997 company owed hughes 1243000 sales companys products hughes affiliates amounted 34000 103000 years ended december 31 1997 1996 respectively result agema acquisition see note 16 spectraphysics ab subsidiaries spectra related parties result spectras stock interest company december 31 1998 1997 company owed spectra 0 4985000 respectively note 15 segment information company determined operating segments commercial government market segments commercial segment comprises thermal imaging applications including condition monitoring research development manufacturing process control airborne observation broadcast government segment comprises thermal imaging applications including search rescue federal drug interdiction surveillance reconnaissance navigation safety border maritime patrol environment monitoring groundbased security accounting policies segments described note 1 company evaluates performance based upon revenue gross profit segment evaluate segment performance income measurement operating segment information including revenue gross profit follows thousands information related revenue significant geographical location follows thousands longedlived assets generally located united states exception property equipment december 31 property equipment located following geographic areas thousands note 16 agema acquisition effective december 1 1997 company acquired outstanding shares agema infrared systems ab corporation organized laws sweden agema infrared systems limited corporation organized laws united kingdom agema infrared systems ltd corporation organized laws canada agema infrared systems inc delaware corporation agema exchange 4162000 shares companys common stock value 54106000 additional 1559000 direct acquisition costs also incurred included purchase price agema designs manufactures markets handheld infrared imaging systems commercial market results agemas operations combined company since date acquisition accounted using purchase method accounting accordingly purchase price allocated net assets acquired based upon estimated fair values follows thousands included current liabilities acquired 2000000 estimated costs shut certain identified agema facilities estimated costs included cost involuntarily terminate relocate employees sell relocate certain assets terminate operating leases otherwise wind operations collectively shutdown certain facilities formerly operated agema shutdown substantially completed prior december 1 1998 actual costs accomplish shutdown exceeded costs originally estimated approximately 2880000 excess shutdown costs recorded adjustment purchase price agema resulted increase excess purchase price net assets acquired total shutdown costs incurred summarized follows thousands intangible assets acquired excess purchase price net assets acquired amortized straightline basis 15 years related amortization expense aggregated 1179000 79000 1998 1997 respectively included selling operating costs note 16 agema acquisition continued consolidated unaudited results operations pro forma basis presented though acquisition agema occurred january 1 1996 excluding onetime charges acquired inprocess research development acquisition related costs duplicative inventories thousands except per share data unaudited pro forma results prepared comparative purposes include certain adjustments additional amortization expense excess purchase price net assets acquired intangible assets purport indicative results operations actually would resulted combination effect january 1 1996 future results operations consolidated entities purposes proforma presentation amounts translated average rate 760 671 swedish kroner us dollar 1997 1996 respectively conjunction acquisition quarter ended december 31 1997 company recognized onetime charge 52549000 writeoff consisted 36450000 acquired inprocess research development acquisition related costs included separate line operating expense 16099000 inventories due creation duplicative product lines included cost goods sold note 17 subsequent events march 30 1999 company completed acquisition inframetrics inc privately held infrared imaging company headquartered billerica massachusetts issuing approximately 23 million shares companys stock outstanding stock inframetrics inc additionally company assumed paidoff approximately 24000000 inframetrics inc short longterm debt transaction expected accounted pooling interests quarterly financial data unaudited flir systems inc sum quarterly earnings loss per share equal annual loss per share result computation quarterly versus annual average shares outstanding significant fourth quarter adjustment quarter ended december 31 1997 company increased reserve doubtful accounts 800000 primarily related commercial customers southeast asia additionally quarter ended december 31 1997 company recorded onetime charge 525 million associated acquisition agema effective december 1 1997 writeoff consisted 364 million process research development mergerrelated costs included separate line operating expense 161 million inventories due creation duplicative product lines included cost goods sold item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2011 2010 related consolidated statements income shareholders’ equity comprehensive earnings cash flows years threeyear period ended december 31 2011 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2011 2010 results operations cash flows years threeyear period ended december 31 2011 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 29 2012 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon february 29 2012 1 amounts adjusted reclassification certain discontinued operations continuing operations accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification amounts shown consolidated statement income year ended december 31 2010 adjusted reflect reclassification certain business units previously reported discontinued operations continued operations foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss 61 million gain 64 million december 31 2011 2010 respectively transaction gains losses included income net gain 11 million net gain 07 million net loss 39 million years ended december 31 2011 2010 2009 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined risk uncollectability minimal flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2011 2010 1926 million 272 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 324 million 287 million december 31 2011 2010 respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year frequently required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets goodwill intangible assets indefinite useful lives amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2011 2010 2009 111 million 92 million 82 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated practicable carrying value investments december 31 2011 2010 105 million 104 million respectively investments included assets consolidated balance sheets contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards assumed conversion convertible notes flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands 1 amounts adjusted reclassification certain discontinued operations continuing operations effect stockbased compensation awards years ended december 31 2011 2010 2009 aggregated 352000 418000 515000 shares excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stockbased compensation awards date grant except restricted stock unit awards valued fair market value company’s common stock date grant company recognizes compensation expense timebased options restricted stock unit awards straightline basis requisite service period award compensation expense tranche performancebased options recognized vesting period applicable tranche independent others performance criteria earnings per share targets particular year met related tranche vest flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2011 2010 2009 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2011 2010 2009 follows thousands december 31 2011 company approximately 333 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 18 years fair value stockbased awards determined blackscholes model granted years ended december 31 2011 2010 2009 reported estimated following weightedaverage assumptions company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2011 2010 stock options granted timebased options 2009 approximately 30 percent stock options granted performancebased options approximately 70 percent timebased options difference nature awards taken consideration determining expected term company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2011 2010 2009 138 million 155 million 170 million respectively related tax benefit realized exercise stock options 55 million 83 million 92 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” since effective date january 1 2006 additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill longlived assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration recent accounting pronouncements june 2011 fasb issued accounting standards update 201105 “presentation comprehensive income” “asu 201105” improve comparability consistency transparency financial reporting increase prominence items reported comprehensive income asu 201105 effective fiscal years interim periods within years beginning december 15 2011 accordingly company adopted asu 201105 january 1 2012 september 2011 fasb issued accounting standards update 201108 “testing goodwill impairment” “asu 201108” simplify entities test goodwill impairment asu 201108 effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 accordingly company adopted asu 201108 january 1 2012 note 2 fair value financial instruments cash equivalents december 31 2011 2010 1926 million 272 million respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets accordance fasb asc topic 820 “fair value measurements disclosures” cash equivalents instruments convertible cash daily company material financial assets liabilities measured fair value carrying amount accounts receivable accounts payable accrued payroll related liabilities approximates fair value instruments due shortterm nature fair value foreign currency exchange contracts december 31 2011 significant note 3 foreign currency exchange rate risk company’s foreign businesses enter contracts customers vendors denominated currencies functional currencies protect functional currency equivalent cash flows associated certain contracts company enters foreign currency forward contracts company’s activities involving foreign currency forward contracts designed hedge changes functional currency equivalent cash flows due movements foreign exchange rates compared functional currency foreign currencies hedged primarily euro swedish kroner company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts gains losses foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount losses related derivative instruments recorded expense year ended december 31 2011 2010 23 million 07 million respectively losses offset consolidated statement income reciprocal gains underlying assets liabilities originally gave rise exposure flir systems inc notes consolidated financial statementscontinued note 3 foreign currency exchange rate riskcontinued notional amounts used measure volume foreign currency forward contracts represent exposure foreign currency gains losses table presents notional amounts company’s outstanding foreign currency forward contracts currency december 31 2011 2010 thousands december 31 2011 company’s foreign currency forward contracts general maturities 45 days less note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2011 2010 2009 thousands note 5 inventories consist following thousands flir systems inc notes consolidated financial statementscontinued note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2011 2010 2009 438 million 342 million 261 million respectively note 7 goodwill year ended december 31 2011 company recorded goodwill connection acquisition aerius photonics llc two small companies see note 18 company reviews goodwill impairment annually frequently triggering event twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared carrying value goodwill june 30 2011 company determined impairment recorded goodwill december 31 2011 triggering events would require updated impairment review carrying value goodwill reporting segment activity two year period ending december 31 2011 follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets intangible assets summarized follows thousands year ended december 31 2011 company acquired 88 million identifiable intangible assets part acquisition aerius photonics llc 11 million identifiable intangible assets part acquisition two small companies aggregate amortization expense recorded 2011 2010 2009 332 million 258 million 164 million respectively intangible assets recorded december 31 2011 estimated future aggregate amortization expense years ending december 31 2012 2016 approximately thousands company continually monitors events changes circumstances could indicate carrying amounts company’s intangible assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether carrying value assets recovered expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2011 2010 2009 note 9 credit agreements october 6 2006 company signed credit agreement “2006 credit agreement” bank america na union bank california na us bank national association lenders 2006 credit agreement provided 300 million fiveyear revolving line credit 2006 credit agreement borrowings bore interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon company’s leverage ratio eurodollar interest rate 1053 percent prime lending rate 325 percent december 31 2010 2006 credit agreement required company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 0175 percent 0325 percent december 31 2010 commitment fee rate 0175 percent december 31 2010 company amounts outstanding 2006 credit agreement company 65 million letters credit outstanding 2006 credit agreement december 31 2010 reduces total available credit facility terminated february 8 2011 flir systems inc notes consolidated financial statementscontinued note 9 credit agreementscontinued july 7 2010 company entered uncommitted letter credit agreement bank america support letters credit whose expiration would extend beyond 2006 credit agreement december 31 2011 2010 total value letters credit outstanding facility 06 million 86 million respectively february 8 2011 company signed new credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million february 8 2016 credit agreement allows company certain designated subsidiaries borrow euro kroner pound sterling agreed upon currencies borrowing rates credit agreement determined company’s option time borrowing generally based either prime lending rate bank america na rate interest paid deposits relevant currency plus specified margin based established consolidated total leverage ratio grid eurodollar interest rate 2081 percent prime lending rate 325 percent december 31 2011 credit agreement requires company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 025 percent 040 percent december 31 2011 commitment fee rate 025 percent credit agreement contains two financial covenants require maintenance certain leverage ratios fiveyear revolving line credit available credit agreement unsecured december 31 2011 company amounts outstanding credit agreement 158 million letters credit outstanding reduces total available credit company sweden subsidiary 30 million swedish kroner approximately 43 million line credit interest rate 281 percent december 31 2011 december 31 2011 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s swedish subsidiary subject automatic renewal annual basis note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2011 2010 2009 thousands note 11 longterm debt longterm debt consists following thousands flir systems inc notes consolidated financial statementscontinued note 11 longterm debtcontinued august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” net proceeds issuance notes approximately 2477 million deducting underwriting fees offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 commencing march 1 2012 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases company’s common stock note 12 commitments company leases primary facilities various operating leases expire 2012 2023 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2011 2010 2009 amounted 101 million 133 million 101 million respectively future minimum obligations noncancelable leases net expected sublease income contractual obligations follows thousands note 13 contingencies company subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas august 11 2008 raytheon granted leave file second amended complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer second amended complaint counterclaims september 2 2008 denied material allegations august 31 2009 court entered order granting flir parties motion summary judgment raytheons trade secret misappropriation claim based flir parties statute limitations defense raytheon abandoned claims except claims relating four patents “patent claims” august 11 2010 flir parties raytheon entered agreement principle resolve remaining patent claims october 27 2010 parties finalized agreement resulted payment 3 million flir parties raytheon agreement also entitles flir parties certain license rights patents subject patent claims final judgment entered january 7 2011 parties appealed certain rulings district court united states court appeals federal circuit issues appeal briefed oral argument occurred february 8 2012 company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable may 20 2011 company entered definitive settlement agreement william j parrish timothy fitzgibbons collectively “plaintiffs” terms settlement agreement company made cash settlement payment 39 million plaintiffs dismissal prejudice claims made defendants 2008 action filed company two individuals asserting claims negligent intentional interference prospective economic relations malicious prosecution settlement agreement company also received nonexclusive license certain infrared technology company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands 1 amounts adjusted reclassification certain discontinued operations continuing operations provisions income taxes continuing operations follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences december 31 2011 company united states tax net operating loss carryforwards totaling approximately 777 million expire 2025 2030 addition company various state net operating loss carryforwards totaling approximately 675 million expire 2012 2030 federal state net operating losses generated icx technologies prior acquisition company 2010 tax benefits described recorded asset benefits likely recognized extent management assesses realization assets likely valuation allowance required recorded believe net deferred tax assets 418 million reflected december 31 2011 consolidated balance sheet mostly realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 67 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income achieved united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company currently intends reinvest earnings operations outside united states indefinitely december 31 2011 cumulative amount earnings upon united states income taxes provided approximately 552 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2011 relate united states united kingdom various foreign jurisdictions december 31 2011 company approximately 292 million unrecognized tax benefits 175 million would affect company’s effective tax rate recognized next twelve months company expects minimal changes unrecognized tax benefits flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued company classifies interest penalties related uncertain tax positions income tax expense december 31 2011 company 24 million accrued interest penalties 22 million net federal state benefits related uncertain tax positions recorded current noncurrent accrued income taxes consolidated balance sheet company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted four plans flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 1992 plan 1993 plan 2002 plan previously granted awards 1993 plan 2002 plan remain outstanding prior january 1 2006 stock options granted timebased vesting schedules ranging immediate vesting three years generally expired ten years grant date 2006 company also began granting performancebased options timebased restricted stock unit awards 2011 began granting performancebased restricted stock unit awards vesting performancebased options restricted stock unit awards contingent upon meeting certain diluted earnings per share growth targets primarily three independent tranches three year period options expire ten years grant date vesting tranche dependent tranches timebased restricted stock unit awards generally vest three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options issued replacement options connection acquisition indigo systems corporation 2004 stock options restricted stock unit awards issued replacement awards connection acquisition icx 2010 information respect stock option activity 2011 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensationcontinued information respect restricted stock unit activity 2011 follows december 31 2011 5288000 shares common stock reserved future issuance 2011 plan employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date company reserved 5000000 shares common stock issuance espp 340000 shares issued 2011 4281000 shares remain available espp december 31 2011 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 75 million 49 million 44 million years ended december 31 2011 2010 2009 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded minimum pension liability accumulated comprehensive earnings estimated benefit paid 2012 reported current liabilities measurement date used pension plans december 31 amounts recognized comprehensive earnings years ended december 31 2011 2010 2009 net tax follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued components accumulated comprehensive earnings loss related company’s pension plans december 31 2011 2010 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 94 million 76 million december 31 2011 2010 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2012 follows thousands note 17 operating segments related information operating segments company two business divisions commercial systems government systems commercial systems division commercial systems division focused design manufacture marketing instrument sensor electronics solutions facilitate improved situational awareness environmental analytics commercial customers division comprised two operating segments thermal vision measurement raymarine thermal vision measurement segment provides advanced thermal imaging solutions customer need see night adverse conditions image scene gathering valuable temperature information raymarine segment provides electronics maritime market leading global provider fully integrated “stem stern” networked electronic systems boats sizes government systems division government systems division designs manufactures markets advanced imaging detection systems government markets high performance required division comprised three operating segments surveillance detection integrated systems surveillance segment provides enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare detection segment produces sensor instruments detect identify chemical biological radiological nuclear explosives “cbrne” threats military force protection homeland security commercial applications integrated systems segment develops platform solutions combating sophisticated security threats incorporates multiple sensor systems order deliver actionable intelligence wide area surveillance intrusion detection facility security flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued january 1 2011 within commercial systems division company combined former thermography commercial vision systems operating segments thermal vision measurement operating segment also january 1 2011 within government systems division certain icx business units combined legacy government systems operating segment form surveillance operating segment remaining business units icx separated detection integrated systems operating segments accordingly company retrospectively reported december 31 2010 amounts comparable basis raymarine acquired may 2010 icx acquired october 2010 therefore operating results year ended december 31 2011 raymarine detection integrated systems operating segments comparable operating results prior periods described accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands 1 amounts adjusted reclassification certain discontinued operations continuing operations flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands 1 amounts adjusted reclassification certain discontinued operations continuing operations longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands note 18 business acquisitions july 2011 company acquired aerius photonics llc “aerius” leading provider shortwavelength infrared detectors advanced laser components approximately 270 million cash company recorded 88 million identifiable intangible assets 165 million goodwill conjunction acquisition recorded company’s thermal vision measurement business segment goodwill consists largely company’s ability enhance component offerings expand oem customer base augment company’s multispectral systems development capabilities minimize cost commercializing aerius detectors laser components company’s current future product offerings flir systems inc notes consolidated financial statementscontinued note 18 business acquisitionscontinued preliminary allocation purchase price follows thousands certain tax attributes allocation goodwill pending final valuation expected finalized june 30 2012 none goodwill recognized deductible income tax purposes identifiable intangible assets estimated useful life follows thousands additionally 2011 company acquired outstanding stock tacktick ltd belamarin oy approximately 51 million cash purchase price allocations recorded 2011 connection acquisitions raymarine business segment include identifiable intangible assets approximately 11 million goodwill approximately 15 million may 2010 company acquired outstanding stock raymarine holdings limited “raymarine” leading provider comprehensive range electronic equipment recreational boating light commercial marine markets approximately 1778 million cash october 2010 company acquired outstanding stock icx leading provider integrated advanced sensing technologies homeland security force protection critical infrastructure applications approximately 2642 million cash addition company assumed certain outstanding icx stock options unvested restricted stock units result 331386 shares company’s common stock valued 21 million issuable company upon exercise icx stock options vesting icx restricted stock units company recorded 574 million identifiable intangible assets 1110 million goodwill conjunction icx acquisition recorded company’s surveillance detection integrated systems business segment identifiable intangible assets goodwill business segment follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitionscontinued final allocation purchase price follows thousands none goodwill recognized deductible income tax purposes operating results acquisitions included company’s results operations since respective dates acquisition acquisitions significant either individually aggregate defined regulation sx securities exchange commission compared company’s overall financial position note 19 discontinued operations 2010 connection acquisition icx company began pursue sale certain business units icx results operations reported discontinued operations year 2011 company decided proceed disposition three business units company reclassified business units continuing operations accordingly net loss 02 million business units reclassified discontinued operations consolidated statement income year ended december 31 2010 december 2011 company sold two icx business units reported discontinued operations addition company written net assets estimated market value two remaining business units classified discontinued operations net loss 07 million sale write 30 million operating losses 13 million year included loss discontinued operations net cumulative tax benefits 38 million consolidated statement income year ended december 31 2011 two remaining business units assets totaling approximately 47 million liabilities approximately 07 million december 31 2011 note 20 shareholders’ equity february 2009 company’s board directors authorized repurchase 200 million shares company’s outstanding shares common stock open market february 2009 authorization expired february 2011 february 2011 company’s board directors authorized repurchase 200 million shares company’s outstanding shares common stock open market authorization expires february 2013 authorizations company repurchased 6135000 shares total 1607 million 1306000 shares total 357 million 3232000 shares total 732 million years ended december 31 2011 2010 2009 respectively february 9 2011 company’s board directors adopted dividend policy company intends pay quarterly cash dividends common stock year ended december 31 2011 company paid dividends quarterly rate 006 per share total 380 million note 21 subsequent event february 9 2012 company’s board directors declared quarterly dividend 007 per share common stock payable march 9 2012 shareholders record close business february 21 2012 total cash payment dividend approximately 109 million 1 amounts fourth quarter 2010 first three quarters 2011 adjusted reclassification certain discontinued operations continuing operations 2 earnings continuing operations second quarter 2011 include payment 39 million litigation settlement see note 13 consolidated financial statements additional information sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2012 2011 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2012 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2012 2011 results operations cash flows years threeyear period ended december 31 2012 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2013 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon march 1 2013 accompanying notes integral part consolidated financial statements flir systems inc consolidated statements comprehensive income thousands accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification company made certain reclassifications prior years financial statements conform presentation year ended december 31 2012 reclassifications effect consolidated financial position shareholders equity net cash flows periods presented foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings gain 147 million loss 61 million december 31 2012 2011 respectively transaction gains losses included income net loss 30 million net gain 11 million net gain 07 million years ended december 31 2012 2011 2010 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available use estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined risk uncollectability minimal flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2012 2011 59 million 1926 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 335 million 324 million december 31 2012 2011 respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year frequently required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2012 2011 2010 85 million 111 million 92 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated practicable carrying value investments december 31 2012 2011 135 million 105 million respectively investments included assets consolidated balance sheets contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals adjusted flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards assumed conversion convertible notes following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2012 2011 2010 aggregated 1198000 352000 418000 shares excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued fair market value companys stock discounted dividends date grant except marketbased restricted stock units fair value determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2012 2011 2010 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2012 2011 2010 follows thousands december 31 2012 company approximately 371 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 20 years fair value stockbased awards granted years ended december 31 2012 2011 2010 estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2012 2011 2010 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures year ended december 31 2012 2011 2010 company granted approximately 985000 534000 535000 timevested restricted stock units respectively addition year ended december 31 2011 company granted approximately 101000 performancebased restricted stock units fair value timevested performancebased restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested performancebased restricted stock units granted year ended december 31 2012 2011 2010 2166 3435 2991 respectively year ended december 31 2012 company also granted approximately 795000 marketbased restricted stock units may earned based upon companys total shareholder return compared total shareholder return sp 500 index three year period fair value marketbased restricted stock units granted year ended december 31 2012 1173 total fair value restricted stock unit awards granted year ended december 31 2012 table 307 million includes 93 million grant date fair value associated marketbased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2012 2011 2010 36 million 138 million 155 million respectively related tax benefit realized exercise stock options 01 million 55 million 83 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” since effective date january 1 2006 additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill longlived assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration recent accounting pronouncements february 2013 fasb issued accounting standards update 201302 reporting amounts reclassified accumulated comprehensive income asu 201302 establishes new requirements disclosing reclassifications items accumulated comprehensive income includes identification line items net earnings affected reclassifications asu 201302 effective annual interim periods fiscal years beginning december 15 2012 accordingly company adopted asu 201302 january 1 2013 note 2 fair value financial instruments company 59 million 1926 million cash equivalents december 31 2012 2011 respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets accordance fasb asc topic 820 “fair value measurements disclosures” cash equivalents instruments convertible cash daily fair value company’s forward currency contracts december 31 2012 2011 disclosed note 3 based level 2 inputs fair value company’s longterm debt approximately 2548 million based upon level 2 inputs december 31 2012 company material financial assets liabilities measured fair value carrying amount accounts receivable accounts payable accrued payroll related liabilities approximates fair value instruments due shortterm nature flir systems inc notes consolidated financial statementscontinued note 3 foreign currency exchange rate risk company’s foreign businesses enter contracts customers vendors denominated currencies functional currencies protect functional currency equivalent cash flows associated certain contracts company enters foreign currency forward contracts company’s activities involving foreign currency forward contracts designed hedge changes functional currency equivalent cash flows due movements foreign exchange rates compared functional currency foreign currencies hedged primarily euro swedish kroner company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts gains losses foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount gains losses related derivative instruments recorded expense year ended december 31 2012 2011 2010 gain 51 million loss 23 million loss 07 million respectively general losses offset consolidated statement income reciprocal gains underlying assets liabilities originally gave rise exposure notional amounts used measure volume foreign currency forward contracts represent exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2012 2011 thousands december 31 2012 company’s foreign currency forward contracts general maturities 6 months less carrying amount derivative instruments included consolidated balance sheets follows thousands note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2012 2011 2010 thousands flir systems inc notes consolidated financial statementscontinued note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2012 2011 2010 353 million 438 million 342 million respectively note 7 goodwill year ended december 31 2011 company recorded goodwill connection acquisition aerius photonics llc aerius two small companies amount goodwill related two acquisitions 2012 subject final determination valuation assets acquired liabilities assumed accordingly goodwill recorded either acquisition december 31 2012 see note 18 business acquisitions company reviews goodwill impairment annually frequently triggering event twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared carrying value goodwill june 30 2012 company determined impairment recorded goodwill december 31 2012 triggering events would require updated impairment review flir systems inc notes consolidated financial statementscontinued note 7 goodwill continued carrying value goodwill reporting segment activity two year period ending december 31 2012 follows thousands note 8 intangible assets intangible assets summarized follows thousands year ended december 31 2011 company acquired 88 million identifiable intangible assets part acquisition aerius 11 million identifiable intangible assets part acquisition two small companies intangible assets related two acquisitions 2012 subject allocation respective purchase prices accordingly intangible assets recorded related two acquisitions december 31 2012 see note 18 business acquisitions aggregate amortization expense recorded 2012 2011 2010 244 million 332 million 258 million respectively intangible assets recorded december 31 2012 estimated future aggregate amortization expense years ending december 31 2013 2017 approximately thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets continued company continually monitors events changes circumstances could indicate carrying amounts company’s intangible assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether carrying value assets recovered expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2012 2011 2010 note 9 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million february 8 2016 credit agreement allows company certain designated subsidiaries borrow euro kroner pound sterling agreed upon currencies borrowing rates credit agreement determined company’s option time borrowing generally based either prime lending rate bank america na rate interest paid deposits relevant currency plus specified margin based established consolidated total leverage ratio grid eurodollar interest rate 1805 percent prime lending rate 325 percent december 31 2012 credit agreement requires company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 025 percent 040 percent december 31 2012 commitment fee rate 025 percent credit agreement contains two financial covenants require maintenance certain leverage ratios fiveyear revolving line credit available credit agreement unsecured december 31 2012 company amounts outstanding credit agreement 106 million letters credit outstanding reduces total available credit note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2012 2011 2010 thousands note 11 longterm debt longterm debt consists following thousands flir systems inc notes consolidated financial statementscontinued note 11 longterm debt continued august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” net proceeds issuance notes approximately 2477 million deducting underwriting fees offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes may include working capital expenditure needs business acquisitions repurchases company’s common stock note 12 commitments company leases primary facilities various operating leases expire 2013 2023 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2012 2011 2010 amounted 136 million 101 million 133 million respectively future minimum obligations noncancelable leases net expected sublease income contractual obligations follows thousands note 13 contingencies company subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas raytheons complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer complaint september 2 2008 denied material allegations august 31 2009 court entered order granting flir parties motion summary judgment raytheons trade secret misappropriation claim based flir parties statute limitations defense raytheon abandoned claims except claims relating four patents “patent claims” august 11 2010 flir parties raytheon entered agreement principle resolve remaining patent claims resulted payment 3 million flir parties raytheon entitles flir parties certain license rights patents subject patent claims parties appealed certain rulings district court united states court appeals federal circuit august 1 2012 reversed judgment district court remanded case proceedings consistent appellate courts opinion company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable may 20 2011 company made cash settlement payment 390 million resolve pending claims action filed company settlement agreement company also received nonexclusive license certain infrared technology company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations continuing operations follows thousands provisions income taxes continuing operations follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued deferred tax assets liabilities composed following components thousands provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued companys foreign rate differential primarily result multiyear agreement effective august 1 2012 european jurisdiction well impact lower foreign statutory rates december 31 2012 company united states tax net operating loss carryforwards totaling approximately 579 million expire 2018 2031 addition company various state net operating loss carryforwards totaling approximately 795 million expire 2018 2031 federal state net operating losses generated icx technologies prior acquisition company 2010 finally company various foreign net operating loss carryforwards totaling approximately 935 million expire 2018 2033 tax benefits described recorded asset benefits likely recognized extent management assesses realization assets likely valuation allowance required recorded believe net deferred tax assets 552 million reflected december 31 2012 consolidated balance sheet mostly realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 93 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income achieved united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company currently intends reinvest earnings operations outside united states indefinitely december 31 2012 cumulative amount earnings upon united states income taxes provided approximately 680 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2012 relate united states united kingdom various foreign jurisdictions december 31 2012 company approximately 351 million unrecognized tax benefits 228 million would affect company’s effective tax rate recognized next twelve months company expects minimal changes unrecognized tax benefits company classifies interest penalties related uncertain tax positions income tax expense december 31 2012 company 23 million accrued interest penalties 22 million net federal state benefits related uncertain tax positions recorded current noncurrent accrued income taxes consolidated balance sheet flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted three plans flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 1993 plan 2002 plan previously granted awards 1993 plan 2002 plan remain outstanding company granted timebased options performancebased options timebased restricted stock unit awards performancebased restricted stock unit awards marketbased restricted stock unit awards vesting performancebased options restricted stock unit awards contingent upon meeting certain diluted earnings per share growth targets primarily three independent tranches three year period vesting tranche dependent tranches options generally expire ten years grant date timebased restricted stock unit awards generally vest three year period marketbased restricted stock unit awards granted 2012 may earned based upon companys total shareholder return compared total shareholder return sp 500 index three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options issued replacement options connection acquisition indigo systems corporation 2004 stock options restricted stock unit awards issued replacement awards connection acquisition icx 2010 information respect stock option activity 2012 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation continued information respect restricted stock unit activity 2012 follows december 31 2012 12458000 shares common stock reserved future issuance 2011 plan employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date company reserved 5000000 shares common stock issuance espp 427000 shares issued 2012 3853000 shares remain available espp december 31 2012 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 58 million 75 million 49 million years ended december 31 2012 2011 2010 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded minimum pension liability accumulated comprehensive earnings estimated benefit paid 2013 reported current liabilities measurement date used pension plans december 31 amounts recognized comprehensive earnings years ended december 31 2012 2011 2010 net tax follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued components accumulated comprehensive earnings loss related company’s pension plans december 31 2012 2011 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 81 million 94 million december 31 2012 2011 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2013 follows thousands note 17 operating segments related information operating segments company two business divisions commercial systems government systems commercial systems division commercial systems division focused design manufacture marketing instrument sensor electronics solutions facilitate improved situational awareness environmental analytics commercial customers division comprised two operating segments thermal vision measurement raymarine thermal vision measurement segment provides advanced thermal imaging solutions customer need see night adverse conditions image scene gathering valuable temperature information raymarine segment provides electronics maritime market leading global provider fully integrated “stem stern” networked electronic systems boats sizes government systems division government systems division designs manufactures markets advanced imaging detection systems government markets high performance required division comprised three operating segments surveillance detection integrated systems surveillance segment provides enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare detection segment produces sensor instruments detect identify chemical biological radiological nuclear explosives “cbrne” threats military force protection homeland security commercial applications integrated systems segment develops platform solutions combating sophisticated security threats incorporates multiple sensor systems order deliver actionable intelligence wide area surveillance intrusion detection facility security flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued january 1 2011 company merged thermography commercial vision systems operating segments thermal vision measurement operating segment raymarine acquired may 14 2010 creating raymarine operating segment finally icx acquired october 4 2010 icx operating results period acquisition december 31 2010 reported separate segment effective january 1 2011 icx results reported detection integrated system segments portion reported surveillance segment beginning january 1 2011 former government systems operating segment also included surveillance operating segment raymarine acquired may 2010 icx acquired october 2010 operating results years ended december 31 2012 2011 raymarine detection integrated systems operating segments comparable operating results prior periods described accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions december 2012 company acquired lorex technology inc provider consumer oriented professional grade video surveillance systems approximately 612 million cash traficon international nv provider video image processing software hardware traffic analysis applications approximately 463 million cash tangible assets acquired including accounts receivable inventories included consolidated balance sheet december 31 2012 included thermal vision measurement segment assets note 17 operating segments related information allocation purchase price identifiable intangible assets goodwill subject final determination valuation assets acquired liabilities assumed accordingly excess purchase price approximately 841 million recorded assets december 31 2012 operating results lorex traficon included companys results operations since respective dates acquisition amounts results immaterial july 2011 company acquired aerius leading provider shortwavelength infrared detectors advanced laser components approximately 270 million cash company recorded 88 million identifiable intangible assets 165 million goodwill conjunction acquisition recorded company’s thermal vision measurement business segment goodwill consists largely company’s ability enhance component offerings expand oem customer base augment company’s multispectral systems development capabilities minimize cost commercializing aerius detectors laser components company’s current future product offerings additionally 2011 company acquired outstanding stock tacktick ltd belamarin oy approximately 51 million cash purchase price allocations recorded 2011 connection acquisitions raymarine business segment include identifiable intangible assets approximately 11 million goodwill approximately 15 million none goodwill recognized expected deductible income tax purposes operating results acquisitions 2011 included company’s results operations since respective dates acquisition acquisitions significant either individually aggregate defined regulation sx securities exchange commission compared company’s overall financial position note 19 discontinued operations 2010 connection acquisition icx company began pursue sale certain business units icx results operations business units reported discontinued operations year second quarter 2012 company sold remaining two business units reported discontinued operations operating losses operations including insignificant associated losses recognized subsequent disposal net losses sales units net tax reflected consolidated statements income year ended december 31 2012 note 20 shareholders’ equity february 2009 company’s board directors authorized repurchase 200 million shares company’s outstanding shares common stock open market privately negotiated transactions february 2009 authorization expired february 2011 february 2011 company’s board directors authorized repurchase 200 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expired february 2013 authorizations company repurchased 10466000 shares total 2142 million 6135000 shares total 1607 million 1306000 shares total 357 million years ended december 31 2012 2011 2010 respectively february 9 2011 company’s board directors adopted dividend policy company intends pay quarterly cash dividends common stock year ended december 31 2012 company paid dividends quarterly rate 007 per share total 425 million year ended december 31 2011 company paid dividends quarterly rate 006 per share total 380 million note 21 subsequent events february 6 2013 company’s board directors declared quarterly dividend 009 per share common stock payable march 8 2013 shareholders record close business february 19 2013 total cash payment dividend approximately 131 million also february 6 2013 companys board directors authorized repurchase 250 million shares companys outstanding shares common stock open market privately negotiated transactions authorization expire february 6 2015 1 earnings continuing operations second quarter 2011 include payment 390 million litigation settlement see note 13 consolidated financial statements additional information sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2015 2014 related consolidated statements income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2015 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2015 2014 results operations cash flows years threeyear period ended december 31 2015 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso report dated february 26 2016 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon february 26 2016 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc company world leader sensor systems enhance perception awareness company founded 1978 since become premier designer manufacturer marketer thermal imaging sensing products systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated reclassification result retrospective adoption accounting standards update 201517 balance sheet classification deferred taxes company made certain reclassifications prior years deferred tax assets conform balance sheet presentation december 31 2015 reclassifications effect consolidated financial position shareholders equity net cash flows periods presented see recent accounting pronouncements additional information foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings loss within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income expense net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings loss 1237 million loss 620 million december 31 2015 2014 respectively transaction gains losses included income expense net loss 25 million net gain 02 million net loss 03 million years ended december 31 2015 2014 2013 respectively revenue recognition revenue recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated contractual terms fulfillment significant obligations flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognition continued company designs markets sells products primarily commercial offtheshelf products certain customers request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc company allocates revenue among deliverables primarily based upon objective reliable evidence fair value element arrangement objective reliable evidence fair value element available company uses estimated selling price purposes allocating total arrangement consideration among elements credit extended customers revenue recognized company determined risk uncollectability minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty liabilities established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2015 2014 290 million 298 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered addition company also records allowance customers based certain factors including length time receivables past due historical collection experience individual customers inventories stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued inventories continued inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 368 million 396 million december 31 2015 2014 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed third quarter year frequently warranted impairment determine events changes business conditions indicate carrying value may recoverable company recognize impairment charges goodwill years ended december 31 2015 2014 2013 see note 7 goodwill additional information intangible assets intangible assets amortized using straightline methodology estimated useful lives intangible assets indefinite useful lives evaluated annually impairment frequently required company recognize impairment charges intangible assets indefinite lives years ended december 31 2015 2014 2013 impairment longlived assets longlived asset groups reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset group impairment exists asset group written fair value company recognize impairment charges longlived assets years ended december 31 2015 2014 2013 advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2015 2014 2013 187 million 126 million 107 million respectively flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated practicable carrying value investments 52 million 135 million december 31 2015 2014 respectively investments included assets consolidated balance sheets fourth quarter 2015 company sold investment private technology company cost basis 83 million total sales price 285 million result sale company recorded pretax gain 202 million within income expense net consolidated statement income recorded cash receipts 256 million cash inflow investing activities remaining 29 million receivable recorded assets consolidated balance sheet december 31 2015 contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals disclosures adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance shares upon vesting restricted stock awards following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2015 2014 2013 aggregated 354000 171000 549000 shares respectively excluded purposes diluted earnings per share since effect inclusion would antidilutive supplemental cash flow disclosure thousands flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation company uses blackscholes option pricing model estimate fair value stock option awards shares expected issued companys employee stock purchase plan nonvested stock awards referred restricted stock unit awards valued fair market value companys stock discounted expected dividends date grant except marketbased restricted stock units fair value determined date grant using latticebased optionpricing valuation model incorporates montecarlo simulation company recognizes compensation expense stockbased compensation awards straightline basis requisite service period award following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2015 2014 2013 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2015 2014 2013 follows thousands december 31 2015 company approximately 370 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 192 years fair value stockbased awards granted years ended december 31 2015 2014 2013 estimated following weightedaverage assumptions flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2015 2014 2013 stock options granted timebased options company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures years ended december 31 2015 2014 2013 company granted approximately 804000 685000 1173000 timevested restricted stock units respectively fair value timevested restricted stock units fixed determined date grant based upon companys stock price date grant weighted average fair values timevested restricted stock units granted years ended december 31 2015 2014 2013 2630 3280 2398 respectively year ended december 31 2015 company granted approximately 128000 marketbased restricted stock units may earned based upon companys total shareholder return compared total shareholder return three year period component company 60th percentile level sp 500 index shares vested marketbased restricted stock unit awards must held participant period one year vest date fair value marketbased restricted stock units granted year ended december 31 2015 2555 total fair value restricted stock unit awards granted year ended december 31 2015 table 272 million includes 33 million grant date fair value associated marketbased restricted stock units weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts total amount cash received exercise stock options years ended december 31 2015 2014 2013 208 million 442 million 46 million respectively related tax benefit realized exercise stock options 39 million 128 million 06 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration risk financial instruments potentially subject company concentration credit risk consist primarily accounts receivable concentration credit risk respect accounts receivable limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary substantial portion company’s revenue derived sales united states foreign government agencies see note 17 operating segments related information company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment tests goodwill intangible assets longlived assets recognition measurement loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings loss accumulated comprehensive earnings loss includes cumulative translation adjustments fair value adjustments cash flow hedges changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration following table sets forth changes balances component accumulated comprehensive earnings loss year ended december 31 2015 amounts reclassified accumulated comprehensive earnings loss pension plan items recorded selling general administrative expenses amounts reclassified cash flow hedge items recorded interest expense companys consolidated statement income year ended december 31 2015 flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements may 2014 financial accounting standards board fasb issued accounting standards update 201409 revenue contracts customers asu 201409 establishes new guidance companies recognize revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu 201409 also provides additional disclosure requirements asu 201409 effective annual periods interim periods beginning december 15 2016 july 9 2015 fasb approved deferral effective date periods beginning december 15 2017 accordingly company currently intends adopt asu 201409 january 1 2018 currently evaluating impact adoption asu 201409 consolidated financial statements june 2014 fasb issued accounting standards update 201412 accounting sharebased payments terms award provide performance target could achieved requisite service period asu 201412 requires performance target affects vesting could achieved requisite service period treated performance condition asu 201412 effective annual interim periods within annual period beginning december 15 2015 accordingly company currently intends adopt asu 201412 january 1 2016 expect adoption asu 201412 material impact consolidated financial statements august 2014 fasb issued accounting standards update 201415 presentation financial statementsgoing concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu 201415 new guidance management required assess entity’s ability continue going concern provide related footnote disclosures certain circumstances asu 201415 effective annual interim periods beginning december 15 2016 accordingly company currently intends adopt asu 201415 january 1 2017 expect adoption asu 201415 impact consolidated financial statements april 2015 fasb issued accounting standards update 201503 interestimputation interest subtopic 83530 asu 201503 simplifies presentation debt issuance costs requiring debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts asu 201503 effective financial statements issued fiscal years interim periods beginning december 15 2015 early adoption permitted applied retrospectively company adopted asu 201503 effective january 1 2015 adoption asu 201503 material impact consolidated financial statements july 2015 fasb issued fasb accounting standards update 201511 inventory topic 330 simplifying measurement inventory asu 201511 amendments update require inventory measured lower cost net realizable value net realizable value estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation asu 201511 effective fiscal years beginning december 15 2016 including interim periods within fiscal years amendments update applied prospectively earlier application permitted company currently intends adopt asu 201511 january 1 2017 expect adoption asu 201511 material impact consolidated financial statements september 2015 fasb issued accounting standards update 201516 business combinations topic 805 asu 201516 requires acquirer recognize adjustments provisional amounts identified measurement period reporting period adjustment amounts determined asu 201516 effective financial statements issued fiscal years interim periods beginning december 15 2015 early adoption permitted applied prospective basis effective october 1 2015 company adopted asu 201516 adoption asu 201516 material impact companys consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued recent accounting pronouncements continued november 2015 fasb issued accounting standards update 201517 balance sheet classification deferred taxes asu 201517 standard requires deferred tax liabilities assets classified noncurrent balance sheet effective interim annual periods beginning december 15 2016 early adoption permitted effective december 31 2015 company retrospectively adopted standard resulted reclassification 342 million current assets deferred income taxes net noncurrent assets 47 million current assets deferred income taxes noncurrent liabilities consolidated balance sheet december 31 2014 january 2016 fasb issued accounting standards update 201601 financial instruments overall recognition measurement financial assets financial liabilities asu 201601 pronouncement revises classification measurement investments certain equity investments presentation certain fair value changes certain financial liabilities measured fair value asu 201601 requires change fair value many equity investments recognized net income asu 201601 effective interim annual periods beginning december 15 2017 early adoption permitted company currently intends adopt asu 201601 january 1 2018 currently evaluating potential effects adopting provisions asu 201601 note 2 fair value financial instruments factors used determining fair value financial assets liabilities summarized three broad categories accordance fasb asc topic 820 “fair value measurements” level 1 quoted prices active markets identical securities reporting date level 2 significant directly indirectly observable inputs including quoted prices similar securities interest rates prepayment speeds credit risk level 3 significant inputs generally less observable objective sources including assumptions determining fair value factors methodology used valuing securities necessarily indication risk associated investing securities company 290 million 298 million cash equivalents december 31 2015 2014 respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets cash equivalents instruments convertible cash daily fair value company’s forward currency contracts interest rate swap contracts december 31 2015 2014 disclosed note 3 derivative financial instruments based level 2 inputs fair value company’s senior unsecured notes described note 11 longterm debt approximately 2541 million based upon level 2 inputs december 31 2015 fair value companys term loan also described note 11 approximates carrying value due variable market rate used calculate interest payments company significant financial assets liabilities measured fair value note 3 derivative financial instruments foreign currency exchange rate risk company’s foreign businesses enter contracts customers vendors denominated currencies functional currencies protect functional currency equivalent cash flows associated certain contracts company enters foreign currency forward contracts company’s activities involving foreign currency forward contracts designed hedge changes functional currency equivalent cash flows due movements foreign exchange rates compared functional currency company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts changes fair value foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount gains losses related derivative instruments recorded income expense net year ended december 31 2015 2014 2013 loss 67 million loss 83 million gain 46 million respectively flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued foreign currency exchange rate risk continued general gains losses offset consolidated statements income reciprocal gains losses underlying assets liabilities originally gave rise exposure notional amounts used measure volume foreign currency forward contracts represent companys total exposure foreign currency gains losses table presents net notional amounts company’s outstanding foreign currency forward contracts currency december 31 2015 2014 thousands december 31 2015 company’s foreign currency forward contracts general maturities six months less carrying amount foreign exchange contracts included consolidated balance sheets follows thousands interest rate swap contracts companys outstanding debt december 31 2015 consists fixed rate notes floating rate term loan company maintains floating rate revolver flexibility fund working capital needs uses cash interest expense companys floating rate debt typically calculated based fixed spread reference rate libor also known eurocurrency rate therefore fluctuations market interest rates cause interest expense increases decreases given amount floating rate debt company managing interest rate risk related floating rate debt interest rate swaps company receives floating rate payments makes fixed rate payments impact interest rate swaps fix floating rate basis calculation interest term loan levels indicated table effective interest rate paid equal fixed rates shown plus credit spread effect december 31 2015 effective interest rate term loan 249 percent december 31 2015 following interest rate swaps outstanding flir systems inc notes consolidated financial statementscontinued note 3 derivative financial instruments continued interest rate swap contracts continued interest rate swaps cash flow hedges recorded asset liability companys consolidated balance sheets fair value fair value adjustments recorded adjustment accumulated comprehensive earnings loss except gains losses ineffectiveness interest rate swaps would recorded adjustment income expense net fair value carrying amount companys interest rate swaps 03 million 05 million and02 million recorded assets current liabilities respectively consolidated balance sheet december 31 2015 amount recognized comprehensive income loss year ended december 31 2015 loss 06 million net tax effects note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2015 2014 2013 thousands note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2015 2014 2013 325 million 346 million 359 million respectively property equipment net december 31 2015 includes land building valued approximately 22 million held sale flir systems inc notes consolidated financial statementscontinued note 7 goodwill carrying value goodwill activity two year period ending december 31 2015 follows thousands year ended december 31 2015 company recorded 580 million goodwill connection preliminary purchase price allocation associated acquisition dvtel inc dvtel see note 18 business acquisitions additional information activity year ended december 31 2014 reduction goodwill associated companys sale certain tangible assets intellectual property related design manufacturing nonthermal microoptics oem emerging markets segment company reviews goodwill impairment annually third quarter frequently events circumstances indicate carrying value assets exceeds fair value third quarter 2015 company completed annual review goodwill determined impairment recorded goodwill necessary december 31 2015 triggering events indicators impairment would require updated impairment review note 8 intangible assets intangible assets summarized follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets continued intangible assets summarized follows thousands year ended december 31 2015 company acquired 274 million identifiable intangible assets part acquisition dvtel described note 18 business acquisitions year ended december 31 2014 company purchased certain patents 58 million aggregate amortization expense recorded 2015 2014 2013 164 million 211 million 247 million respectively intangible assets recorded december 31 2015 estimated future aggregate amortization expense years ending december 31 2016 2020 approximately thousands note 9 credit agreement february 8 2011 company entered credit agreement “credit agreement” bank america na us bank national association jpmorgan chase bank na lenders credit agreement provides 200 million fiveyear revolving line credit april 5 2013 credit agreement amended extend maturity revolving credit facility april 8 2016 april 5 2018 addition incorporating 150 million term loan facility maturing april 5 2019 amendment also incorporated revised schedule fees interest rate spreads company right subject certain conditions including approval additional commitments qualified lenders increase revolving line credit agreement additional 150 million time prior april 5 2018 credit agreement allows company certain designated subsidiaries borrow united states dollars euros swedish kronor british pound sterling japanese yen canadian dollars australian dollars agreed upon currencies borrowing rates credit agreement determined company’s option time borrowing generally based either prime lending rate bank america na rate interest paid deposits relevant currency plus specified spread based established consolidated total leverage ratio pricing grid specified margins ranging 025 percent 225 percent per annum based type loan total leverage ratio company including respective spreads onemonth libor interest rate 1924 percent per annum prime lending rate 350 percent per annum december 31 2015 credit agreement requires company pay commitment fee amount unused revolving commitments rate based company’s total leverage ratio commitment fee rate ranges 025 percent 040 percent unused revolving commitments december 31 2015 commitment fee rate 030 percent per annum credit agreement contains two financial covenants require maintenance total leverage ratio interest coverage ratio company compliance december 31 2015 credit facilities available credit agreement unsecured december 31 2015 company revolving loans outstanding credit agreement 301 million letters credit outstanding reduces total available revolving credit agreement flir systems inc notes consolidated financial statementscontinued note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2015 2014 2013 thousands note 11 longterm debt longterm debt consists following thousands august 2011 company issued 250 million aggregate principal amount 375 percent senior unsecured notes due september 1 2016 “notes” net proceeds issuance notes approximately 2477 million deducting underwriting fees offering expenses amortized period five years interest payable notes semiannually arrears march 1 september 1 proceeds notes used general corporate purposes including working capital expenditure needs business acquisitions repurchases company’s common stock april 5 2013 company borrowed 150 million term loan facility incorporated credit agreement principal payments term loan 375 million made quarterly commenced june 30 2013 continue december 31 2018 final maturity payment respect term loan including interest due april 5 2019 interest accrued onemonth libor rate plus scheduled spread paid monthly see note 3 derivative financial instruments interest rate swap contracts additional information effective interest rate term loan december 31 2015 note 12 commitments company leases primary facilities various operating leases expire 2015 2023 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2015 2014 2013 amounted 122 million 140 million 183 million respectively flir systems inc notes consolidated financial statementscontinued note 12 commitments continued future minimum obligations noncancelable leases contractual obligations follows thousands note 13 contingencies flir systems inc subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas raytheons complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer complaint september 2 2008 denied material allegations october 27 2010 flir parties raytheon entered settlement agreement resolved patent infringement claims patent claims pursuant flir parties paid 3 million raytheon entitles flir parties certain license rights patents subject patent claims october 28 2014 fourweek trial began respect raytheons remaining claims misappropriations trade secrets claims related 31 alleged trade secrets november 24 2014 jury united states district court eastern district texas rejected raytheon’s claims determined 27 alleged trade secrets fact trade secrets neither indigo prior acquisition flir systems inc flir systems inc infringed trade secrets claimed awarded raytheon damages court yet rule posttrial motion seeking modify jury verdict flir parties motion award attorney’s fees amount 28 million prevailing party texas theft liability act matter remains ongoing subject appeal company unable estimate amount range potential loss recovery might result final determination matter favorable unfavorable adverse ruling merits original claims flir parties remote could material october 22 2014 company initially contacted united states department state office defense trade controls compliance “ddtc” pursuant international traffic arms regulation “itar” § 12712c regarding unauthorized export technical data defense services dual third country nationals least four facilities company april 27 2015 company submitted initial report ddtc regarding details issues raised october 22 2014 submission ddtc subsequently notified company considering administrative proceedings part 128 itar requested tolling agreement company executed june 16 2015 ddtc continues review company unable reasonably estimate time may take resolve matter amount range potential loss penalty government action may incurred connection matter however unfavorable outcome could potentially material financial condition results operations company period outcome becomes estimable known company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows flir systems inc notes consolidated financial statementscontinued note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands described note 1 nature business significant accounting policies company elected retrospectively adopt fasb asu 201517 requires deferred tax assets liabilities recorded noncurrent adoption resulted reclassification 342 million current assets deferred income taxes net assets 47 million current assets deferred income taxes noncurrent liabilities consolidated balance sheet december 31 2014 net deferred tax assets liabilities classified balance sheet follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued tax effects temporary differences gave rise significant portions deferred tax assets deferred tax liabilities follows thousands provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences companys foreign tax rate differential primarily result threeyear agreement belgium expired july 31 2015 well impact lower foreign statutory rates december 31 2015 company united states tax net operating loss carryforwards totaling approximately 46 million expire 2019 2031 addition company various state net operating loss carryforwards totaling approximately 392 million expire 2016 2033 federal state net operating losses primarily generated icx technologies prior acquisition company 2010 finally company various foreign net operating loss carryforwards totaling approximately 711 million portion expire 2018 2033 portion indefinite carryforward period flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued tax benefits described accounted using asset liability method requires recognition deferred tax assets liabilities expected future tax consequences temporary differences carrying amounts tax basis assets liabilities extent management assesses realization assets likely valuation allowance required recorded december 31 2015 company determined valuation allowance deferred tax assets 26 million required primarily related certain acquired net operating losses review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company believes likely results future operations generate sufficient taxable income realize net deferred tax assets united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company intends reinvest earnings operations outside united states indefinitely december 31 2015 cumulative amount earnings upon united states income taxes provided approximately 722 million determination amount unrecognized deferred tax liability related earnings practicable following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2015 relate united states united kingdom various foreign jurisdictions would affect company’s effective tax rate recognized january 11 2016 european commission announced decision concluding certain rules belgian tax legislation deemed incompatible european union regulations state aid result decision european commission directed belgian government recover past taxes certain entities reflective disallowed state aid company expects impact one subsidiaries covering threeyear period concluded expiration agreement july 2015 negotiations ongoing belgian government european commission agree methodology calculate applicable amounts company impacted decision although company received request payment official notice company evaluated potential impact european commissions decision accordance fasb asc topic 740 income taxes noting recent decision could significantly increase companys unrecognized tax benefits within next twelve months however due ongoing negotiations uncertainty surrounding calculation methodology litigation process company currently unable estimate range potential increase company classifies interest penalties related unrecognized tax benefits income tax provision december 31 2015 company 11 million accrued interest penalties related unrecognized tax benefits recorded current noncurrent accrued income taxes consolidated balance sheet flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued company files united states federal state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted two plans flir systems inc 2002 stock incentive plan “2002 plan” flir systems inc 2011 stock incentive plan “2011 plan” company discontinued issuing awards 2002 plan previously granted awards 2002 plan remain outstanding company granted timebased options timebased restricted stock unit awards marketbased restricted stock unit awards options generally expire ten years grant date timebased options restricted stock unit awards generally vest three year period marketbased restricted stock unit awards may earned based upon companys total shareholder return compared total shareholder return component company 60th percentile level sp 500 index three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options restricted stock unit awards issued replacement awards connection acquisition icx technologies 2010 information respect stock option activity 2015 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation continued stock incentive plans continued information respect restricted stock unit activity 2015 follows december 31 2015 12569000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date company reserved 5000000 shares common stock issuance espp 165000 shares issued average purchase price 2436 2015 3310000 shares remained available espp december 31 2015 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 75 million 69 million 49 million years ended december 31 2015 2014 2013 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded changes minimum pension liability accumulated comprehensive earnings loss estimated benefit paid 2016 reported current liabilities remaining obligations recorded pension longterm liabilities measurement date used pension plans december 31 amounts recognized comprehensive loss income years ended december 31 2015 2014 2013 net tax follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued components accumulated comprehensive earnings loss related company’s pension plans december 31 2015 2014 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands weighted average assumptions used follows flir systems inc notes consolidated financial statementscontinued note 16 employee benefit plans continued pension plans continued discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 28 million 36 million december 31 2015 2014 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2016 follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related information operating segments company six reporting segments follows surveillance segment develops manufactures enhanced imaging recognition solutions wide variety military law enforcement public safety government customers around world protection borders troops public welfare offerings include airborne land maritime manportable multispectrum imaging systems radars lasers imaging components integrated multisensor system platforms services related systems effective january 1 2015 personal vision systems product line transferred oem emerging markets segment surveillance segment product line includes handheld weaponmounted thermal imaging systems use consumers accordingly prior period segment financial information tables reclassified applicable prior periods comparative purposes reclassification impact consolidated revenue earnings loss operations instruments segment develops manufactures devices image measure assess thermal energy gases environmental elements industrial commercial scientific applications products include thermal imaging cameras gas detection cameras firefighting cameras process automation cameras environmental test measurement devices security segment develops manufactures cameras video recording systems use commercial critical infrastructure home security applications products include thermal visiblespectrum cameras digital networked video recorders related software accessories enable efficient effective safeguarding assets hours day adverse weather conditions oem emerging markets oem emerging markets segment develops manufactures thermal imaging camera cores components utilized third parties create thermal types imaging systems segment also develops manufactures intelligent traffic monitoring signal control systems well thermal imaging solutions use consumers smartphone mobile devices markets maritime segment develops manufactures electronics imaging instruments recreational commercial maritime market segment provides full suite networked electronic systems including multifunction helm displays navigational instruments autopilots radars sonar systems thermal visible imaging systems communications equipment boats sizes detection segment develops manufactures sensor instruments integrated platform solutions detection identification suppression chemical biological radiological nuclear explosives threats military force protection homeland security commercial applications accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded cost eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segments continued operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segments continued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands prior year revenue geographical area table reclassified conform presentation provided year ended december 31 2015 longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions november 30 2015 company acquired 100 outstanding stock dvtel provider software hardware technologies advanced video surveillance approximately 975 million cash subject customary postclosing adjustments excess purchase price preliminary net tangible identifiable intangible assets recorded goodwill within companys security segment subject final determination valuation assets acquired liabilities assumed preliminary allocation purchase price dvtel follows thousands allocation purchase price related acquisition preliminary based management’s judgments evaluating several factors including preliminary valuation assessments tangible intangible assets preliminary estimates fair value liabilities assumed primary areas preliminary purchase price allocation yet finalized relate valuation identifiable intangible assets property equipment income taxes including uncertain tax positions certain tangible assets liabilities final allocation purchase price assets acquired liabilities assumed completed final valuation assessments tangible intangible assets completed estimates fair value liabilities assumed finalized year ended december 31 2016 preliminary goodwill 580 million represents future economic benefits expected arise synergies combining operations ability dvtel provide company domain knowledge distribution channels adjacent security markets company made election section 338 internal revenue code 1986 amended resulted taxdeductible goodwill related acquisition dvtel company estimates taxdeductible goodwill intangibles resulting election approximately 248 million amortized united states tax purposes 15 year period value taxdeductible goodwill intangibles differs amounts listed preliminary purchase price allocation impact elections made section 338 affects united states income taxes goodwill intangibles owned companys united states subsidiaries connection preliminary allocation purchase price assets acquired liabilities assumed company identified certain intangible assets following table presents acquired intangible assets preliminary estimated fair values preliminary estimated useful lives thousands except years preliminary acquisitiondate identifiable intangible assets primarily consist intangibles derived developed technology customer relationships inprocess research development developed technology represents completed software related internal external software platforms inprocess research development represents value assigned acquired research development projects acquisition date established technological feasibility alternative future use inprocess research development intangible assets capitalized accounted indefinitelived intangible assets subject impairment testing completion abandonment projects upon successful completion project launch product make separate determination useful life inprocess research development intangible assets related amortization recorded expense estimated useful life specific projects flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions continued average 10year useful life customer relationships estimated based projected economic benefits associated asset average 10year estimated useful life represents approximate point projection period majority asset’s cash flows expected realized based assumed attrition rates developed technology customer relationships inprocess research development valued using multiperiod excess earnings method operating results dvtel included companys results operations since date acquisition material acquisition significant defined regulation sx securities exchange act 1934 significant compared companys overall results operations consequently pro forma financial information provided note 19 shareholders’ equity february 5 2013 company’s board directors authorized repurchase 250 million shares company’s outstanding shares common stock open market privately negotiated transactions authorization expired february 6 2015 february 5 2015 companys board directors authorized repurchase 150 million shares common stock open market privately negotiated transactions authorization expire february 5 2017 authorizations company repurchased 4169000 shares total 1232 million 4243000 shares total 1392 million 5988000 shares total 1621 million years ended december 31 2015 2014 2013 respectively december 31 2015 10831000 shares remaining february 2015 authorization may repurchased year ended december 31 2015 company paid dividends quarterly rate 011 per share total 614 million year ended december 31 2014 company paid dividends quarterly rate 010 per share total 565 million year ended december 31 2013 company paid dividends quarterly rate 009 per share total 514 million note 20 restructuring costs years ended december 31 2015 2014 2013 company recorded net pretax restructuring expenses totaling 14 million 170 million 275 million respectively 2013 company initiated realignment plan included closing six nottoscale sites united states europe transfer operations companys larger facilities company also consolidated optics laser manufacturing businesses better realize benefits vertical integration areas company recorded restructuring expenses segments follows thousands flir systems inc notes consolidated financial statementscontinued note 20 restructuring costs continued restructuring expenses recorded consolidated statements income follows thousands following table summarizes activity cost type thousands note 21 subsequent events february 4 2016 company’s board directors declared quarterly dividend 012 per share common stock payable march 4 2016 shareholders record close business february 19 2016 total cash payment dividend approximately 165 million 1 2015 net earnings includes restructuring expenses 03 million reported first quarter 05 million reported second quarter 03 million reported third quarter 03 million reported fourth quarter 2 2014 gross profit includes restructuring expenses 06 million reported fourth quarter 3 2014 net earnings includes restructuring expenses 84 million reported first quarter 35 million reported second quarter 41 million reported third quarter 10 million reported fourth quarter sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9item 8 financial statements supplementary data item includes following financial information report independent accountants board directors shareholders flir systems inc opinion accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position flir systems inc subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed price waterhouse llp portland oregon march 9 1998 flir systems inc consolidated statement operations thousands except per share amounts accompanying notes integral part financial statements flir systems inc consolidated balance sheet thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement shareholders equity thousands except share data accompanying notes integral part financial statements flir systems inc consolidated statement cash flows thousands accompanying notes integral part financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies company designs manufactures markets thermal imaging broadcast camera systems worldwide wide variety applications government commercial markets thermal imaging systems detect infrared radiation heat emitted directly objects materials enable operator see objects total darkness adverse weather conditions obscurants smoke haze government applications include public safety law enforcement drug interdiction search rescue border patrol maritime patrol environmental protection defense surveillance reconnaissance navigation assistance commercial applications include electronic newsgathering nondestructive testing evaluation research development manufacturing process control condition monitoring image analysis principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated consolidation recognition revenue recognized products shipped services performed except certain longterm contracts recorded percentageof completion method percentageofcompletion method used research development contracts production contracts require significant amounts initial engineering development costs percentageof completion determined relating actual costs incurred date total costs complete respective contract foreign currency translation financial statements subsidiaries outside united states generally measured using local currency functional currency assets liabilities subsidiaries translated rates exchange balance sheet date income expense items translated average monthly rates exchange resultant translation adjustments included cumulative foreign translation adjustment separate component shareholders equity gains losses foreign currency transactions subsidiaries included net earnings cash equivalents company considers shortterm investments highly liquid readily convertible cash original maturities less three months cash equivalents purposes statement cash flows company generally invests excess cash investment grade shortterm commercial paper held maturity december 31 1997 company hold shortterm investments inventories stated lower average cost market note 1 nature business significant accounting policies continued property equipment property equipment stated cost depreciated using straight line methodology estimated useful lives range two ten years repairs maintenance charged operations incurred software development costs company capitalizes software development costs project reaches technological feasibility ceases capitalization related product ready release research development costs related software development reached technological feasibility expensed incurred software development costs amortized greater ratio number units shipped current anticipated future units shipped b straightline method remaining estimated economic life product generally estimated economic life three years income taxes company utilizes liability method set forth statement financial accounting standards 109 sfas 109 accounting income taxes see note 3 earnings per share earnings per share based weighted average number shares common stock common stock equivalents outstanding periods computed using treasury stock method stock options 1997 company adopted statement financial accounting standards 128 earnings per share following table sets forth reconciliation denominator utilized computation basic diluted loss earnings per share thousands effect stock options 1997 388000 shares excluded purposes diluted earnings per share since effect would antidilutive reclassifications certain reclassifications made prior years data conform current years presentation reclassifications impact previously reported results operations shareholders equity note 1 nature business significant accounting policies continued statement cash flows cash paid interest income taxes amounted following thousands noncash portion agema acquisition excluded statement cash flows see note 17 fair value financial assets liabilities company estimates fair value monetary assets liabilities based upon comparison assets liabilities current market values instruments similar nature degree risk company estimates recorded value monetary assets liabilities approximates fair value december 31 1997 except patent note described note 9 interest imputed patent note 14 exceeds current market rate type note therefore fair value note estimated approximately 16000 excess recorded value december 31 1997 stockbased compensation company adopted disclosure provisions statement financial accounting standards 123 sfas 123 accounting stockbased compensation effective january 1 1996 sfas 123 allows companies choose whether account stockbased compensation method prescribed accounting principles board opinion 25 apb 25 use fair value method described sfas 123 company elected continue follow provisions apb 25 see note 13 concentration credit risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make companys customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs indepth credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary certain risks uncertainties preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectibility accounts receivable realizability inventories recoverability capitalized software deferred tax assets actual results could differ estimates note 1 nature business significant accounting policies continued recent accounting pronouncements 1997 financial accounting standards board issued statement financial accounting standards 130 sfas 130 reporting comprehensive income additionally 1997 financial accounting standards board issued statement financial accounting standards 131 sfas 131 disclosure segments enterprise related information items require certain additional disclosures companys operations historical operations company plans adopt sfas 130 sfas 131 1998 however management believes impact adoption significant effect companys financial position results operations note 2 operating costs selling operating costs consist following thousands note 3 income taxes sfas 109 requires company recognize deferred tax liabilities assets expected future tax consequences events basis differences recognized companys financial statements tax returns method deferred tax liabilities assets determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse benefit provision income taxes follows thousands note 3 income taxes continued deferred tax assets composed following components thousands provision income taxes differs amount tax determined applying applicable us statutory federal income tax rate pretax income result following differences december 31 1997 companys net operating loss carryforwards aggregated 9267000 expire years 1998 2012 utilization companys acquired net operating loss carryforwards optimas limited future earnings optimas limited approximately 350000 per year optimas experienced cumulative change ownership 50 within threeyear period addition company various tax credits available aggregating 1334000 december 31 1997 expire years 1999 2012 note 4 accounts receivable accounts receivable net allowance doubtful accounts 2483000 1671000 december 31 1997 1996 respectively note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands property equipment include cost equipment held company capital lease agreements cost related accumulated depreciation aggregated 3674000 1939000 respectively december 31 1997 2724000 1336000 respectively december 31 1996 note 7 software development costs software development costs summarized follows thousands amortization capitalized software costs aggregated 459000 300000 393000 years ended december 31 1997 1996 1995 respectively note 8 notes payable company 30000000 line credit bearing interest ibor plus 175 775 december 31 1997 secured assets company additionally company one subsidiaries 40000000 swedish kroner approximately 5040000 line credit 470 december 31 1997 december 31 1997 1996 company 26558000 6365000 respectively outstanding lines note 9 longterm debt longterm debt december 31 summarized follows thousands patent note calls annual payments 1999 70000 plus adjustment changes consumer price index note include stated interest rate interest imputed rate 14 consumer price index estimated assuming average increase 5 per year payments 116000 115000 112000 made years ended december 31 1997 1996 1995 respectively related patent capitalized based present value inception patent note 683000 patent fully amortized december 31 1990 note 10 pension plans result agema acquisition see note 17 company offers employees outside united states participation defined benefit pension plans summary components net periodic pension expense defined benefit plan employees sweden follows thousands note 10 pension plans continued summary funded status pension plan sweden net pension liability follows thousands assumptions used defined benefit pension plans follows note 11 commitments contingencies company leases primary facilities various operating leases expire 1998 2003 total rent expense years ended december 31 1997 1996 1995 amounted 1940000 1471000 871000 respectively minimum rental payments required noncancelable leases equipment facilities december 31 1997 follows thousands company 401k savings retirement plan provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company recorded matching contributions 511000 533000 0 years ended december 31 1997 1996 1995 respectively note 12 capital stock 1996 company increased number shares common stock reserved future issuance pursuant incentive stock plans 2769400 plans restricted stock incentive stock options nonqualified stock options may granted employees consultants nonemployee directors company exercise price less fair market value stock date grant options granted pursuant plans expire ten years date grant plan terminates 2003 1992 incentive stock plan 430000 shares common stock reserved restricted stock awards shares awarded earned ratably term restricted stock agreement based upon achievement specified performance goals shares granted 1997 1996 aggregated 115000 100000 shares respectively shares granted 115000 33330 shares earned 1997 1996 respectively based upon achievement specified performance goals shares granted issued lapse cease subject award compensation expense related awards amounts 1747000 398000 recorded 1997 1996 respectively included selling operating costs december 31 1997 215000 shares available future awards note 13 stock options company elected account stock based compensation apb 25 however required sfas 123 company computed pro forma disclosure purposes value options granted 1997 1996 1995 using blackscholes option pricing model weighted average assumptions used stock option grants 1997 1996 1995 riskfree interest rate 60 52 77 respectively expected dividend yield 0 respectively expected life three years expected volatility 402 227 239 respectively options assumed exercised upon vesting purposes valuation adjustments made options forfeited prior vesting years ended december 31 1997 1996 1995 total value options granted computed 1879000 819000 1200000 respectively would amortized straightline basis vesting period options company accounted plans accordance sfas 123 companys net earnings pro forma net earnings per share would follows thousands except per share data effects applying sfas 123 providing pro forma disclosure 1997 1996 1995 likely representative effects reported net earnings per share future years since options vest several years additional awards may made note 13 stock options continued table summarizes companys stock option activity following table sets forth exercise price range number shares weighted average exercise price remaining contractual lives group similar price grant dates options exercisable december 31 1997 totaled 565547 shares weighted average exercise price 1010 options available grant december 31 1997 totaled 1021322 shares note 14 longterm contracts 1994 company entered longterm research development contract consortium companies develop autonomous landing guidance system commercial military aircraft part us governments technology reinvestment program companys portion contract aggregated 650000 april 1995 company awarded additional 900000 contract second phase development revenue contract aggregated 0 416000 896000 years ended december 31 1997 1996 1995 respectively included revenue costs associated contract aggregated 0 200000 425000 1997 1996 1995 respectively included cost goods sold outstanding billings december 31 1997 1996 aggregated 0 35000 respectively included accounts receivable note 15 related party transactions company hughes aircraft company related parties resulting hughes stock interest company purchases inventory parts hughes subsidiaries years ended december 31 1997 1996 1995 company purchased parts aggregating 2243000 1670000 1320000 respectively hughes subsidiaries december 31 1997 1996 company owed hughes 1243000 128000 respectively sales companys products hughes affiliates amounted 34000 103000 320000 years ended december 31 1997 1996 1995 respectively result agema acquisition see note 17 spectraphysics ab subsidiaries spectra related parties result spectras stock interest company december 31 1997 company owed spectra 4985000 payable full june 30 1998 note 16 export sales major customers export sales major customers follows thousands note 17 agema acquisition effective december 1 1997 company acquired outstanding shares agema infrared systems ab corporation organized laws sweden agema infrared systems limited corporation organized laws united kingdom agema infrared systems ltd corporation organized laws canada agema infrared systems inc delaware corporation agema exchange 4162000 shares companys common stock value 54106000 additional 1559000 direct acquisition costs also incurred included purchase prices agema designs manufactures markets handheld infrared imaging systems commercial market results agemas operations combined company since date acquisition note 17 agema acquisition continued acquisition accounted using purchase method accounting accordingly portion purchase price allocated net assets acquired based upon estimated fair values follows thousands excess purchase price net assets acquired amortized straightline basis 15 years amortization excess purchase price net assets acquired aggregated 79000 1997 included selling operating costs consolidated unaudited results operations pro forma basis presented though acquisition agema occurred january 1 1996 excluding onetime charges acquired inprocess research development acquisition related costs duplicative inventories thousands except per share data unaudited pro forma results prepared comparative purposes include certain adjustments additional amortization expense excess purchase price net assets acquired intangible assets purport indicative results operations actually would resulted combination effect january 1 1996 future results operations consolidated entities purposes proforma presentation amounts translated average rate 760 671 swedish kroner us dollar 1997 1996 respectively conjunction acquisition quarter ended december 31 1997 company recognized onetime charge 52549000 writeoff consisted 36450000 acquired inprocess research development acquisition related costs included separate line operating expenses 16099000 inventories due creation duplicative product lines included cost goods sold quarterly financial data unaudited flir systems inc sum quarterly loss earnings per share equal annual loss per share result computation quarterly versus annual average shares outstanding primarily related shares issued december 1 1997 related agema acquisition significant fourth quarter adjustment quarter ended december 31 1997 company increased reserve doubtful accounts 800000 primarily related commercial customers southeast asia additionally quarter ended december 31 1997 company recorded onetime charge 525 million associated acquisition agema effective december 1 1997 writeoff consisted 364 million process research development mergerrelated costs included separate line operating expense 161 million inventories due creation duplicative product lines included cost goods sold item 9item 8 financial statements supplementary data item includes following financial information report independent registered public accounting firm board directors shareholders flir systems inc audited accompanying consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2010 2009 related consolidated statements income shareholders’ equity comprehensive earnings cash flows years threeyear period ended december 31 2010 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position flir systems inc subsidiaries december 31 2010 2009 results operations cash flows years threeyear period ended december 31 2010 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states flir systems inc’s internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2011 expressed unqualified opinion effectiveness company’s internal control financial reporting kpmg llp portland oregon march 1 2011 flir systems inc consolidated statements income thousands except per share amounts accompanying notes integral part consolidated financial statements flir systems inc consolidated balance sheets thousands except par value accompanying notes integral part consolidated financial statements flir systems inc consolidated statements shareholders’ equity comprehensive earnings thousands accompanying notes integral part consolidated financial statements flir systems inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements flir systems inc notes consolidated financial statements note 1 nature business significant accounting policies flir systems inc world leader sensor systems enhance perception awareness company founded 1978 empower people ability see night using infrared technology since become premier designer manufacturer marketer thermal imaging systems company’s advanced sensors integrated sensor systems enable gathering analysis critical information wide variety applications commercial industrial government markets worldwide company’s goal enable customers benefit valuable information produced advanced sensing technologies deliver sustained superior financial performance shareholders company creates value customers providing advanced surveillance tactical defense capabilities improving personal public safety security facilitating air ground maritime navigation enhancing enjoyment outdoors providing infrastructure inefficiency information conveying preemptive structural deficiency data displaying process irregularities enabling commercial business opportunities continual support development new thermal imaging data analytics applications company’s business model meets needs multitude customersit sells offtheshelf products wide variety markets efficient timely affordable manner well offers variety system configurations suit specific customer requirements centered design products low cost manufacturing high volume distribution company’s commercial operating model developed time provides unique ability adapt market changes meet customers’ needs reclassification 93 million made current assets current liabilities december 31 2009 balance sheet properly classify balance value added taxes payable current liability reclassification impact previously reported results operations shareholders’ equity principles consolidation accompanying consolidated financial statements include accounts company wholly owned subsidiaries intercompany accounts transactions eliminated foreign currency translation assets liabilities company’s subsidiaries outside united states translated united states dollars current exchange rates effect balance sheet date revenues expenses translated monthly average exchange rates resulting translation adjustments reflected accumulated comprehensive earnings within shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currencies functional currency reflected income net consolidated statements income incurred cumulative translation adjustment included accumulated comprehensive earnings gain 64 million 126 million december 31 2010 2009 respectively transaction gains losses included income net gain 07 million net loss 39 million net gain 129 million years ended december 31 2010 2009 2008 respectively revenue recognition revenue primarily recognized persuasive evidence arrangement exists upon delivery product customer fixed determinable price reasonable assurance collection passage title risk loss customer indicated shipping terms fulfillment significant obligations flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued revenue recognitioncontinued company designs markets sells products primarily commercial offtheshelf products many company’s government systems commercial vision systems customers particularly use airborne systems request different system configurations based standard options accessories company offers general revenue arrangements involve acceptance provisions based upon customer specified acceptance criteria limited circumstances customer specified acceptance criteria exist revenue deferred customer acceptance company cannot demonstrate system meets specifications prior shipment contracts multiple elements ie training installation additional parts etc undelivered end reporting period company recognizes revenue delivered elements determined delivered elements stand alone value undelivered elements objective reliable evidence fair value credit extended customers revenue recognized company determined risk uncollectability minimal company’s products sold warranty provisions require remedy deficiencies quality performance company’s products specified period time generally twelve twentyfour months cost customers warranty reserves established time revenue recognized levels represent company’s estimate costs incurred fulfill warranty requirements provisions estimated losses sales related receivables recorded identified revenue includes certain shipping handling costs stated net representative commissions sales taxes service revenue deferred recognized contract period case extended warranty contracts recognized services provided cost goods sold cost goods sold includes materials labor overhead costs incurred manufacturing products services sold period well warranty costs material costs include raw materials purchased components subassemblies outside processing inbound freight costs labor overhead costs consist direct indirect manufacturing costs including wages fringe benefits operating supplies depreciation occupancy costs purchasing receiving inspection costs research development expenditures research development activities expensed incurred cash equivalents company considers shortterm investments highly liquid readily convertible cash maturities less three months purchased cash equivalents cash equivalents december 31 2010 2009 272 million 3136 million respectively primarily investments money market funds accounts receivable allowance doubtful accounts receivable stated amounts company expects collect credit limits established process reviewing financial history stability customer company regularly flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued accounts receivable allowance doubtful accountscontinued evaluates collectability trade receivables balances based combination factors determined customer unable fully meet financial obligation company records specific allowance reduce related receivable amount expected recovered inventories generally stated lower cost market include materials labor manufacturing overhead cost determined based currently adjusted standard cost basis approximates actual manufacturing cost firstin firstout basis inventory writedowns recorded conditions exist indicate inventories likely excess anticipated demand obsolete based upon company’s assumptions future demand products market conditions company regularly evaluates ability realize value inventories based combination factors including following historical usage rates forecasted sales usage product end life dates estimated current future market values new product introductions recorded writedowns reduce carrying value company’s inventories net realizable value create new costbasis inventories writedowns reflected cost goods sold consolidated statements income demonstration units company’s products used demonstration units stated lower cost market included prepaid expenses current assets consolidated balance sheets demonstration units available sale company periodically evaluates marketability realizable values carrying value demonstration units 287 million 236 million december 31 2010 2009 respectively property equipment property equipment stated cost depreciated using straightline methodology estimated useful lives repairs maintenance charged expense incurred goodwill reviewed june year frequently required impairment determine events changes business conditions indicate carrying value assets may recoverable intangible assets intangible assets goodwill amortized using straightline methodology estimated useful lives longlived assets longlived assets reviewed impairment circumstances indicate carrying amounts may recoverable impairment exists carrying value greater expected undiscounted future cash flows expected provided asset impairment exists asset written fair value flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued advertising costs advertising costs included selling general administrative expenses expensed incurred advertising costs years ended december 31 2010 2009 2008 92 million 82 million 73 million respectively costbasis investments company private company investments consist investments company ability exercise significant influence accounted cost method investments carried cost adjusted company believes events occurred likely significant otherthantemporary adverse effect estimated fair value investments events occurred fair value investments calculated practicable carrying value investments december 31 2010 2009 104 million 92 million respectively investments included assets consolidated balance sheets contingencies company subject possibility loss contingencies arising normal course business estimated loss accrued company determines probable asset impaired liability incurred amount reasonably estimated company regularly evaluates current available information determine whether accruals adjusted earnings per share basic earnings per share based weighted average number shares common stock outstanding period diluted earnings per share computed similar basic earnings per share except weighted shares outstanding increased include additional shares assumed exercise stock options dilutive assumed issuance unvested restricted stock awards assumed conversion convertible notes flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued earnings per sharecontinued following table sets forth reconciliation numerator denominator utilized computation basic diluted earnings per share thousands effect stockbased compensation awards years ended december 31 2010 2009 2008 aggregated 418000 515000 9000 shares excluded purposes diluted earnings per share since effect would antidilutive supplemental cash flow disclosure thousands stockbased compensation company uses blackscholes option pricing model estimate fair value stockbased compensation awards date grant except restricted stock unit awards valued fair market value company’s common stock date grant company recognizes compensation expense timebased options restricted stock unit awards straightline basis requisite service period award compensation expense tranche performancebased options recognized vesting period applicable tranche independent others performance criteria earnings per share targets particular year met related tranche vest flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensationcontinued following table sets forth stockbased compensation expense related tax benefit recognized consolidated statements income years ended december 31 2010 2009 2008 thousands stockbased compensation expense capitalized consolidated balance sheets december 31 2010 2009 2008 follows thousands december 31 2010 company approximately 325 million total unrecognized stockbased compensation costs net estimated forfeitures recognized weighted average period 18 years fair value stockbased awards determined blackscholes model granted years ended december 31 2010 2009 2008 reported estimated following weightedaverage assumptions company uses united states treasury constant maturity interest rate date grant riskfree interest rate uses historical volatility expected volatility company’s determination expected term based analysis historical expected exercise patterns 2010 stock options granted timebased options 2009 approximately 30 percent stock options granted performancebased options approximately 70 percent timebased options 2008 stock options granted flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued stockbased compensation continued performancebased options difference nature awards taken consideration determining expected term company uses estimated forfeiture rate 5 percent stockcompensation expense nonexecutive employees based analysis historical expected forfeitures weightedaverage fair value stockbased compensation awards granted vested intrinsic value options exercised period thousands except per share amounts company also issued stock options restricted stock units replacement awards valued 21 million connection acquisition icx technologies inc “icx” 2010 see note 18 total fair value replacement awards vested year ended december 31 2010 06 million total amount cash received exercise stock options years ended december 31 2010 2009 2008 155 million 170 million 367 million respectively related tax benefit realized exercise stock options 83 million 92 million 274 million respectively company elected adopt “longhaul” method calculate historical pool windfall tax benefits calculates grant basis windfall excess tax benefit arose upon exercise stock option based comparison total tax deduction “asif” deferred tax asset would recorded company followed recognition provisions financial accounting standards board accounting standards codification “fasb asc” topic 718 “compensationstock compensation” since effective date january 1 2006 additionally company elected adopt “taxlaw ordering” method measuring timing tax deductions stock option exercises recognized consolidated financial statements concentration risk financial instruments potentially subject company concentration credit risk consist primarily trade receivables concentration credit risk respect trade receivables limited relatively large number geographically diverse customers make company’s customer base thus diversifying trade credit risk company controls credit risk credit approvals credit limits monitoring procedures company performs credit evaluations new customers requires letters credit bank guarantees advanced payments deemed necessary flir systems inc notes consolidated financial statementscontinued note 1 nature business significant accounting policiescontinued concentration riskcontinued substantial portion company’s revenue derived sales united states foreign government agencies see note 17 company also purchases certain key components sole limited source suppliers company maintains cash deposits major banks time may exceed federally insured limits company periodically assesses financial condition institutions instruments invests adjusts investment balances mitigate risk principal loss use estimates preparation financial statements conformity united states generally accepted accounting principles requires management make estimates judgments affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period significant estimates judgments made management company include matters collectability accounts receivable realizability inventories recoverability deferred tax assets impairment goodwill longlived assets loss contingencies adequacy warranty accruals actual results could differ estimates company believes estimates used reasonable accumulated comprehensive earnings accumulated comprehensive earnings includes cumulative translation adjustments changes minimum liability pension plans foreign currency translation adjustments included comprehensive income tax affected investments international affiliates deemed indefinite duration recent accounting pronouncements october 2009 fasb issued accounting standards update 200913 “revenue recognition topic 605 multipledeliverable revenue arrangementsa consensus fasb emerging issues task force” “asu 200913” provides amendments criteria subtopic 60525 “revenue recognitionmultipleelement arrangements” separating consideration multipledeliverable arrangements expands disclosures related multipledeliverable revenue arrangements asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company early adopted asu 200913 january 1 2010 company’s adoption asu 200913 material impact consolidated financial statements october 2009 fasb issued accounting standards update 200914 “software topic 985 certain revenue arrangements include software elementsa consensus fasb emerging issues task force” “asu 200914” changes accounting model revenue arrangements include tangible products software elements asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 company early adopted asu 200914 january 1 2010 company’s adoption asu 200914 material impact consolidated financial statements flir systems inc notes consolidated financial statementscontinued note 2 fair value financial instruments cash equivalents december 31 2010 2009 272 million 3136 respectively primarily investments money market funds company categorized cash equivalents level 1 financial asset measured fair value based quoted prices active markets identical assets accordance fasb asc topic 820 “fair value measurements disclosures” cash equivalents instruments convertible cash daily company material financial assets liabilities measured fair value carrying amount accounts receivable accounts payable accrued payroll related liabilities approximates fair value instruments due shortterm nature fair value foreign currency exchange contracts december 31 2010 significant note 3 foreign currency exchange rate risk company’s foreign businesses enter contracts customers vendors denominated currencies functional currencies protect functional currency equivalent cash flows associated certain contracts company enters foreign currency forward contracts company’s activities involving foreign currency forward contracts designed hedge changes functional currency equivalent cash flows due movements foreign exchange rates compared functional currency foreign currencies hedged primarily euro swedish kroner british pound sterling australian dollar company manages exposure counterparty nonperformance credit risk entering foreign currency forward contracts major financial institutions expected fully perform terms contracts gains losses foreign currency forward contracts recognized income end reporting period based difference contract rate spot rate net amount gains losses related outstanding derivative instruments recorded expense year ended december 31 2010 net loss 07 million gains losses offset consolidated statement income reciprocal gains losses underlying assets liabilities originally gave rise exposure notional amounts used measure volume foreign currency forward contracts represent exposure foreign currency gains losses table presents notional amounts company’s outstanding foreign currency forward contracts currency december 31 2010 millions december 31 2010 company’s foreign currency forward contracts general maturities 45 days less flir systems inc notes consolidated financial statementscontinued note 4 accounts receivable accounts receivable net allowance doubtful accounts following table summarizes company’s allowance doubtful accounts activity 2010 2009 2008 thousands note 5 inventories consist following thousands note 6 property equipment property equipment summarized follows thousands depreciation expense years ended december 31 2010 2009 2008 342 million 261 million 231 million respectively note 7 goodwill year ended december 31 2010 company recorded goodwill connection acquisitions raymarine holdings ltd “raymarine” icx technologies inc “icx” directed perception inc year ended december 31 2009 company recorded goodwill connection flir systems inc notes consolidated financial statementscontinued note 7 goodwillcontinued acquisition salvador imaging inc omnitech partners inc infrared korea ltd see note 18 company reviews goodwill impairment annually frequently triggering event twostep test performed assess goodwill impairment first fair value reporting unit compared carrying value fair value exceeds carrying value goodwill impaired testing required second step performed carrying value exceeds fair value implied fair value reporting unit’s goodwill must determined compared carrying value goodwill carrying value reporting unit’s goodwill exceeds implied fair value impairment loss equal difference recorded determining fair value reporting units company relied upon income approach market approach income approach fair value business based cash flows expected generate remaining life estimated cash flows converted present value equivalent using appropriate rate return analyzed within boundary overall market capitalization company market approach fair value business based forecasted earnings multiplied average earnings multiplier group company’s peers compared carrying value goodwill june 30 2010 company determined impairment recorded goodwill december 31 2010 triggering events would require updated impairment review carrying value goodwill reporting segment activity two year period ending december 31 2010 follows thousands flir systems inc notes consolidated financial statementscontinued note 8 intangible assets intangible assets summarized follows thousands year ended december 31 2010 identifiable intangible assets acquired part acquisitions thousands addition company recorded intangible asset 59 million fair value tenant leases acquired purchase building 2010 aggregate amortization expense recorded 2010 2009 2008 258 million 164 million 168 million respectively intangible assets recorded december 31 2010 estimated future aggregate amortization expense years ending december 31 2011 2015 approximately thousands company continually monitors events changes circumstances could indicate carrying amounts company’s intangible assets may recoverable events changes circumstances occur company assess recoverability intangible assets determining whether flir systems inc notes consolidated financial statementscontinued note 8 intangible assetscontinued carrying value assets recovered expected future cash flows future undiscounted cash flows determined less carrying amount intangible assets company recognize impairment loss based excess carrying amount fair value assets company recognize intangible asset impairment charges years ended december 31 2010 2009 2008 note 9 credit agreements october 6 2006 company signed credit agreement “credit agreement” bank america na union bank california na us bank national association lenders credit agreement provides 300 million fiveyear revolving line credit agreement borrowings bore interest based upon prime lending rate bank america eurodollar rates provision spread eurodollar rates based upon company’s leverage ratio eurodollar interest rate 1053 percent prime lending rate 325 percent december 31 2010 rates 1001 percent 325 percent respectively december 31 2009 credit agreement required company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 0175 percent 0325 percent december 31 2010 2009 commitment fee rate 0175 percent december 31 2010 2009 company amounts outstanding credit agreement company 65 million 78 million letters credit outstanding credit agreement december 31 2010 2009 respectively reduces total available credit facility terminated february 8 2011 july 7 2010 company entered uncommitted letter credit agreement bank america support letters credit whose expiration would extend beyond current credit agreement december 31 2010 total value letters credit outstanding facility 86 million february 8 2011 company signed new credit agreement “new credit agreement” bank america na us bank national association jpmorgan chase bank na lenders new credit agreement provides 200 million fiveyear revolving line credit company right subject certain conditions including approval additional commitments qualified lenders increase line credit additional 150 million october 8 2016 new credit agreement allows company certain designated subsidiaries borrow euro kroner pound sterling agreed upon currencies new credit agreement requires company pay commitment fee amount unused credit rate based company’s leverage ratio ranges 025 percent 040 percent new credit agreement contains two financial covenants require maintenance certain leverage ratios fiveyear revolving line credit available new credit agreement secured company’s assets company sweden subsidiary 30 million swedish kroner approximately 44 million line credit interest rate 2158 percent december 31 2010 december 31 2010 company amounts outstanding line credit 30 million swedish kroner line credit secured primarily accounts receivable inventories company’s swedish subsidiary subject automatic renewal annual basis flir systems inc notes consolidated financial statementscontinued note 10 accrued product warranties company generally provides twelve twentyfour month warranty products provision estimated future costs warranty based upon historical cost product performance experience recorded revenue recognized following table summarizes company’s warranty liability activity 2010 2009 2008 thousands december 31 2010 30 million accrued product warranties classified longterm outstanding warranty period greater twelve months note 11 longterm debt longterm debt consists following thousands june 2003 company issued 210 million 30 percent senior convertible notes due 2023 private offering pursuant rule 144a securities act 1933 amended net proceeds issuance approximately 2039 million interest payable semiannually june 1 december 1 year february 5 2009 company commenced exchange offer outstanding convertible notes holders elected exchange notes offer whose notes accepted exchange company received 901224 shares company’s common stock cash payment 20 per 1000 principal amount notes offer expired march 9 2009 notes aggregate principal amount 999 million exchanged pursuant exchange offer converted approximately 90 million shares company’s common stock company recognized gain 22 million extinguishment notes gain 20 million expense associated cash inducement reported income net consolidated statements income addition july 2009 convertible notes aggregate principal amount 301 million converted approximately 27 million shares company’s common stock december 2009 convertible notes aggregate principal amount 27 million converted 244000 shares company’s common stock june 2010 remaining 588 million outstanding convertible notes converted 53 million shares company’s common stock flir systems inc notes consolidated financial statementscontinued note 11 longterm debtcontinued convertible notes classified longterm liability consolidated balance sheet stated contractual maturity 2023 company determined expected life notes seven years since notes first redeemable june 2010 company estimated nonconvertible borrowing rate debt seven year maturity issued june 2003 60 percent accordingly value liability component notes time issuance 1744 million value equity component 356 million carrying amounts convertible notes follows thousands effective interest rate convertible notes 60 percent interest amortization expense convertible notes recognized consolidated statements income follows thousands note 12 commitments company leases primary facilities various operating leases expire 2011 2023 company also leases certain operating machinery equipment office equipment operating lease agreements total net rent expense years ended december 31 2010 2009 2008 amounted 133 million 101 million 105 million respectively flir systems inc notes consolidated financial statementscontinued note 12 commitmentscontinued future minimum obligations noncancelable leases net expected sublease income contractual obligations follows thousands note 13 contingencies company subsidiary indigo systems corporation known flir commercial systems inc together “flir parties” named lawsuit filed raytheon company “raytheon” march 2 2007 united states district court eastern district texas august 11 2008 raytheon company granted leave file second amended complaint amended asserted claims tortious interference patent infringement trade secret misappropriation unfair competition breach contract fraudulent concealment flir parties filed answer second amended complaint counterclaims september 2 2008 denied material allegations august 31 2009 court entered order granting flir parties’ motion summary judgment raytheon’s trade secret misappropriation claim based flir parties’ statute limitations defense raytheon abandoned claims except claims relating four patents “patent claims” august 11 2010 flir parties raytheon entered agreement principle resolve remaining patent claims october 27 2010 parties finalized agreement results payment 3 million flir parties raytheon company recorded 3 million loss third quarter fiscal 2010 agreement entitles flir parties certain license rights patents subject patent claims final judgment entered january 7 2011 parties appealed certain rulings district court united states court appeals federal circuit company intends vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable july 10 2008 william j parrish e timothy fitzgibbons collectively “plaintiffs” filed action flir systems inc affiliate indigo systems corporation known flir commercial systems inc earl r lewis james fitzhenry collectively “defendants” california superior court county santa barbara asserting claims negligent intentional tortious interference prospective economic relations claims arose prior action court thendefendants parrish fitzgibbons prevailed november 20 2009 plaintiffs amended complaint add malicious prosecution claim well two additional claims negligent intentional tortious interference prospective economic relations july 19 2010 plaintiffs amended complaint name company’s former outside counsel prior action defendant claims former outside counsel subsequently dismissed without prejudice tortious interference claims dismissed defendants case currently set trial may 2011 defendants intend vigorously defend matter unable estimate amount range potential loss might result outcome matter unfavorable flir systems inc notes consolidated financial statementscontinued note 13 contingenciescontinued company also subject legal proceedings claims litigation arising ordinary course business company makes provision liability probable liability incurred amount loss reasonably estimated company believes recorded adequate provisions probable estimable losses outcome matters currently determinable company expect ultimate costs resolve matters material adverse effect company’s financial position results operations cash flows note 14 income taxes company recognizes deferred tax assets liabilities expected future tax consequences events basis differences recognized company’s financial statements tax returns method deferred tax assets liabilities determined based difference financial statement carrying amount tax basis assets liabilities using enacted tax rates effect years differences expected reverse pretax earnings significant geographical locations follows thousands provisions income taxes follows thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued deferred tax assets liabilities composed following components thousands flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued provision income taxes differs amount tax determined applying applicable united states statutory federal income tax rate pretax income result following differences december 31 2010 company united states tax net operating loss carryforwards totaling approximately 1095 million expire 2025 2030 addition company various state net operating loss carryforwards totaling approximately 909 million expire 2011 2030 federal state net operating losses generated icx technologies acquired flir systems inc 2010 tax benefits described recorded asset benefits likely recognized extent management assesses realization assets likely valuation allowance required recorded believe net deferred tax assets 327 million reflected december 31 2010 consolidated balance sheet mostly realizable based future forecasts taxable income relatively short time horizon determined valuation allowance net deferred tax assets 73 million required primarily related certain acquired net operating losses valuation allowance required morelikelythannot portion deferred tax assets may realized review available positive negative evidence considered including past future performance market environment company operates utilization tax attributes past length carryback carryforward periods evaluation potential tax planning strategies evaluating realizability deferred tax assets company may required record additional valuation allowance deferred tax assets future periods future forecasts taxable income achieved united states income taxes provided accumulated undistributed earnings certain subsidiaries outside united states company currently intends reinvest earnings operations outside united states indefinitely december 31 2010 cumulative amount earnings upon united states income taxes provided approximately 3836 million determination amount unrecognized deferred tax liability related earnings practicable flir systems inc notes consolidated financial statementscontinued note 14 income taxescontinued following table summarizes activity related unrecognized tax benefits including amounts accrued potential interest penalties thousands unrecognized tax benefits december 31 2010 relate united states united kingdom various foreign jurisdictions approximately 11 million tax positions expected reverse next 12 month period due expiration statute limitations recorded current accrued income taxes consolidated balance sheet december 31 2010 remaining amounts recorded long term liability offset deferred tax assets december 31 2010 company approximately 309 million unrecognized tax benefits 209 million would affect company’s effective tax rate recognized next twelve months company expects increases unrecognized tax benefits consistent prior year increases including increases interest penalties company classifies interest penalties related uncertain tax positions income tax expense december 31 2010 company 31 million accrued interest penalties 27 million net federal state benefits related uncertain tax positions recorded current noncurrent accrued income taxes consolidated balance sheet company files united states state foreign income tax returns jurisdictions varying statutes limitations company currently following tax years open examination major taxing jurisdictions flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensation stock incentive plans company stockbased compensation program provides equity incentives employees consultants directors program includes incentive nonstatutory stock options nonvested stock awards referred restricted stock unit awards granted three plans flir systems inc 1992 stock incentive plan “1992 plan” flir systems inc 1993 stock option plan nonemployee directors “1993 plan” flir systems inc 2002 stock incentive plan “2002 plan” prior january 1 2006 stock options granted timebased vesting schedules ranging immediate vesting three years generally expired ten years grant date company discontinued issuing option awards 1992 plan 1993 plan previously granted options plans remain outstanding expiration 2006 company also began granting performancebased options timebased restricted stock unit awards vesting performancebased options contingent upon meeting certain diluted earnings per share growth targets primarily three independent tranches three year period options expire ten years grant date vesting tranche dependent tranches restricted stock unit awards generally vest three year period shares issued result stock option exercises distribution vested restricted stock units new shares company also stock options issued replacement options connection acquisition indigo systems corporation 2004 stock options restricted stock units issued replacement awards connection acquisition icx 2010 information respect stock option activity 2010 follows flir systems inc notes consolidated financial statementscontinued note 15 stockbased compensationcontinued stock incentive planscontinued information respect restricted stock unit activity 2010 follows december 31 2010 9750000 shares common stock reserved future issuance stock incentive plans employee stock purchase plan company employee stock purchase plan “espp” allows employees purchase shares company’s common stock 85 percent fair market value lower either date enrollment purchase date company reserved 5000000 shares common stock issuance espp 252000 shares issued 2010 4621000 shares remain available espp december 31 2010 future issuance shares issued espp purchases new shares note 16 employee benefit plans employee 401k plans company 401k savings retirement plan “plan” provide voluntary salary deferral contributions pretax basis employees within united states accordance section 401k internal revenue code 1986 amended plan allows contributions company made expensed matching contributions 49 million 44 million 40 million years ended december 31 2010 2009 2008 respectively pension plans company previously offered employees outside united states participation defined benefit pension plan curtailed addition company provides supplemental executive retirement plan “serp” certain officers company based united states company recorded minimum pension liability accumulated comprehensive earnings estimated benefit paid 2011 reported current liabilities measurement date used pension plans december 31 flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued amounts recognized comprehensive earnings years ended december 31 2010 2009 2008 net tax follows thousands components accumulated comprehensive earnings loss related company’s pension plans december 31 2010 2009 follows thousands summary components net periodic pension expense benefit obligation fund assets plans follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued weighted average assumptions used follows discount rates used based upon publicly listed indices instruments average maturities estimated consistent respective obligations pension liability 76 million 86 million december 31 2010 2009 respectively recognized pension plans representing excess unfunded accumulated benefit obligation accrued pension costs benefits expected paid plans approximately thousands components net periodic benefit cost follows thousands flir systems inc notes consolidated financial statementscontinued note 16 employee benefit planscontinued pension planscontinued components net periodic benefit cost expected recognized amounts accumulated comprehensive earnings loss year ending december 31 2011 follows thousands note 17 operating segments related information operating segments company determined operating segments thermography commercial vision systems raymarine government systems icx market segments thermography segment addresses broad range commercial industrial applications typically imaging temperature measurement together required products range highly sensitive cameras extensive analytic capabilities sophisticated image processing less expensive cameras offering excellent performance value less demanding applications commercial vision systems segment focused emerging commercial markets infrared imaging technology primary need see night adverse conditions smoke light fog markets include commercial security automotive marine airborne personal night vision first responder markets also included segment company’s infrared sensor business sells focal plane arrays camera cores internally well third parties original equipment manufacturer oem basis raymarine segment designs develops markets electronics maritime industry provider fully integrated “stem stern” networked electronic systems boats sizes products include multifunction displays used control multiple onboard electronic components radar systems thermal imaging cameras autopilot systems sonar modules connectivity software various instruments used monitor factors boat speed direction location business distributes products vast network independent distributors retailers well relationships boat builders providing first fitment aftermarket solutions government systems segment focused selling advanced imaging systems government customers markets high performance required typical applications include surveillance force protection drug interdiction search rescue special operations target designation gs products often customized specific applications frequently incorporate additional sensors including visible light cameras radars low light cameras laser rangefinders laser illuminators laser designators icx segment primarily produces sensor systems detect identify chemical biological radiological nuclear explosives threats deliver actionable intelligence wide area surveillance intrusion detection facility security icx integrates advanced sensors force protection homeland security commercial applications flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segmentscontinued accounting policies segments company’s president chief executive officer evaluates performance segment based upon revenue earnings operations consolidated basis amounts represent revenue earnings operations represented consolidated statements income consists corporate expenses certain operating expenses allocated operating segments management reporting purposes intersegment revenues recorded estimated arms length basis eliminated consolidation accounts receivable inventories operating segments regularly reviewed management reported segment assets remaining assets liabilities capital expenditures depreciation managed companywide basis operating segment information follows thousands flir systems inc notes consolidated financial statementscontinued note 17 operating segments related informationcontinued operating segmentscontinued revenue longlived assets geographic area information related revenue significant geographical location determined end customer follows thousands longlived assets comprised net property equipment net identifiable intangible assets goodwill longterm assets longlived assets significant geographic locations follows thousands major customers revenue derived major customers follows thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitions may 2010 company acquired outstanding stock raymarine holdings limited “raymarine” leading provider comprehensive range electronic equipment recreational boating light commercial marine markets approximately 1778 million cash company recorded 677 million identifiable intangible assets 916 million goodwill conjunction raymarine acquisition recorded company’s raymarine business segment goodwill consists largely ability company raymarine working together grow combined businesses integration other’s products market presence distribution channels domain knowledge allocation purchase price follows thousands none goodwill recognized deductible income tax purposes acquisitionrelated costs included selling general administrative expenses year ended december 31 2010 46 million identifiable intangible assets estimated useful life follows thousands raymarine’s revenue net earnings included company’s consolidated statement income year ended december 31 2010 thousands flir systems inc notes consolidated financial statementscontinued note 18 business acquisitionscontinued october 2010 company acquired outstanding stock icx leading provider integrated advanced sensing technologies homeland security force protection critical infrastructure applications approximately 2642 million cash addition company assumed certain outstanding icx stock options unvested restricted stock units result 331386 shares company’s common stock valued 21 million issuable company upon exercise icx stock options vesting icx restricted stock units connection acquisition company begun pursuing sale certain business units including transportation solutions strategic fit company expects complete sale 2011 net loss 05 million business units reported discontinued operations year ended december 31 2010 business units assets totaling approximately 179 million liabilities approximately 35 million december 31 2010 company recorded 574 million identifiable intangible assets 1106 million goodwill conjunction icx acquisition recorded company’s icx business segment goodwill consists largely ability company expand company’s capabilities advanced sensors chemical biological radiological nuclear explosives detection defense homeland security markets acquisition also enhances company’s existing intelligence surveillance reconnaissance product suite addition icx’s advanced radars integrated platforms preliminary allocation purchase price follows thousands certain tax attributes allocation goodwill pending final valuation expected finalized june 30 2011 none goodwill recognized deductible income tax purposes acquisitionrelated costs included selling general administrative expenses year ended december 31 2010 45 million flir systems inc notes consolidated financial statementscontinued note 18 business acquisitionscontinued identifiable intangible assets estimated useful life follows thousands icx’s revenue earnings continuing operations included company’s consolidated statement income year ended december 31 2010 thousands proforma revenue net earnings company acquisition date raymarine icx january 1 2009 thousands proforma results represent combined revenue net earnings company raymarine icx reported proforma results include intangible asset amortization periods assume acquisition costs incurred 2009 company acquired outstanding stock salvador imaging inc omnitech partners inc certain assets infrared korea ltd approximately 571 million cash purchase accounting allocations recorded 2009 relation acquisitions included recording identifiable intangible assets approximately 171 million goodwill approximately 344 million contingent consideration approximately 19 million contingent consideration paid january 2011 additionally december 2009 company acquired outstanding stock directed perception inc approximately 202 million cash purchase accounting allocations recorded 2010 included recording identifiable intangible assets approximately 45 million goodwill approximately 141 million operating results acquisitions included company’s results operations since respective dates acquisition acquisitions significant either individually aggregate defined regulation sx securities exchange commission compared company’s overall financial position flir systems inc notes consolidated financial statementscontinued note 19 repurchase company stock february 2007 february 2009 company’s board directors authorized repurchase 120 million shares 200 million shares respectively company’s outstanding shares common stock open market february 2007 authorization expired february 2009 february 2009 authorization expired february 2011 authorizations company repurchased 1306000 shares total 357 million 3232000 shares total 732 million 1381000 shares total 407 million years ended december 31 2010 2009 2008 respectively february 2011 company’s board directors authorized repurchase 200 million shares company’s outstanding shares common stock open market authorization expires february 2013 note 20 subsequent event february 9 2011 company’s board directors adopted new dividend policy company intends pay quarterly cash dividends common stock first dividend 006 per share outstanding common stock paid shareholders record close business february 22 2011 payment date march 10 2011 total cash payment dividend approximately 96 million quarterly financial data unaudited flir systems inc thousands except per share data sum quarterly earnings per share always equal annual earnings per share result computation quarterly versus annual average shares outstanding item 9 nannannannanitem 15 exhibits financial statement schedules reports form 8k a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent auditors financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits number description 21 merger agreement dated march 19 1999 among flir systems inc inframetrics inc irabu acquisition corporation shareholders inframetrics inc incorporated reference current report form 8k filed april 14 1999 31 second restated articles incorporation flir systems inc incorporated reference exhibit 31 registration statement form s1 file 3362582 32 first amendment second restated articles incorporation flir systems inc incorporated reference exhibit 11 registration statement form 8a filed june 11 1999 33 first restated bylaws flir systems inc incorporated reference exhibit 32 registration statement form s1 file 3362582 41 rights agreement dated june 2 1999 incorporated reference exhibit 11 registration statement form 8a filed june 11 1999 101 form indemnity agreement flir systems inc member board directors incorporated reference exhibit 101 registration statement form s1 file 33625821 number description 102 1992 stock incentive plan incorporated reference exhibit 103 registration statement form s1 file 33625821 103 1993 stock option plan nonemployee directors incorporated reference exhibit 104 registration statement form s1 file 33625824 104 lease dated february 11 1985 amended among flir systems inc pacific realty association lp incorporated reference exhibit 106 registration statement form s1 file 3362582 105 combination agreement dated october 6 1997 among flir systems inc spectraphysics ab spectraphysics holding sa spectraphysics holdings gmbh spectraphysics holdings plc pharos holdings inc incorporated reference exhibit 20 current report form 8k filed october 24 1997 106 registration rights agreement dated december 1 1997 among flir systems inc spectraphysics ab spectraphysics holdings plc pharos holdings incorporated reference exhibit 102 current report form 8k filed december 15 1997 107 inframetrics inc shareholders agreement dated march 19 1999 among flir inframetrics shareholders inframetrics incorporated reference exhibit 101 current report form 8k filed april 14 1999 108 amendment inframetrics inc shareholders agreement dated october 27 1999 among flir inframetrics former shareholders inframetrics incorporated reference exhibits registration statement form s1 file 33390717 109 flir systems inc 1999 employee stock purchase plan incorporated reference exhibit company’s proxy statement dated april 30 19991 1010 form change control agreement dated may 8 2001 earl r lewis arne almerfors stephen bailey james fitzhenry daniel l manitakos william sundermeier andrew c teich detlev h suderowincorporated reference exhibits form 10k filed march 12 20021 1011 flir systems inc supplemental executive retirement planincorporated reference exhibits form 10k filed march 12 20021 1012 credit agreement among flir systems inc bank america na certain financial institutions dated march 22 2002 incorporated reference exhibits form 10q filed april 24 2002 1013 flir systems inc 2002 stock incentive plan incorporated reference exhibits registration statement form s8 file 333102992 1014 amended restated 1999 employee stock purchase plan amended june 4 2002 incorporated reference exhibits form 10q filed august 6 20021 1015 executive employment agreement dated january 1 2003 flir systems inc earl r lewis1 1016 amendment dated december 19 2000 lease dated february 11 1985 among flir systems inc pacific realty association lp 1017 contract supply uncooled imaging modules dated july 4 20022 210 subsidiaries flir systems inc 230 consent kpmg llp 991 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 1 exhibit constitutes management contract compensatory plan arrangement 2 portions exhibit omitted pursuant request confidential treatment 17 cfr 24024b 2 b quarter ended december 31 2001 company filed following reports form 8k 1 company filed current report form 8k dated october 17 2002 reporting item 5 item 7 issuance press release announcing financial results quarter nine months ended september 30 2002 ii expectations revenue net income year ending december 31 2002 iii authorization company’s board directors company purchase 1500000 shares company’s common stock time open market privately negotiated transactions 2 company filed current report form 8k dated december 20 2002 reporting item 5 item 7 issuance press release announcing receipt new order valued approximately 17 million simrad optronics norway ii expectations revenue net earnings year ending december 31 2003 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 6th day march 2003 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 6 2003 signature title earl r lewis earl r lewis chairman board directors president chief executive officer john c hart john c hart director angus l macdonald angus l macdonald director michael smith michael smith director ronald l turner ronald l turner director steven e wynne steven e wynne director certifications earl r lewis certify 1 reviewed annual report form 10k flir systems inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 6 2003 earl r lewis earl r lewis president chief executive officer stephen bailey certify 1 reviewed annual report form 10k flir systems inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 6 2003 stephen bailey stephen bailey sr vice president finance chief financial officer schedule ii flir systems inc valuation qualifying accounts thousands 1 deductions represents writeoffs net recoveries 2 deductions include writeoffs net recoveries 545 500 applied certain nontrade receivables independent auditors’ report financial statement schedule board directors flir systems inc date january 31 2003 reported consolidated balance sheet flir systems inc oregon corporation subsidiaries december 31 2002 related statements operations shareholders’ equity cash flows year ended included form 10k year ended december 31 2002 connection audit aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k year ended december 31 2002 financial statement schedule responsibility company’s management responsibility express opinion financial statements based audit opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth herein report refers audit transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” sfas 142 fully described note 5 consolidated financial statements however engaged audit review apply procedures 2001 2000 consolidated financial statements respect disclosures kpmg llp portland oregon january 31 2003 report independent public accountants financial statement schedule board directors flir systems inc audited accordance generally accepted auditing standards consolidated financial statements years ended december 31 2001 2000 included flir systems inc subsidiaries’ form 10k issued report thereon dated february 8 2002 audit made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility company’s management presented purposes complying securities exchange commissions rules part basic financial statements valuation qualifying accounts schedule years ended december 31 2001 2000 subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statement taken whole arthur andersen llp portland oregon february 8 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants flir systems inc may 20 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements flir systems inc appearing annual report registration statements filed flir systems inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein prior period financial statements 2001 2000 revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” adopted company january 1 2002item 15 exhibits financial statement schedules reports form 8k a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent auditors financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement 2 portions exhibit omitted pursuant request confidential treatment 17 cfr 24024b 2 b quarter ended december 31 2003 company filed following reports form 8k 1 company filed current report form 8k dated october 22 2003 reporting item 7 item 12 issuance press release announcing financial results quarter nine months ended september 30 2003 ii expectations revenue net income year ending december 31 2003 2 company filed current report form 8k dated october 22 2003 reporting item 5 item 7 issuance press release announcing company signed definitive agreement acquire indigo systems corporation 3 company filed current report form 8k dated december 18 2003 reporting item 5 item 7 issuance press release announcing company received clearance hartscottrodino antitrust improvements act 1976 amended acquisition indigo systems corporation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 4th day march 2004 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 4 2004 schedule ii flir systems inc valuation qualifying accounts thousands 1 deductions represent writeoffs net recoveries 2 deductions include writeoffs net recoveries 545 500 applied certain nontrade receivables independent auditors’ report financial statement schedule board directors flir systems inc date february 2 2004 reported consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2003 2002 related consolidated statements operations shareholders’ equity cash flows years ended included form 10k year ended december 31 2003 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k years ended december 31 2003 2002 financial statement schedule responsibility company’s management responsibility express opinion financial statements based audit opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth herein report refers audit transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” sfas 142 fully described note 5 consolidated financial statements however engaged audit review apply procedures 2001 2002 consolidated financial statements respect disclosures kpmg llp portland oregon february 2 2004 report independent public accountants financial statement schedule board directors flir systems inc audited accordance generally accepted auditing standards consolidated financial statements years ended december 31 2001 2000 included flir systems inc subsidiaries’ form 10k issued report thereon dated february 8 2002 audit made purpose forming opinion statements taken whole valuation qualifying accounts schedule responsibility company’s management presented purposes complying securities exchange commissions rules part basic financial statements valuation qualifying accounts schedule years ended december 31 2001 2000 subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statement taken whole arthur andersen llp portland oregon february 8 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants flir systems inc may 20 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements flir systems inc appearing annual report registration statements filed flir systems inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein prior period financial statements 2001 2000 revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” adopted company january 1 2002item 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent registered public accounting firm financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 4th day march 2005 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 4 2005 schedule ii flir systems inc valuation qualifying accounts thousands 1 additions include assumption allowance doubtful accounts indigo systems corporation 106 currency translation adjustment 128 2 deductions represent writeoffs net recoveries report independent registered public accounting firm financial statement schedule board directors shareholders flir systems inc date february 25 2005 reported consolidated balance sheets flir systems inc subsidiaries december 31 2004 2003 related consolidated statement operations shareholders’ equity cash flows years threeyear period ended december 31 2004 included form 10k year ended december 31 2004 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k three years ended december 31 2004 financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein discussed note 1 consolidated financial statements consolidated financial statements 2003 retroactively revised include effect earnings per share required emerging issue task force’s statement 0408 “the effect contingently convertible debt diluted earnings per share” adopted company fourth quarter 2004 kpmg llp portland oregon february 25 2005item 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent registered public accounting firm financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 6th day march 2006 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 6 2006 schedule ii flir systems inc valuation qualifying accounts thousands 1 additions include assumption allowance doubtful accounts indigo systems corporation 106 currency translation adjustment 128 2 deductions represent writeoffs net recoveries report independent registered public accounting firm board directors shareholders flir systems inc date march 2 2006 reported consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2005 2004 related consolidated statements income shareholders’ equity cash flows years threeyear period ended december 31 2005 included form 10k year ended december 31 2005 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k three years ended december 31 2005 financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein kpmg llp portland oregon march 2 2006item 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent registered public accounting firm financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 16th day march 2007 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 16 2007 schedule ii flir systems inc valuation qualifying accounts thousands 1 deductions represent writeoffs net recoveries 2 currency translation adjustment 3 additions include assumption allowance doubtful accounts indigo systems corporation 106 currency translation adjustment 128 report independent registered public accounting firm board directors shareholders flir systems inc date march 16 2007 reported consolidated balance sheets flir systems inc oregon corporation subsidiaries december 31 2006 2005 related consolidated statements income shareholders’ equity comprehensive earnings loss cash flows years threeyear period ended december 31 2006 included form 10k year ended december 31 2006 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k three years ended december 31 2006 consolidated financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statement schedule based audits opinion consolidated financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements consolidated financial statements december 31 2005 years twoyear period ended december 31 2005 restated discussed note 1 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123 revised 2004 sharebased payment kpmg llp portland oregon march 16 2007item 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules following schedule filed part report schedule iivaluation qualifying accounts report independent registered public accounting firm financial statement schedule schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day february 2008 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 29 2008 schedule ii flir systems inc valuation qualifying accounts thousands 1 deductions represent writeoffs net recoveries 2 currency translation adjustmentitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day february 2009 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer principal accounting financial officer duly authorized officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 27 2009item 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits number description 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day february 2010 flir systems inc registrant stephen bailey stephen bailey sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 26 2010item 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 3rd day march 2014 flir systems inc registrant anthony l trunzo anthony l trunzo sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 3 2014 signature title andrew c teich president chief executive officer andrew c teich anthony l trunzo sr vice president finance chief financial officer anthony l trunzo principal financial officer david muessle vice president corporate controller david muessle principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch angus l macdonald director angus l macdonald michael smith director michael smith john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day february 2015 flir systems inc registrant anthony l trunzo anthony l trunzo sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 27 2015 signature title andrew c teich president chief executive officer andrew c teich anthony l trunzo sr vice president finance chief financial officer anthony l trunzo principal financial officer david muessle vice president corporate controller david muessle principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald cathy stauffer director cathy stauffer michael smith director michael smith john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 24th day february 2017 flir systems inc registrant amit singhi amit singhi sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 24 2017 signature title andrew c teich president chief executive officer director andrew c teich amit singhi sr vice president finance chief financial officer amit singhi principal financial officer brian e harding vice president corporate controller brian e harding principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald michael smith director michael smith cathy stauffer director cathy stauffer john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 23rd day february 2018 flir systems inc registrant carol p lowe carol p lowe executive vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 23 2018 signature title james j cannon president chief executive officer director james j cannon carol p lowe executive vice president chief financial officer carol p lowe principal financial officer brian e harding vice president corporate controller brian e harding principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald michael smith director michael smith cathy stauffer director cathy stauffer robert tyrer director robert tyrer john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day february 2019 flir systems inc registrant carol p lowe carol p lowe executive vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 27 2019 signature title james j cannon president chief executive officer director james j cannon carol p lowe executive vice president chief financial officer carol p lowe principal financial officer brian e harding vice president corporate controller brian e harding principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald michael smith director michael smith cathy stauffer director cathy stauffer robert tyrer director robert tyrer john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day february 2020 flir systems inc registrant carol p lowe carol p lowe executive vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 27 2020 signature title james j cannon president chief executive officer director james j cannon carol p lowe executive vice president chief financial officer carol p lowe principal financial officer travis b johnson vice president corporate controller travis b johnson principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald michael smith director michael smith cathy stauffer director cathy stauffer robert tyrer director robert tyrer john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1this exhibit constitutes management contract compensatory plan arrangement item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 25th day february 2021 flir systems inc registrant bys carol p lowe carol p lowe executive vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 25 2021 signaturetitle james j cannon president chief executive officer director james j cannon carol p lowe executive vice president chief financial officer carol p loweprincipal financial officer travis b johnson vice president corporate controller travis b johnsonprincipal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald michael smith director michael smith cathy stauffer director cathy stauffer robert tyrer director robert tyrer john w wood jr director john w wood jr steven e wynne director steven e wynnenanitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day february 2012 flir systems inc registrant anthony l trunzo anthony l trunzo sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 29 2012 signature title earl r lewis chairman board directors president chief executive officer earl r lewis anthony l trunzo sr vice president finance chief financial officer anthony l trunzo principal financial officer david muessle vice president corporate controller david muessle principal accounting officer john carter director john carter william w crouch director william w crouch angus l macdonald director angus l macdonald michael smith director michael smith john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 1st day march 2013 flir systems inc registrant anthony l trunzo anthony l trunzo sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 1 2013 signature title earl r lewis chairman board directors president chief executive officer earl r lewis anthony l trunzo sr vice president finance chief financial officer anthony l trunzo principal financial officer david muessle vice president corporate controller david muessle principal accounting officer john carter director john carter william w crouch director william w crouch angus l macdonald director angus l macdonald michael smith director michael smith john w wood jr director john w wood jr steven e wynne director steven e wynneitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day february 2016 flir systems inc registrant amit singhi amit singhi sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated february 26 2016 signature title andrew c teich president chief executive officer director andrew c teich amit singhi sr vice president finance chief financial officer amit singhi principal financial officer david muessle vice president corporate controller david muessle principal accounting officer earl r lewis chairman board directors earl r lewis john carter director john carter william w crouch director william w crouch catherine halligan director catherine halligan angus l macdonald director angus l macdonald michael smith director michael smith cathy stauffer director cathy stauffer john w wood jr director john w wood jr steven e wynne director steven e wynnenanitem 15 exhibits financial statement schedules a1 financial statements financial statements included item 8 a2 financial statement schedules included required information inapplicable required presented financial statements related notes thereto a3 exhibits 1 exhibit constitutes management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 1st day march 2011 flir systems inc registrant anthony l trunzo anthony l trunzo sr vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated march 1 2011