FLIR 10-Q Quarter ended June 30, 2010

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended June 30, 2010

OR

For the transition period from to

Commission file number 0-21918

FLIR Systems, Inc.

(Exact name of Registrant as specified in its charter)

(503) 498-3547

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At July 30, 2010, there were 158,113,330 shares of the Registrant’s common stock, $0.01 par value, outstanding.

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INDEX

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FLIR SYSTEMS, INC.

(In thousands, except per share amounts)

(Unaudited)

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

1

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FLIR SYSTEMS, INC.

(In thousands, except par value)

(Unaudited)

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

2

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FLIR SYSTEMS, INC.

(In thousands)

(Unaudited)

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

3

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2010.

Reclassification

A reclassification of $9.3 million has been made from other current assets to other current liabilities on the December 31, 2009 balance sheet to properly classify the balance of value added taxes payable as a current liability. This reclassification had no impact on previously reported results of operations or shareholders’ equity.

Note 2. Accounting for Convertible Debt

In June 2003, the Company issued $210 million of 3.0 percent senior convertible notes due in 2023. The net proceeds from the issuance were approximately $203.9 million. The Company determined that the expected life of the notes should be seven years since the notes were first redeemable in June 2010. The Company estimates that its nonconvertible borrowing rate for debt with a seven year maturity issued in June 2003 was 6.0 percent. Accordingly, the value of the liability component of the notes at the time of issuance was $174.4 million and the value of the equity component was $35.6 million.

In June 2010, $58.8 million of the outstanding convertible notes were converted into 5.3 million shares of the Company’s common stock in non-cash transactions.

The carrying amounts of the convertible notes are as follows (in thousands):

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The unamortized discount and issuance costs were amortized through May 2010. The effective interest rate of the convertible notes was 6%. Interest and amortization expense of the convertible notes recognized in the Consolidated Statements of Income are as follows (in thousands):

Stock-based compensation expense and related tax benefit recognized in the Consolidated Statements of Income are as follows (in thousands):

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

As of June 30, 2010, the Company had $41.3 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.1 years.

5

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 3 . Stock-based Compensation – (Continued)

The fair value of the stock-based awards, as determined under the Black-Scholes model, granted in the three months and six months ended June 30, 2010 and 2009 was estimated with the following weighted-average assumptions:

The fair value of stock-based compensation awards granted and vested, and the intrinsic value of options exercised during the period were (in thousands, except per share amounts):

The total amount of cash received from the exercise of stock options in the three months ended June 30, 2010 and 2009 was $2.2 million and $2.0 million, respectively, and the related tax benefit realized from the exercise of the stock options was $2.5 million and $1.3 million, respectively. The total amount of cash received from the exercise of stock options in the six months ended June 30, 2010 and 2009 was $3.4 million and $6.4 million, respectively, and the related tax benefit realized from the exercise of the stock options was $2.9 million and $4.3 million, respectively.

6

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Information with respect to stock option activity is as follows:

Information with respect to restricted stock unit activity is as follows:

There were approximately 124,000 shares issued under the 2009 Employee Stock Purchase Plan (the “2009 ESPP”) during the six months ended June 30, 2010. There were approximately 4,749,000 shares available at June 30, 2010 for future issuance under the 2009 ESPP.

7

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):

The effect of stock options and restricted stock units for the three and six months ended June 30, 2010 that aggregated 406,000 and 514,000, respectively, and for the three and six months ended June 30, 2009 that aggregated 704,000 shares and 834,000 shares, respectively, has been excluded for purposes of calculating diluted earnings per share since the effect would have been anti-dilutive

As of June 30, 2010, the Company had $172.0 million of cash equivalents, which were primarily investments in money market funds. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets, in accordance with Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” The fair value of the Company’s forward currency contracts as of June 30, 2010 was not significant. The Company does not have any other financial assets or liabilities that are measured at fair value.

The Company purchases derivative financial instruments on a limited basis to manage well-defined foreign currency risks. The Company enters into forward exchange contracts to hedge the value of material non-functional currency monetary asset and liability balances. The net effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions would not be material to the Company’s financial position or the results of operations.

The table below summarizes, by currency, the notional amounts of the forward exchange contracts in US dollars as of June 30, 2010 (in thousands):

The “Buy” amounts represent the net US dollar equivalents of commitments to purchase foreign currencies, and the “Sell” amounts represent the net US dollar equivalent of commitments to sell foreign currencies. The foreign currency amounts have been translated into the US dollar equivalent value using the exchange rate at the reporting date.

Accounts receivable are net of an allowance for doubtful accounts of $3.0 million and $2.0 million at June 30, 2010 and December 31, 2009, respectively.

Inventories consist of the following (in thousands):

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Property and equipment are net of accumulated depreciation of $114.7 million and $102.9 million at June 30, 2010 and December 31, 2009, respectively.

The carrying value of goodwill by reporting segment and the activity for the six months ended June 30, 2010 is as follows (in thousands):

Intangible assets are net of accumulated amortization of $60.4 million and $53.0 million at June 30, 2010 and December 31, 2009, respectively.

The following table summarizes the Company’s warranty liability and activity (in thousands):

At June 30, 2010, the Company had no borrowings outstanding under its Credit Agreement, dated October 6, 2006, with Bank of America, N.A., Union Bank of California, N.A., U.S. Bank National Association and other Lenders, and $12.4 million of letters of credit outstanding, which reduces the total available credit.

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Long-term debt consists of the following (in thousands):

The following table summarizes the common stock and additional paid-in capital activity during the six months ended June 30, 2010 (in thousands):

During the three months ended June 30, 2010, the Company repurchased 1,206,718 shares of the Company’s common stock under the February 2009 repurchase authorization by the Company’s Board of Directors pursuant to which the Company is authorized to repurchase up to 20.0 million shares of the Company’s outstanding common stock. This authorization will expire in February 2011.

The following table sets forth the calculation of comprehensive earnings for the periods indicated (in thousands):

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company and its subsidiary, Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.), (together, the “FLIR Parties”), were named in a lawsuit filed by Raytheon Company (“Raytheon”) on March 2, 2007, in the United States District Court for the Eastern District of Texas. On August 11, 2008, Raytheon Company was granted leave to file a second amended complaint. The complaint, as amended, asserted claims for tortious interference, patent infringement, trade secret misappropriation, unfair competition, breach of contract and fraudulent concealment. The FLIR Parties filed an answer to the second amended complaint and counterclaims on September 2, 2008, in which they denied all material allegations. On August 31, 2009, the court entered an order granting the FLIR Parties’ motion for summary judgment on Raytheon’s trade secret misappropriation claim based on the FLIR Parties’ statute of limitations defense. Raytheon has abandoned all of its other claims except its claims relating to four patents which are currently set for trial to commence on September 20, 2010. The Company intends to vigorously defend itself in this matter and is unable to estimate the amount or range of potential loss, if any, which might result if the outcome in this matter is unfavorable.

On July 10, 2008, plaintiffs William J. Parrish and E. Timothy Fitzgibbons filed an action against FLIR Systems, Inc. its affiliate Indigo Systems Corporation (now known as FLIR Commercial Systems, Inc.), Earl R. Lewis and James A. Fitzhenry (collectively, “Defendants”) in California Superior Court for the County of Santa Barbara asserting claims for negligent and intentional tortious interference with prospective economic relations. The claims arose from a prior action in the same court in which then-defendants Parrish and Fitzgibbons prevailed. On November 20, 2009, plaintiffs amended their complaint to add a malicious prosecution claim, as well as two additional claims for negligent and intentional tortious interference with prospective economic relations. On July 19, 2010, plaintiffs further amended their complaint to name the Company’s former counsel in the prior action as a defendant. Defendants intend to vigorously defend themselves in this matter and are unable to estimate the amount or range of potential loss, if any, which might result if the outcome in this matter is unfavorable.

As of June 30, 2010, the Company had approximately $6.0 million of net unrecognized tax benefits of which all $6.0 million would affect the Company’s effective tax rate if recognized. The Company anticipates a portion of its net unrecognized tax benefits will be recognized within 12 months as the result of settlements or effective settlements with various tax authorities, the closure of certain audits and the lapse of statute of limitations.

The Company classifies interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2010, the Company had approximately $647,000 of accrued interest related to uncertain tax positions.

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

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Operating Segments

Operating segment information is as follows (in thousands):