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FLIR Systems, Inc. (NASDAQ:FLIR)
Krause Fund Research Fall 2018
Technology Recommendation: SELL Current Price: $45.86
Target Price: $31.00-$39.00
Analysts
Ivan Morales [email protected]
Kameron Kopaska [email protected]
Yu Shen Lim [email protected]
Company Overview FLIR Systems is a leader in developing and distributing products that detect people, objects and substances that are not seen by the human eye. Through innovating technologies, FLIR has been able to produce thermal imaging systems, cutting-edge sensors, and advanced threat-detection solutions for the consumer, commercial, and defense sectors. FLIR has recently consolidated their business units into three major segments: Government & Defense, Commercial, and Industrial. On October 30th, FLIR reported Q3 2018 earnings. FLIR missed revenue expectations by 2.54%, but beat earnings by 12.24%. Stock Performance Highlights 52 week High $63.88 52 week Low $45.00 Beta (5 year, weekly) 1.03 Average Daily Volume 3.57 M Share Highlights Market Capitalization $6.401 B Shares Outstanding 1.21 B Book Value per share $5.08 EPS (2017) $0.87 P/E Ratio 23.8x Dividend Yield 1.38% Dividend Payout Ratio 34% Company Performance Highlights ROA 4.80% ROE 7.0% Sales $1.80 B
Key Investment Highlights • The weakening U.S. dollar is expected to make U.S.
goods and services more attractive. This will help FLIR, who generates just under 50% of its revenue from export markets.
• Increased defense spending and the uptrend of US
government contracts will benefit FLIR, who receives approximately 26% of its revenues from the U.S. government. In Q3 2018, FLIR landed a government contract worth $94.3 M.
• As of FYE 2017, FLIR reported $652 M in backlog.
While orders may be cancelled, historically, FLIR has not received many cancellations for their backlog, and is poised to turn that backlog into revenue.
• The recent acquisition Acylica will increase FLIR’s
vertical integration and expand its product portfolio.
• FLIR was awarded a government contract worth nearly $95 M with a two year base period and six option years in Q3.
• FLIR maintains the dominant position in revenue share
in a niche market that is night vision equipment manufacturing.
Source: Bloomberg3
0.98
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1.28
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1.48One Year Performance
S&P 500
FLIR
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2018 2019 2020 2021
FED Target
Real GDP
Real GDP is an economic measure which tracks the value of all goods and services produced in a given year. Q3 revealed real GDP of 3.5%, down 70 basis points from Q2’s four year high. The decrease seen from Q2 to Q3 was expected, however, Q3 GDP still beat market expectations of 3.3%. This surprise shows that the economy is still strong and should remain that way for 2019 due to low unemployment and high consumer confidence. Although the U.S. has seen strong quarters as of late, we expect real GDP to normalize to an annualized rate of 2-3% in 2019 due to trade tensions with China.
Source: U.S. Bureau of Economic Analysis1
Interest Rates
When the FED increases the federal funds rate, it has an effect on interest rates charged by banks. This helps reduce spending to decelerate an overheating economy and keep inflation low. We expect to see another rate hike in December of 2018, and at least one more rate hike in 2019. This will hurt companies by increasing their cost of debt, but will give the FED options should the economy spiral into a recession. Due to the correlation between interest rates and the strength of an economy, we believe rate hikes will not hurt FLIR’s sales.
Source: Federal Reserve Economic Data15
Inflation
Inflation measures the increase in prices and the decrease of purchasing power. In the U.S., there are two primary price indices: the consumer price index (CPI) and the producer price index (PPI). CPI measures inflation from the viewpoint of the buyer, while PPI measures inflation from the viewpoint of the seller. Jerome Powell believes contractionary monetary policy will keep the job market strong and keep inflation near 2% for the next several years. We believe inflation will remain near 2% in 2019.
Source: Statista2
Forecasted Prices of Aluminum
Source: Bloomberg3
The graph above shows the median consensus forecasts for aluminum. The price for aluminum is expected to remain stagnant until 2020, when the price is expected to increase by nearly five percent. Aluminum is widely used as input in electronic equipment; an increase in the price of aluminum represents an operational risk. We incorporated this assumption into our model by increasing cost of goods sold by five percent in 2020.
The trade weighted-index (TWI) tracks the strength of the US dollar relative to foreign currency. When the US dollar declines, it causes the TWI to decrease which makes exports more appealing to foreign investors. The TWI is forecasted to decrease over the next seven years by just over nine
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Real GDP
1.27%
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15 16 17 18E 19E 20E 21E 22E 23E
Inflation
Economic Analysis
3
percent4. We believe this will benefit the industry and FLIR, which generates 47% of its revenue in export markets.
Source: IBISWorld4
Industry Position Overview
FLIR’s operations are in two industries: Electronic Equipment and Defense. The Electronic Equipment segment consists of products such as marine electronics, home security equipment, and components used in smartphones. The defense segment is made up of weapon-mounted systems, advanced thermal imaging devices, and sensors for surveillance. Approximately 26% of FLIR’s revenue comes from the US Government.
Electronic Equipment & Instruments Industry
The Electronic Equipment & Instruments Industry consists of producers of small-scale electronic equipment, instruments, electronic components, and electronic equipment mainly for OEM (Original Equipment Manufacturer) markets. Electrical motors, commercial and industrial lighting, heating, cooling, & thermal systems are a few of the products that drive this industry. Inputs facing trade tariffs are a crucial part to this industry. It is estimated that 87% of the industry relies on imported raw materials, components, and equipment from China.5
Source: MarketWatch5
Recent Developments
Over the past three years, the Electronic Equipment, Instruments, and Electronic Components industry has outperformed the S&P 500. This can be attributed to strong growth of global technology and high levels of consumer confidence. This leads to more consumer spending on electronics, thus increasing revenues for the industry. However, YTD performance of the electronic index has underperformed the S&P by a margin of 11.73 percent.
Source: Fidelity13
We believe this is primarily due to a shortage of electronic components, which is a result of manufacturers’ inability to match supply with high demand6. This causes an increase in the price of inputs for firms that operate in this industry.
The table below shows lead times for major electronic equipment components. It is clear that supply has shifted from short lead times of 14 weeks or less to “highly constrained” lead times, resulting in squeezed supply and higher prices.
Source: EPSNews7
Industry Analysis
4
Competitive Positioning
FLIR generates the largest portion of its revenue in the US. This fact led us to filter the Electronic Equipment & Instruments industry to US equities in attempt to better analyze FLIR’s position within the industry.
Source: Bloomberg4
US equities make up nearly 1/3 of the electronic equipment & instruments industry’s market cap. Of these US equities, eleven companies generate over 80% of the revenue; of these 11 companies, FLIR accounts for nearly 10% of the market cap and roughly 7% of the revenue.
Most of these 11 companies are positioned to see a growth in revenue for FYE ’18, with the exception of FLIR, FITBIT, and MTS. The chart below details the revenue forecasts for FYE ‘18.
Source: Bloomberg4
While FLIR is not positioned for growth in 2018 in terms of revenue, it is expected to show growth with respect to EPS. FLIR’s 2018 EPS growth from the prior year is 17.02 percent.
Source: Bloomberg4
FLIR is able to increase EPS in 2018 without growing its prior year revenues by maintaining strong operating margins.
Source: FLIR 10K12
Defense Industry
The defense industry has historically consisted of companies who specialize in the production of defense weaponry, however, technological innovation paired with public concern regarding terrorism has made the industry more diverse. Industry products range from armored military vehicles and missiles to night-vision goggles.
The industry is heavily dependent on governmental military spending. Consequently, this makes the industry reliant on US military spending. The US spends more on military and defense related products than the next seven countries combined, as outlined by the chart below.
Source: Business Insider14
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Government Contracts
Industry dependency on military and defense spending can translate into dependency on government contracts. US federal contracts make up roughly 13% of the federal budget. In 2017, U.S. government contracts made up nearly two-thirds of all federal contracts.
Source: Congressional Research Survey8
The Bloomberg Industry Classification Standard of the Defense Industry revealed total revenue for the industry in the US to be $369.52 B. In 2017, the U.S. government spent $320 B, roughly 86% of total industry revenue generated in the U.S.
Trends
U.S. government contract obligations vary by year. Obligations were at their peak in 2008, before contract amounts started to decline. In 2015, contract obligations began to rise. Given the current administration’s sentiment on military spending, we predict this trend to continue and reach historically high contract obligations.
Source: Congressional Research Survey8
Recent Developments
Global military spending in 2018 is up 110 basis points and U.S. military spending is up 41 basis points YoY. On August 13th, President Trump signed the 2019 National Defense Authorization Act (NDAA), authorizing $717 B
for the Pentagon’s programs, signaling an increase of 1446 basis points from 2018 to 2019.9
Porter’s 5 Forces
Threat of New Entrants: Low
The threat for a new entrant is low, and it will remain that way for the future. To become a major player in thermal vision technology, it requires a great amount of capital in order to fund research and development. Large companies are able to self-finance their own research and development, a crucial cost that needs to be funded due to high competition in the sector. Since the government is one of the largest consumers in this industry, obtaining contracts is one of the main ways to generate revenue.
Power of Suppliers: Medium
The power of suppliers is medium due to the long-term contract terms that manufacturers agree upon. Plastic materials is one of the supplies that allows companies to manufacture there products at a low cost. There are a limited number of trusted manufactures because of long-term contract terms.
Threat of Buyers: High
The major consumers for night vision equipment are government entities. The nature of how well the market is going depends on the overall spending on defense. In years when governments decreased their funding, the industry as a whole saw their revenue decrease. With the threat of buyers for this industry being few and powerful, it makes the threat of buyers remain high.
Threat of Substitutes: Low
The field being very high tech and defense focused. The main worry for substitutes is when new technology gets developed before another company. The more effective a firm is able to finance their research and development, the more likely their products will stay ahead of competition and the threat of substitutes will remain low.
Competition in the Industry: High
The competition in night vision manufacturing is tight, with 35 companies being in the industry and the four largest accounting for 40% of the revenue. With night vision technology being in the mature stage of growth, it is unlikely that newer companies will be able to succeed. The main competition in this industry is based on the ability to develop new technologies and effectively market them to customers. Competition in the industry will likely decrease prices and hurt margins.
6
Company Analysis
$956,438
$375,474
$227,047
$127,796
$113,679
$80,000 $580,000 $1,080,000
United States
Europe
Asia
Middle East/Africa
Canada/Latin America
Revenue by Location (thousands)
2015 2016 2017
lli
ons)
Catalysts for Growth
The electronic equipment industry is projected to see an increase in conglomerates as large firms boost their M&A activity to expand product lines and increase operating efficiency. This will help firms cut costs and increase margins. The rise of autonomous vehicles and other artificially intelligent (AI) products will increase the demand for electronic equipment. Companies such as General Motors and Ford have announced recent investments in the autonomous vehicle space. GM invested $581 M to acquire Cruise, a self-driving startup. Ford invested $1 B in Argo AI, a robotics company, to enhance Ford’s existing self-driving car business. Ford expects to have level 4 autonomous vehicles on the streets by 2021.10
Source: TechEmergence10
FLIR has also made investments in AI technology. In September of 2018, FLIR acquired Acyclica to improve their Intelligent Traffic System. FLIR plans to use Acyclica’s technology to transmit data to transportation department end-users to make roads safer and increase efficiency. The ITS market is expected to see a 5.65% CAGR driven primarily from concerns among public safety, government attraction, and increasing traffic congestion from increases in population.11
Summary
FLIR is organized into three main business units: Government and Defense, Industrial, and Commercial. These business units are further organized into six main operating segments: Surveillance, Instruments, Security, OEM & Emerging Markets, Maritime, and Detection.
Source: FLIR 10K12
Geographic Revenue
FLIR’s revenue varies by division and by geography. Over 30% of revenue was generated by surveillance and over 50% of all revenue came from domestic sales.
Source: FLIR 10K12
Operating Segments
In 2017, FLIR saw the largest portion of its revenue come from its surveillance segment. Surveillance, instruments, and OEM/emerging accounted for over 84% of FLIR’s revenue.
Source:
FLIR 10K12
Surveillance
FLIR’s surveillance segment makes advanced thermal imaging devices and sensors for intelligence, surveillance, and reconnaissance. Main customers in this segment include the military, law enforcement, public safety, and government bodies around the world. In addition to military-grade products, this segment also provides off-the-shelf and customizable hand-held and
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$226.60$240.00 $231.50
$197.20$224.10 $217.70
$0
$50
$100
$150
$200
$250
$300
2015 2016 2017
USD
(mill
ions
)
Year
Operating Margin (Security)
Revenue COGS
$347.50 $336.10 $357.80
$232.40 $237.30 $250.90
$-
$200
$400
2015 2016 2017
Operating Margin (Instruments)
Revenue COGS
$186.70 $243.70
$347.20
$143.00 $177.60
$243.90
$- $50
$100 $150 $200 $250 $300 $350 $400
2015 2016 2017
USD
(mill
ions
)
Year
Operating Margin (OEM & Emerging)
Revenue COGS
weapon-mounted thermal imaging systems for consumers. Surveillance is FLIR’s largest segment by revenue; it historically generated about 33% of FLIR’s total revenue. In 2017, FLIR generated a profit margin of 27.8% in the surveillance segment.
Source: FLIR 10K12
Instruments
FLIR’s instruments segment makes devices for imaging and measuring thermal energy. The Instruments segment is FLIR’s second largest segment and historically generated about 22% of total revenues. In 2017, this segment produced a profit margin of 29.9%.
Source: FLIR 10K12
OEM & Emerging
FLIR’s OEM & Emerging segment produces thermal imaging camera cores and components that go into other thermal devices, smart phones, and other mobile devices. This segment also focuses on emerging businesses, such as intelligent traffic systems (ITS), thermal imaging technology for mobile devices and unmanned aerial systems. Moving forward, FLIR expects ITS to be able to sustain revenues large enough to demand its own division. We did not price this into our model because of a lack of certainty. This segment is the third largest by revenue and has historically generated about 14% of FLIR’s total revenues. This segment generated a profit margin of 29.8% in 201712.
Source: FLIR 10K12
Security
The security segment develops video recording systems that serve commercial, home security, and border surveillance applications. The Security segment develops a wide spectrum of camera systems for use in commercial, infrastructure, and home monitoring applications. Customers include corporations, institutions, and homeowners. This segment housed the “FLIR” and “Lorex” brands. In a change of focus, FLIR completed the sale of its “Lorex,” consumer, small and medium-sized visible-spectrum business. FLIR expects this sale to enable them to better focus on the critical infrastructure and enterprise-level market within the Security segment. Security is FLIR’s fourth largest segment by revenue and historically generated about 13% of total revenue. This segment generated a profit margin of 5.9% in 2017.
Source: FLIR 10K12
$503.00 $532.50 $545.80
$353.40 $381.00 $393.80
$- $100 $200 $300 $400 $500 $600
2015 2016 2017USD
(mill
ions
)
Year
Operating Margin (Surveillance)
Revenue COGS
8
$177.90 $185.70 $189.70
$160.50 $167.10 $166.70
$140.00 $150.00 $160.00 $170.00 $180.00 $190.00 $200.00
2015 2016 2017
USD
(mill
ions
)
Year
Operating Margin (Maritime)
Revenue COGS
$115.30 $124.10 $128.50
$85.00 $88.80 $92.40
$- $20 $40 $60 $80
$100 $120 $140
2015 2016 2017
USD
(mill
ions
)
Year
Operating Margin (Detection)
Revenue COGS
Maritime
The maritime segment is responsible for creating electronics for recreational and commercial marine use. The Maritime segment is the second smallest by revenue and historically generated about 11% of total revenues. Maritime produced an operating margin of 12.10% in 2017.
Source: FLIR 10K12
Detection
The detection segment produces sensors and other integrated platforms for detecting and suppressing extreme acts of violence. . Primary customers in this segment include military forces, homeland security bodies, law enforcement, and commercial institutions. This segment, along with the Surveillance segment, is under FLIR’s “Government and Defense” business unit. While this segment houses many of FLIR’s defense contracts and sophisticated research and development, it is the smallest segment by revenue. Detection historically generated about 7% of FLIR’s total revenues. This segment generated a profit margin of 28.10% in 2017.
Source: FLIR 10K
Niche Market
FLIR produces much of its equipment to be used in what is known as the night vision equipment manufacturing industry. This niche market consists of products such as thermal imaging cameras, night vision
goggles, and complex sensor systems. FLIR’s Surveillance, Instruments, OEM, and Detection segments produce these types of devices, representing the importance of FLIR’s competitive positioning in this niche market.
In 2015, FLIR generated approximately 22% of revenue in the night vision equipment manufacturing market, followed by their two closest competitors: Harris Corporation at 8% and L-3 Communications Holdings, Inc. at 7%.
Source: IBISWorld4
In October of 2018, L3 and Harris Corp. announced a merger to form L3 Harris Technologies, Inc. The merger will result in the creation of the 6th and 10th largest defense company in the U.S and the world, respectively. This creates potential market share loss for FLIR as L3 Harris Technologies attempts to innovate the industry and streamline their processes. The graph below shows closing prices of L3 and Harris Corp; the market responded positively to the news of the merger, signaling a risk for FLIR.16
Source: Yahoo Finance11
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Production and Distribution
Manufacturing
FLIR’s manufacturing has seen internal growth over years. FLIR’s acquisitions have increased its vertical integration, which has lowered the cost of buying materials. FLIR’s vertical integration also allows it to decrease lead times creating for faster deliveries. It has also allowed FLIR to increase the flexibility of their production; FLIR offers a wide range of products which allows them to quickly adjust to changes in customers’ needs and demands. As a result of FLIR’s flexibility, FLIR is able to maintain independence in designing components of their products.
Distribution
As FLIR has grown they have used a combination of direct sales, third-parties, and retail outlets to sell their products. When using third-parties to sell their products, FLIR commands the third-parties to undergo training programs to learn about recent updates and new applications of their products. As global military expenditures have increased, so has FLIR’s international sales. From 2016 to 2017, FLIR’s sales increased by 82 basis points and 72 basis points in Asia and Canada/Latin America, respectively.12
Analysis of Recent Earnings
FLIR released 2018 Q3 earnings near the end of October. Total sales increased by 1.65% from 2017 Q3, but missed on revenue expectations by 2.54%. Although FLIR missed on revenue, it beat earnings expectations by 12.24%, largely due to FLIR’s ability to manage operating expenses through vertical integration.12
Cost Structure
FLIR’s cost of goods sold rose from 895 M to 942 M for the fiscal year ending in 2017. The increase in the cost of goods sold was from a result of increased revenues. While the cost of goods sold increased, gross margin improved. The cost that goes into FLIR’s cost of goods includes materials, labor, overhead in manufacturing, services sold in the period, and warranty cost. The cost of materials includes raw materials, pre-assembled items, and inbound freight cost. Labor and overhead are a mix of direct and indirect manufacturing cost, which include wages, benefits, supplies, depreciation, amortization, and inspection cost. The history of gross margin from 2018 through 2016 has remained relatively constant with a range of 47.7% to 48.4%. If FLIR remains consistent with their cost structure, then the valuation of gross margin should represent a gradual change.
Dividend Payout
FLIR has increased its dividend payment by a 16% CAGR since 2011. FLIR plans to continue increasing dividends, and forecasted dividends by applying FLIR’s payout ratio to our forecasted earnings.
Catalysts for Growth
Backlog
The chart below shows FLIR’s backlog by segment. Backlog represents orders FLIR has received, but has not received payments for. Historically, FLIR has not had substantial cancellations on orders, and we believe FLIR can turn backlog into revenue.
Source: FLIR 10K12
Government Contract Uptrend
Increased defense spending, specifically higher obligated government contracts will have a strong influence on FLIR’s future revenues. More than half of FLIR’s revenue was generated domestically and just over a quarter of its revenue was from the U.S government.
FLIR Lands Government Contract
On September 26th, FLIR announced it was awarded an Indefinite Delivery, Indefinite Quantity contract worth $94.3 M. The contract has a two-year base period with eight individual option years.14
Investment Risks
Reliance on Defense Spending
FLIR is very dependent on U.S. defense spending. If the U.S. cuts down on defense spending, FLIR could lose a portion of their revenue. Furthermore, a decrease in U.S. defense spending could cause the world to follow, causing a global decrease in defense spending.
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Valuation Analysis
Tight Competition
The competitive nature of FLIR’s niche market could cause FLIR to see a decrease in sales or a decrease in margins. The recent announcement of L3 and Harris Corp.’s merger could create synergies for L3 Harris Technology that FLIR would have trouble competing with.
Revenues
We first forecasted revenues from the historical linear growth until the continuing value year of 2022 (CV); this is the base growth if present trends continue. We then adjusted the forecast for trends based on our economic and industry outlook. To achieve this, we separately forecasted real GDP, real GNP, consumer price index, producer price index (electronics and overall), consumer sentiment, import price index (electronics), and unemployment rates until CV. These separate economic and industry forecasts were used to guide our trend adjustment. Variables suffering from multicollinearity were dropped from the model. We expect total revenue to grow at 7.7% on average every year until CV, when it will then grow at 6.7% every year going forward.
Revenue Decomposition
Total revenues were forecasted from the historical data with regression analysis. We adjusted trend based on our estimation of FLIR’s future growth. Revenues were forecasted on a yearly frequency, so no seasonality adjustments were necessary. Predictor variables include real GDP, real GNP, consumer price index, producer price index, consumer sentiment, import price index, and unemployment rates. We removed insignificant predictors to avoid an overly complex model. A separate model based on ridge regression was also used to keep multicollinearity, in check.
We forecasted FLIR’s revenue decomposition by segments to remain roughly constant throughout the continuing value year (CV 2022). As of 2018, FLIR is has 3 main business units: Government and Defense, Industrial, and Commercial. These business units are further divided into 6 main segments: Surveillance and Detection (Government and Defense); OEM & Emerging Markets and Instruments (Industrial); Maritime and Security (Commercial).
Surveillance
Surveillance historically generated about one-third of FLIR’s total revenues, more than any other segment. The
U.S. Army’s continual use of FLIR’s military-grade surveillance products will boost revenues in this segment. We forecasted surveillance revenues as a percentage of total revenue to grow by 1.6% annually on average until CV. We forecasted surveillance revenues to grow by 8.1% annually until CV.
Instruments
The instruments segment historically generated about one-fifth of FLIR’s total revenues, making it FLIR’s second largest segment by revenue. We forecasted instrument revenues as a percentage of total revenue to grow by 1.7% annually on average until CV. We forecasted instrument revenues to grow by 8.2% annually until CV.
Security
FLIR’s security segment focuses on security solutions for homes and enterprise infrastructure. Recently, FLIR is integrating its security products to comply with several industry standards, in addition to implementing remote access from mobile devices and computers. On average, FLIR’s security segment historically generated about 12% of total revenues. We expect this proportion to remain steady and forecasted security revenues as a percentage of total revenue to grow by 0.1% annually until CV. Security is a valuable product across all markets, and we forecasted the security segment to grow by 6.6% annually on average until CV.
OEM & Emerging Markets
This segment focuses on core and related components to third party OEMs to integrate into their own products. Additionally, this segment houses production for businesses with high potential but lack the scale to represent their own segment (emerging markets). We forecasted this segment to grow by 1.5% annually on average until CV because it serves high potential markets (traffic intelligence, mobile thermal imaging, and drone systems). The forecasted growth is not as high as other segments because production for emerging markets have small economies of scale.
Maritime
FLIR’s maritime segment focuses on recreational and commercial marine instruments. It is historically the second smallest segment by revenue and we do not expect any major innovations by FLIR in this segment until CV. We forecasted maritime revenues as a percentage of total revenue to grow by 2% annually on average until CV. We also forecasted maritime revenues to grow by 8.5% annually until CV.
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Detection
FLIR’s detection segment is historically the smallest by revenue, generating about 7% of total revenues. Major customers include the government and private entities with interests in the detection and prevention of terrorist and security risks. Competition in this segment is highly competitive and the technology involved evolves rapidly. With heavy competition from tech giant United Technologies and instruments specialist Agilent Technologies, we forecasted this segment to grow by 5.5% annually on average until CV, with revenues as a percentage of total revenue declining by 0.95% annually until CV.
Key Variables
Weighted Average Cost of Capital
This is the rate that FLIR is expected to pay its security holders on average to finance its assets. FLIR’s WACC is heavily weighted towards equity financing, with very low debt levels. We believe that low debt levels will benefit FLIR going forward because 1) the reduction in the effective tax rate reduces the benefits of debt financing, 2) the expected rise in interest rates going forward will increase the cost of debt financing, 3) low debt levels will enhance credit ratings, thereby enabling FLIR to secure low-interest loans or refinance its current loans to lower its cost of debt.
Beta
Beta represents the measure of FLIR’s systematic risk in relation to the market. We calculated beta using a linear intercept model, whereby the returns of FLIR were regressed on the returns of the market index. We used a 5-year weekly historical period as the timeframe and the S&P500 index as the proxy for market returns. We calculated FLIR’s beta to be 1.03.
Cost of Equity
We used the CAPM model to determine FLIR’s cost of equity. We used the 10-year U.S. Treasury Note yield (3.19% as of writing) as proxy for the risk-free rate. We used the geometric mean of historical market returns to determine the market risk premium. Using the SPY index as proxy for the market and a 10-year historical timeframe (matching our risk-free rate period), we calculated the market risk premium to be 5.74%. Incorporating the market risk premium, risk-free rate, and beta resulted in a CAPM cost of equity of 9.10%.
Cost of Debt
We used Moody’s Bond Indices Corporate Baa (Bloomberg: MOODCBAA) as proxy for FLIR's pre-tax cost of debt because FLIR does not have any long-term debt maturing at or after CV. As of writing, FLIR’s credit rating as determined by Moody’s is Baa3, and the MOODCBAA index at 4.61% is a suitable proxy for FLIR’s average corporate bond yield. The effective tax rate is 19.50%, which results in an after-tax cost of debt of 3.71%.
Weights
We calculated FLIR’s value of equity using the product of the current stock price and the number of shares outstanding. The value of debt is the sum of short-term debt, current portion of long-term debt, long-term debt, and present value of operating leases. Equity and debt weights were obtained by respectively dividing the equity and debt value by the sum of both equity and debt values. FLIR’s capital structure is 88% equity and 12% debt. We expect FLIR to maintain a similar capital structure until CV and beyond, with low debt levels and leverage.
Margins
Cost of Goods Sold (COGS)
We forecasted FLIR’s COGS based on historical COGS to Revenues ratio. In the past 5 years, FLIR’s percentage of COGS per revenue has been steadily increasing by 2% annually on average. Based on this trend, we forecasted COGS to grow by 6% annually on average until CV. We forecasted the percentage of COGS per revenue to decrease steadily by 0.5% annually until CV.
Operating Expenses
The selling, general and administrative expense (SGA) is FLIR’s largest operating expense, accounting for 70% of total operating expenses in the past. As FLIR continues to grow, we forecasted its SGA expense to increase by 4% annually until CV. However, we forecasted FLIR’s SGA expense as a percentage of revenue to decrease by 0.4% annually until CV. Research and development (R&D) expenses are expected to grow by 6% annually until CV.
Valuation Models
Discounted Cash Flows (DCF) and Economic Profit (EP) Model
We used the DCF model to derive FLIR’s intrinsic stock value by discounting the present value of the company’s enterprise free cash flows (FCF). We assumed FLIR’s continuing value year to be 2022, when growth will be
12
assumed to be stable. The basis of our free cash flow forecasts lies within our revenue, COGS, and capital structure forecasts. These metrics were methodically forecasted from economic indicators, industry metrics, and FLIR’s strategic position. Indicators and metrics provide initial forecasts with confidence intervals based on regression models. We then narrowed down forecasted confidence intervals based on qualitative analysis such as industry competition and competitive advantages. These forecasts were used to calculate net operating profits less adjusted taxes (NOPLAT) and invested capital, resulting in FCF. We used FLIR’s weighted average cost of capital (WACC) as the FCF’s present value discount factor. Based on this model, we determined FLIR’s terminal growth rate to be 3.5% and NOPLAT to be $335.75 M. We calculated FLIR’s intrinsic stock value to be $34.67.
We also used the EP model to determine FLIR’s intrinsic stock value and projected economic profits. Using both DCF and EP models will provide checks against calculation errors. We forecasted FLIR’s economic profit at CV to be $255.6 million.
Dividend Discount Model (DDM)
We used the DDM to calculate FLIR’s stock price to be $24.65, which is lower than the DCF/EP intrinsic value. FLIR has a relatively high payout ratio of 53.24% when compared to peer companies like Harris Corp., L3 Tech., and Rockwell Collins. Since FLIR began paying dividends in 2011, they have annually increased their dividends at a compound annual growth rate (CAGR) of 16%. The intrinsic value derived using this method is weak because we do not expect FLIR to achieve stable growth and profitability until 2022. The DDM is based on EPS, which can be temporarily manipulated and does not represent true financial performance. The DCF/EP model is superior because it takes actual cash flow into account.
Relative Valuation
We compared FLIR to three comparable firms: Harris Corporation (HRS), L3 Technologies (LLL), and Rockwell Collins (COL). These firms were selected on the basis of evaluating their Price-Earnings (P/E) ratio and EPS estimates. FLIR’s 2018 P/E ratio is about 50% higher than either HRS, LLL, or COL. We used our estimate of FLIR’s EPS in 2018 and the mean P/E ratio of compared firms to calculate an implied relative value of $30.79. This is FLIR’s estimated stock price using relative valuation. This is lower than our DCF/EP model’s intrinsic value of $34.67. The DCF/EP model’s intrinsic value is more representative of FLIR’s operational and financial performance because it is grounded in economic and industry analysis with robust regression models.
Effective Tax Rate
FLIR’s effective tax rate in 2017 was 61.6%. A major portion of this rate, aside from the statutory tax rate of 35%, is attributable to the “United States transition tax.” This is the tax on FLIR’s foreign earnings repatriated to the United States. Based on historical trends, we expect this tax to be a special case and will not occur in the near future. We expect FLIR’s effective tax rate to decline in the future due to the Tax Cuts and Jobs Act of 2017. The weighted average corporate tax rate is 25.7% in 2018 (21% for subsequent years) and is expected to stay at this level or slightly decline until CV. We expect this reduction in future tax rates to be beneficial to FLIR’s growth because the savings can be used to fund invested capital.
We tested a number of different variables to analyze the effect that incremental changes would have on our valuation. Below are the variables we tested; the sensitivity tables are appended at the end of this report.
CV NOPLAT vs. Beta
We wanted to test the effect that systematic risk and the growth of the continuing value had on the stock price. The continuing value represents a majority of FLIR’s future cash flows and a decrease of 1% in the CV growth rate represents a decrease of 13.28% in the stock price, all else held constant. Increases in the beta is analogous to an increase in risk, and lowers the stock price.
COGS Margin vs. R&D Margin
Since competition squeezes margins, our research team wanted to analyze how FLIR would hold up against increased competition. We found that increases in COGS lowers operating profits and lowers the intrinsic value. Similarly, effective R&D helps technology companies stay competitive. We believe FLIR may need to increase the R&D in the future to maintain its competitive position. We found that increases in R&D lower FLIR’s intrinsic value. However, we do not believe this a strong indicator of future performance because the sensitivity test does not translate effective R&D into increased revenue.
Depreciation vs WACC
Our model is not overly sensitive to changes in depreciation. We believe this is because net PPE only represents 10% of total assets. Our model is, however, extremely sensitive to changes in the WACC. This is because the WACC is used to discount future cash flows.
Sensitivity Analysis
13
CV ROIC vs. Risk-Free Rate
Our model is extremely sensitive to changes in the risk-free rate. This is because changes in the risk-free rate change our discount factor. In contrast, our model is not overly sensitive to changes in CV ROIC. This is because WACC and CV growth rates have a much larger impact on intrinsic value.
Pre-Tax Cost of Debt vs Market Risk Premium
Our model is not very sensitive to changes in FLIR’s pre-tax cost of debt. We believe this is because after-tax cost of debt is more sensitive to the tax rate rather than pre-tax cost of debt. However, our model is extremely sensitive to changes in the market risk premium. This is because changes in the market risk premium have a multiplicative effect through the beta.
14
1. Gross Domestic Product. (n.d.). Retrieved November 12, 18, from https://www.bea.gov/data/gdp/gross-domestic-product
2. U.S. - projected inflation rate 2008-2023. (n.d.). Retrieved November 12, 18, from https://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/
3. November 12, 18, from https://www.bloomberg.com/
4. IBISWorld . Retrieved November 12,2018 https://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=89
5. Electronics Industry Says Trump Administration Tariffs on China Could Harm U.S. Electronics Companies. (n.d.). Retrieved November 12, 2018, from https://www.ipc.org/ContentPage.aspx?pageid=Electronics-Industry-Says-Trump-Administration-Tariffs-on-China-Could-Harm-US-Electronics-Companies
6. Electronics Components Shortage: What You Need to Know. (n.d.). Retrieved November 12, 18, from https://news.ewmfg.com/blog/electronics-components-shortage-what-you-need-to-know
7. Defense Acquisitions: How and Where DOD Spends Its Contracting Dollars Moshe Schwartz Specialist in Defense Acquisition John F. Sargent Jr. Specialist in Science and Technology Policy Christopher T. Mann Analyst in Defense Policy and Trade November 12, 18 https://fas.org/sgp/crs/natsec/R44010.pdf
8. President Trump Signs FY 2019 Defense Authorization Bill. (2018, August 13). Retrieved November 12, 2018, from https://news.usni.org/2018/08/13/35764
9. Fagella, D. (2017, June 07). Self-driving car timeline for 11 top automakers.
Retrieved November 12, 2018, from https://venturebeat.com/2017/06/04/self-driving-car-timeline-for-11-top-automakers/
10. FLIR Systems (FLIR) Completes the Acquisition of Acyclica. (2018, September 17). Retrieved November 12, 2018, from https://finance.yahoo.com/news/flir-systems-flir-completes-acquisition-132301535.htmlFLIR 10k
11. Yahoo Finance - Business Finance, Stock Market, Quotes, News. (n.d.). Retrieved November 12, 2018, from https://finance.yahoo.com/
12. FLIR Systems Awarded US Federal Aviation Administration Contract with Ceiling Value of $94.3M to Support Mobile Surveillance Capability Program. (n.d.). Retrieved from http://investors.flir.com/news-releases/news-release-details/flir-systems-awarded-us-federal-aviation-administration-contract
13. Electronic Equipment, Instruments & Components. (n.d.). Retrieved from https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/industries.jhtml?tab=learn&industry=452030
14. Brown, D. (2018, May 02). The 15 countries with the highest military budgets in 2017. Retrieved from https://www.businessinsider.com/highest-military-budgets-countries-2018-5
15. Federal Reserve Economic Data | FRED | St. Louis Fed. (n.d.). Retrieved from https://fred.stlouisfed.org/
16. Meet L3 Harris Technologies: The CEOs explain their merger plan. Retrieved from https://www.defensenews.com/industry/20 18/10/14/meet-l3-harris-technologiesdefense-firms-unveil-merger-plan/
References
15
Disclaimer
This report was created by students enrolled in the Security Analysis (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
FLIR Systems, Inc.Revenue Decomposition
Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022ERevenue
Surveillance 520 503 532.5 545.8 603.343 644.811 698.912 753.45 804.454YoY Growth -6.2% -3.3% 5.9% 2.5% 10.5% 6.9% 8.4% 7.8% 6.8%Instruments 354.1 347.5 336.1 357.8 397.129 424.265 459.877 495.761 529.321YoY Growth 4.9% -1.9% -3.3% 6.5% 11.0% 6.8% 8.4% 7.8% 6.8%Security 179.1 226.6 240 231.5 236.915 255.078 276.308 297.883 318.046YoY Growth 27.0% 26.5% 5.9% -3.5% 2.3% 7.7% 8.3% 7.8% 6.8%OEM & Emerging Markets 199.1 186.7 243.7 347.2 253.52 283.83 306.471 330.476 352.841YoY Growth 8.2% -6.2% 30.5% 42.5% -27.0% 12.0% 8.0% 7.8% 6.8%Maritime 192.6 177.9 185.7 189.7 213.759 228.049 247.219 266.507 284.548YoY Growth 1.9% -7.6% 4.4% 2.2% 12.7% 6.7% 8.4% 7.8% 6.8%Detection 85.7 115.3 124.1 128.5 123.649 133.969 145.044 156.375 166.959YoY Growth 95.0% 134.5% 107.6% 103.5% 96.2% 108.3% 108.3% 107.8% 106.8%Total Revenue 1530.7 1557.1 1662.2 1800.4 1828.31 1970 2133.83 2300.45 2456.17YoY Growth 102.3% 101.7% 106.7% 108.3% 101.6% 107.7% 108.3% 107.8% 106.8%
% of Total RevenueSurveillance 34.0% 32.3% 32.0% 30.3% 33.0% 32.7% 32.8% 32.8% 32.8%Instruments 23.1% 22.3% 20.2% 19.9% 21.7% 21.5% 21.6% 21.6% 21.6%Security 11.7% 14.6% 14.4% 12.9% 13.0% 12.9% 12.9% 12.9% 12.9%OEM & Emerging Markets 13.0% 12.0% 14.7% 19.3% 13.9% 14.4% 14.4% 14.4% 14.4%Maritime 12.6% 11.4% 11.2% 10.5% 11.7% 11.6% 11.6% 11.6% 11.6%Detection 5.6% 7.4% 7.5% 7.1% 6.8% 6.8% 6.8% 6.8% 6.8%
Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
FLIR Systems, Inc.Income Statement
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Revenue 1,557,067.00 1,662,167.00 1,800,434.00 1,828,314.00 1,970,002.00 2,133,830.00 2,300,452.00 2,456,169.00 COGS 771,006.00 857,246.00 983,958.00 1,031,075.16 1,056,906.07 1,134,130.65 1,211,187.98 1,280,892.13 Depreciation 32,500.00 37,800.00 42,300.00 41,043.13 41,768.35 42,558.47 43,407.85 44,311.82 Gross Profit 753,561.00 767,121.00 858,776.00 838,281.97 954,864.27 1,042,257.82 1,132,671.87 1,219,588.69 Operating Expenses:Research and development 132,892.00 147,537.00 170,735.00 168,672.58 181,732.85 196,833.79 212,190.57 226,539.64 Selling, general, and administrative 313,544.00 322,435.00 373,867.00 363,173.20 385,954.31 412,241.18 438,168.14 461,140.42 Restructuring expenses 1,361.00 1,431.00 625.00 - - - - - Loss on net assets held for sale - - 23,588.00 Total Operating Expenses 447,797.00 471,403.00 568,815.00 531,845.79 567,687.16 609,074.97 650,358.71 687,680.06 Earnings from operations 305,764.00 295,718.00 289,961.00 306,436.18 387,177.11 433,182.86 482,313.16 531,908.63 Interest expense 14,086.00 18,071.00 16,804.00 22,989.86 26,876.42 31,391.47 36,300.70 41,382.27 Interest income (1,167.00) (1,402.00) (1,764.00) 1,582.05 1,697.46 1,830.84 1,965.40 2,089.47 Other (income) expense, net (12,601.00) 3,092.00 (4,144.00) 4,233.23 4,756.69 5,363.91 6,010.93 6,661.44 Earning before income taxes 305,446.00 275,957.00 279,065.00 277,631.04 353,846.55 394,596.64 438,036.12 481,775.45 Income tax provision 63,760.00 109,331.00 171,842.00 54,138.05 69,000.08 76,946.35 85,417.04 93,946.21 Earnings from continuing operations 241,686.00 166,626.00 107,223.00 223,492.99 284,846.47 317,650.30 352,619.08 387,829.24 Loss from discontinued operations, net of tax
Net earnings 241,686.00 166,626.00 107,223.00 223,492.99 284,846.47 317,650.30 352,619.08 387,829.24 Weighted Average of Shares Outstanding 139,353.00 137,138.00 137,456.00 136,220.92 135,137.27 134,192.51 133,375.16 132,674.67
Basic EPS 1.73 1.20 0.78 1.64 2.11 2.37 2.64 2.92
Dividends per share 0.44 0.48 0.60 0.91 1.16 1.31 1.46 1.61
Total Dividends paid 61,399.00 65,290.00 82,605.00 125,084.96 158,424.93 176,502.79 195,746.62 215,094.12
FLIR Systems, Inc.Balance Sheet
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssetsCurrent Assets
Cash & cash equivalents 472,785.00 361,349.00 519,090.00 461,508.92 503,430.97 518,278.55 562,066.57 614,501.25 Accounts receivable, net 326,098.00 352,020.00 346,687.00 360,856.89 398,542.60 442,478.08 488,955.11 535,103.66 Inventories 393,092.00 371,371.00 372,183.00 381,487.58 391,024.76 400,800.38 410,820.39 421,090.90 Assets held for sale, net - - 67,344.00 Prepaid expenses & other current assets 95,539.00 79,917.00 81,915.00 83,083.97 82,815.79 82,438.22 81,043.57 78,167.33 Deferred income taxes, net
Total current assets 1,287,514 1,164,657 1,387,219 1,286,937.36 1,375,814.13 1,443,995.23 1,542,885.64 1,648,863.15
Property & equipment, cost 526,010 546,848 570,162 615,869.85 662,720.40 710,742.21 759,964.56 810,417.48 Less accumulated depreciation 253,381 275,063 306,166 347,209.13 388,977.47 431,535.94 474,943.79 519,255.62 Property & equipment, net 272,629 271,785 263,996 268,660.72 273,742.92 279,206.26 285,020.77 291,161.86 Deferred income taxes, net 55,429 45,243 21,001 40,286.87 44,340.17 49,036.20 53,952.65 58,765.70 Goodwill 596,316 801,406 909,811 909,811.00 909,811.00 909,811.00 909,811.00 909,811.00 Intangible assets, net 141,302 168,460 168,130 168,130.00 168,130.00 168,130.00 168,130.00 168,130.00 Other assets 53,210 168,155 59,869 61,365.73 62,899.87 64,472.36 66,084.17 67,736.28
Total assets 2,406,400.00$ 2,619,706.00$ 2,810,026.00$ $ 2,735,191.67 $ 2,834,738.09 $ 2,914,651.06 $ 3,025,884.23 $ 3,144,467.99 Liabilities and Shareholder's equityCurrent Liabilities
Accounts payable 139,540.00 114,225.00 106,389.00 131,725.36 144,896.50 118,856.50 107,814.33 90,562.25 Deferred revenue 31,933.00 34,420.00 25,614.00 35,737.40 39,274.86 43,372.80 47,656.36 51,839.65 Accrued payroll & related liabilities 54,806.00 52,874.00 71,310.00 67,728.56 73,338.36 79,828.36 86,483.46 92,787.67 Accrued product warranties 13,406.00 17,476.00 15,024.00 15,799.58 16,677.85 17,689.86 18,666.97 19,498.96 Advance payments from customers 33,848.00 26,019.00 20,672.00 31,098.41 34,507.04 38,458.35 42,627.52 46,758.01 Accrued expenses 40,930.00 34,022.00 37,089.00 41,216.48 43,126.51 45,322.06 47,361.57 48,966.45 Accrued income taxes 201.00 51,017.00 64,136.00 Liabilities held for sale - - 39,544.00 Other current liabilities 5,987.00 16,659.00 15,155.00 15,524.55 18,126.11 21,148.26 24,432.68 27,830.10 Current portion, long-term debt 264,694.00 15,000.00 -
Total current liabilities 585,345.00 361,712.00 394,933.00 338,830.35 369,947.21 364,676.20 375,042.89 378,243.10 Long-term debt 93,750.00 501,921.00 420,684.00 436,689.11 453,303.14 470,549.26 488,451.51 507,034.86 Deferred income taxes 3,623.00 2,331.00 12,496.00 6,150.00 6,150.00 6,150.00 6,150.00 6,150.00 Accrued income taxes 10,457.00 9,643.00 87,483.00 45,663.57 53,374.43 62,332.18 72,071.38 82,151.58 Pension & other long-term liabilities 63,710.00 65,773.00 59,872.00 66,541.54 71,527.96 77,291.84 83,128.36 88,542.96 Total Liabilities 1,342,230.00 1,303,092.00 1,370,401.00 893,874.56 954,302.74 980,999.48 1,024,844.14 1,062,122.50 Shareholders equity:
Common stock & APIC 1,374.00 12,139.00 91,162.00 83,432.09 80,047.78 76,035.51 70,470.55 62,959.83 Retained earnings (accumulated deficit) 1,773,267.00 1,832,138.00 1,856,756.00 1,871,245.03 1,913,747.57 1,970,976.08 2,043,929.54 2,132,745.66 Accumulated other comprehensive earnings (loss) (125,126.00) (165,951.00) (113,360.00) (113,360.00) (113,360.00) (113,360.00) (113,360.00) (113,360.00)
Total shareholders' equity 1,649,515.00 1,678,326.00 1,834,558.00 1,841,317.12 1,880,435.34 1,933,651.59 2,001,040.09 2,082,345.49 Total Liabilities and shareholders' equity 2,406,400.00 2,619,706.00 2,810,026.00 2,735,191.67 2,834,738.09 2,914,651.06 3,025,884.23 3,144,467.99
All figures in thousands of U.S. Dollar.
FLIR Systems, Inc.Cash Flow Statement
Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017Cash Flows from Operating ActivitiesNet earnings (loss) 177,015.00 200,261.00 241,686.00 166,626.00 107,223.00 Depreciation & amortization 62,796.00 57,245.00 49,534.00 57,513.00 71,010.00 Stock-based compensation arrangements 27,823.00 30,788.00 25,748.00 27,797.00 31,018.00 Loss (gain) on sale of assets, net - - (19,166.00) - - Loss on net assets held for sale - - - - 23,588.00 Deferred income taxes (2,709.00) (1,242.00) 2,863.00 5,613.00 25,968.00 Loss (gain) on sale of certain optics assets - (4,129.00) - - - Inducement loss on exchange offer for convertible notes - - - - - Disposals & write-offs of property & equipment - - - - - Other non-cash items 4,564.00 (791.00) 7,722.00 11,992.00 (31,256.00) Accounts receivable 48,640.00 (76,705.00) 28,258.00 (10,704.00) (7,758.00) Inventories 35,181.00 11,363.00 (74,816.00) 51,170.00 (32,961.00) Prepaid expenses & other current assets 5,434.00 5,754.00 1,858.00 - - Prepaid expenses - - - (7,706.00) 1,217.00 Other assets (1,520.00) (24,261.00) (4,333.00) (10,750.00) 12,027.00 Accounts payable (8,617.00) 15,040.00 38,660.00 (33,465.00) 21,558.00 Deferred revenue (659.00) 93.00 3,503.00 2,928.00 (9,220.00) Accrued payroll & other liabilities 36,017.00 17,240.00 (20,072.00) (16,138.00) 17,076.00 Accrued income taxes (18,898.00) (8,501.00) (9,319.00) 64,822.00 84,352.00 Pension & other long-term liabilities (10,102.00) 4,089.00 3,688.00 2,582.00 (5,590.00) Net Cash Flows from Operating Activities 354,965.00 226,244.00 275,814.00 312,280.00 308,252.00
Cash Flows from Investing ActivitiesAdditions to property & equipment (52,061.00) (61,262.00) (68,234.00) (35,940.00) (42,109.00) Proceeds on sale of property & equipment - - - - - Business acquisitions, net of cash acquired (20,073.00) - (92,260.00) (419,203.00) - Proceeds from sale of certain optics assets - 12,000.00 - - - Proceeds from sale of assets - - 25,649.00 7,331.00 3,686.00 Other investments - - - - - Net Cash Flows from Investing Activities (72,134.00) (49,262.00) (134,845.00) (447,812.00) (38,423.00)
Cash Flows from Financing ActivitiesNet proceeds (repayments) from credit agreement - - - - - Net proceeds (repayments) of long-term debt, including current portion 150,000.00 - - 524,560.00 - Repayment of long-term debt (11,250.00) (15,000.00) (15,000.00) (367,435.00) (97,500.00) Cash inducement on exchange offer for convertible notes - - - - - Repurchase of common stock (162,078.00) (139,238.00) (123,193.00) (66,057.00) - Dividends paid (51,404.00) (56,513.00) (61,399.00) (65,920.00) (82,605.00) Proceeds from exercise of stock options - - - - - Proceeds from shares issued pursuant to stock-based compensation plans 8,650.00 47,581.00 24,835.00 11,966.00 58,241.00 Excess tax benefit of stock options exercised 1,069.00 11,161.00 8,243.00 1,480.00 - Capital contribution - - - - - Tax paid for net share exercises & issuance of vested restricted stock units - - - - (10,731.00) Other financing activities (1,100.00) (18.00) (24.00) 13.00 (17.00) Net Cash Flows from Financing Activities (66,113.00) (152,027.00) (166,538.00) 38,607.00 (132,612.00)
Effect of exchange rate changes on cash 4,019.00 (36,057.00) (33,020.00) (14,511.00) 20,524.00 Net increase (decrease) in cash & cash equivalents 220,737.00 (11,102.00) (58,589.00) (111,436.00) 157,741.00 Cash & cash equivalents, beginning of year 321,739.00 542,476.00 531,374.00 472,785.00 361,349.00 Cash & cash equivalents, end of year 542,476$ 531,374$ 472,785$ 361,349$ 519,090$ All figures in thousands of U.S. Dollar.
FLIR Systems, Inc.Cash Flow Statement
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022ECash Flows from Operating ActivitiesNet earnings (loss) 223,492.99 284,846.47 317,650.30 352,619.08 387,829.24
Accumulated depreciation 41,043.13 41,768.35 42,558.47 43,407.85 44,311.82 Accounts receivable, net (14,169.89) (37,685.71) (43,935.48) (46,477.03) (46,148.55) Inventories (9,304.57) (9,537.19) (9,775.62) (10,020.01) (10,270.51) Prepaid expenses & other current assets (1,168.97) 268.17 377.58 1,394.65 2,876.24 Deferred income taxes, net (25,631.87) (4,053.30) (4,696.03) (4,916.44) (4,813.05) Accounts Payable 25,336.36 13,171.14 (26,040.00) (11,042.17) (17,252.08) Deferred revenue 10,123.40 3,537.46 4,097.95 4,283.55 4,183.30 Accrued payroll & related liabilities (3,581.44) 5,609.79 6,490.01 6,655.10 6,304.21 Accrued product warranties 775.58 878.26 1,012.01 977.11 831.99 Advance payment from customers 10,426.41 3,408.63 3,951.31 4,169.17 4,130.50 Accrued expenses 4,127.48 1,910.02 2,195.56 2,039.50 1,604.88 Accrued income taxes (64,136.00) - - - - Other current liabilities 369.55 2,601.56 3,022.15 3,284.42 3,397.42 Pension & other long term liabilities 6,669.54 4,986.42 5,763.88 5,836.52 5,414.59 Other assets (1,496.72) (1,534.14) (1,572.50) (1,611.81) (1,652.10) Accrued income taxes (41,819.43) 7,710.87 8,957.75 9,739.20 10,080.20 Assets held for sale 67,344.00 - - - -
Net Cash Flows from Operating Activities 228,399.54 317,886.80 310,057.33 360,338.70 390,828.08
Cash Flows from Investing ActivitiesCapital Expenditures (45,707.85) (46,850.55) (48,021.81) (49,222.36) (50,452.91) Goodwill - - - - - Intangible assets - - - - - Long term debt 16,005.11 16,614.03 17,246.12 17,902.25 18,583.35 Liabilities held for sale (39,544.00) - - - -
Net Cash Flows from Investing Activities (69,246.74) (30,236.52) (30,775.69) (31,320.10) (31,869.56)
Cash Flows from Financing ActivitiesCommon stock (7,729.91) (3,384.31) (4,012.27) (5,564.96) (7,510.71) Dividends Paid (125,084.96) (158,424.93) (176,502.79) (195,746.62) (215,094.12) Share repurchases (83,919.00) (83,919.00) (83,919.00) (83,919.00) (83,919.00) Accumulated other comprehensive earnings (loss) - - - - -
Net Cash Flows from Financing Activities (216,733.87) (245,728.24) (264,434.06) (285,230.58) (306,523.84)
Net increase (decrease) in cash & cash equivalents (57,581.08) 41,922.05 14,847.58 43,788.02 52,434.69 Cash & cash equivalents, beginning of year 519,090.00 461,508.92 503,430.97 518,278.55 562,066.57 Cash & cash equivalents, end of year 461,508.92 503,430.97 518,278.55 562,066.57 614,501.25 All figures in thousands of U.S. Dollar.
FLIR Systems, Inc.Common Size Income Statement
Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022ERevenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%COGS 42.54% 43.50% 45.45% 48.35% 48.72% 49.52% 51.57% 54.65% 54.15% 53.65% 53.15% 52.65% 52.15%Depreciation 2.46% 2.84% 2.51% 2.40% 2.26% 2.09% 2.27% 2.35% 2.24% 2.12% 1.99% 1.89% 1.80%Gross Profit 55.00% 53.66% 52.04% 49.25% 49.02% 48.40% 46.15% 47.70% 44.80% 43.62% 42.43% 41.24% 40.05%Operating Expenses:Research and development 8.40% 9.53% 9.80% 9.87% 9.33% 8.53% 8.88% 9.48% 9.23% 9.23% 9.22% 9.22% 9.22%Selling, general, and administrative 20.65% 23.85% 20.66% 21.57% 21.69% 20.14% 19.40% 20.77% 19.86% 19.59% 19.32% 19.05% 18.77%Restructuring expenses 0.00% 0.00% 0.00% 1.73% 1.07% 0.09% 0.09% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00%Loss on net assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.31% 0.00% 0.00% 0.00% 0.00% 0.00%Total Operating Expenses 29.05% 33.38% 30.46% 33.16% 32.09% 28.76% 28.36% 31.59% 29.09% 28.82% 28.54% 28.27% 28.00%Earnings from operations 25.95% 20.28% 21.58% 16.09% 16.94% 19.64% 17.79% 16.11% 15.72% 14.80% 13.88% 12.97% 12.05%Interest expense 0.21% 0.36% 0.83% 0.94% 0.95% 0.90% 1.09% 0.93% 1.26% 1.36% 1.47% 1.58% 1.68%Interest income 0.09% 0.08% 0.11% 0.07% 0.09% 0.07% 0.08% 0.10% 0.09% 0.09% 0.09% 0.09% 0.09%Other (income) expense, net 0.29% 0.14% -0.10% 0.09% 0.23% 0.81% -0.19% 0.23% 0.23% 0.24% 0.25% 0.26% 0.27%Earning before income taxes 26.12% 20.15% 20.77% 15.30% 16.30% 19.62% 16.60% 15.50% 15.19% 17.96% 18.49% 19.04% 19.61%Income tax provision 8.23% 5.73% 4.74% 3.47% 3.22% 4.09% 6.58% 9.54% 6.30% 6.44% 6.57% 6.71% 6.84%Earnings from continuing operations 17.89% 14.42% 16.04% 11.83% 13.08% 15.52% 10.02% 5.96% 12.22% 14.46% 14.89% 15.33% 15.79%Loss from discontinued operations, net of tax 0.02% 0.08% 0.21% 0.00% 0.00% 0.00% 0.00% 0.00%
Net earnings 17.87% 14.34% 15.83% 11.83% 13.08% 15.52% 10.02% 5.96% 12.22% 14.46% 14.89% 15.33% 15.79%
FLIR Systems, Inc.Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssets (as a % of Total Assets)Current Assets
Cash & cash equivalents 19.65% 13.79% 18.47% 19.89% 20.33% 20.77% 21.21% 21.65%Accounts receivable, net 13.55% 13.44% 12.34% 11.60% 10.97% 10.34% 9.71% 9.07%Inventories 16.34% 14.18% 13.24% 13.40% 13.00% 12.60% 12.20% 11.80%Prepaid expenses & other current assets 3.97% 3.05% 2.92% 2.66% 2.35% 2.04% 1.72% 1.41%
Total current assets 53.50% 44.46% 49.37% 48.61% 47.68% 46.75% 45.81% 44.88%Land 0.95% 0.85% 0.81% 0.82% 0.78% 0.74% 0.71% 0.67%Buildings 6.79% 6.21% 5.97% 7.04% 7.43% 7.83% 8.22% 8.61%Machinery & equipment 10.03% 9.85% 9.81% 10.93% 11.32% 11.72% 12.11% 12.51%Office equipment & other property & equipment 4.09% 3.96% 3.70% 3.59% 3.47% 3.34% 3.22% 3.09%Property & equipment, cost 21.86% 20.87% 20.29% 22.38% 23.00% 23.63% 24.25% 24.88%Less accumulated depreciation 10.53% 10.50% 10.90% 11.91% 12.44% 12.97% 13.49% 14.02%Property & equipment, net 11.33% 10.37% 9.39% 10.47% 10.56% 10.66% 10.76% 10.86%Deferred income taxes, net 2.30% 1.73% 0.75% 1.35% 1.35% 1.36% 1.36% 1.37%Goodwill 24.78% 30.59% 32.38% 30.61% 31.63% 32.65% 33.68% 34.70%Intangible assets, net 5.87% 6.43% 5.98% 4.96% 4.56% 4.16% 3.76% 3.35%Other assets 2.21% 6.42% 2.13% 4.00% 4.21% 4.42% 4.63% 4.84%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Liabilities and Shareholder's equityCurrent Liabilities
Accounts payable 5.80% 4.36% 3.79% 4.40% 4.41% 4.43% 4.44% 4.46%Deferred revenue 1.33% 1.31% 0.91% 1.20% 1.21% 1.21% 1.22% 1.23%Accrued payroll & related liabilities 2.28% 2.02% 2.54% 2.24% 2.20% 2.16% 2.12% 2.08%Accrued product warranties 0.56% 0.67% 0.53% 0.51% 0.49% 0.46% 0.44% 0.41%Advance payments from customers 1.41% 0.99% 0.74% 1.04% 1.05% 1.07% 1.08% 1.10%Accrued expenses 1.70% 1.30% 1.32% 1.35% 1.27% 1.19% 1.12% 1.04%Accrued income taxes 0.01% 1.95% 2.28% 1.80% 2.05% 2.29% 2.54% 2.78%Liabilities held for sale 1.41%Other current liabilities 0.25% 0.64% 0.54% 0.52% 0.56% 0.60% 0.64% 0.68%Current portion, long-term debt 11.00% 0.57%
Total current liabilities 24.32% 13.81% 14.05% 17.29% 18.02% 18.74% 19.46% 20.18%Long-term debt 3.90% 19.16% 14.97% 17.92% 19.34% 20.77% 22.19% 23.62%Deferred income taxes 0.15% 0.09% 0.44% 0.14% 0.07% 0.00% -0.08% -0.15%Accrued income taxes 0.43% 0.37% 3.11% 1.55% 1.67% 1.78% 1.90% 2.02%Pension & other long-term liabilities 2.65% 2.51% 2.13% 2.20% 2.14% 2.08% 2.03% 1.97%Total Liabilities 31.45% 35.93% 34.71% 39.10% 41.23% 43.37% 45.51% 47.64%Shareholders equity:
Common stock 1.83% 0.06% 0.06% -6.76% -11.00% -15.24% -19.49% -23.73%Retained earnings (accumulated deficit) 73.69% 69.94% 66.08% 74.18% 76.05% 77.91% 79.78% 81.64%Accumulated other comprehensive earnings (loss) -5.20% -6.33% -4.03% -6.35% -7.29% -8.22% -9.15% -10.09%
Total shareholders' equity 105.94% 100.97% 101.90% 101.27% 100.24% 99.20% 98.16% 97.12%Total Liabilities and shareholders' equity 154.55% 157.61% 156.07% 163.92% 166.83% 169.75% 172.67% 175.58%
FLIR Systems, Inc.Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssets (As a % of revenue)Current Assets
Cash & cash equivalents 30.36% 21.74% 28.83% 32.05% 33.13% 34.22% 35.31% 36.39%Accounts receivable, net 20.94% 21.18% 19.26% 19.46% 18.97% 18.49% 18.01% 17.52%Inventories 25.25% 22.34% 20.67% 22.18% 22.02% 21.87% 21.71% 21.56%Assets held for sale, net 3.74%Prepaid expenses & other current assets 6.14% 4.81% 4.55% 4.54% 4.20% 3.86% 3.52% 3.18%Deferred income taxes, net 0.00% 0.00% 0.00%
Total current assets 82.69% 70.07% 77.05% 78.22% 78.33% 78.44% 78.55% 78.65%Land 1.48% 1.34% 1.26% 1.36% 1.33% 1.31% 1.28% 1.25%Buildings 10.50% 9.79% 9.31% 11.28% 12.01% 12.74% 13.46% 14.19%Machinery & equipment 15.50% 15.52% 15.31% 17.64% 18.47% 19.30% 20.14% 20.97%Office equipment & other property & equipment 6.31% 6.24% 5.78% 5.99% 5.93% 5.88% 5.82% 5.77%Property & equipment, cost 33.78% 32.90% 31.67% 36.27% 37.74% 39.22% 40.70% 42.17%Less accumulated depreciation 16.27% 16.55% 17.01% 19.18% 20.22% 21.26% 22.30% 23.34%Property & equipment, net 17.51% 16.35% 14.66% 17.09% 17.53% 17.96% 18.40% 18.83%Deferred income taxes, net 3.56% 2.72% 1.17% 2.20% 2.25% 2.30% 2.35% 2.39%Goodwill 38.30% 48.21% 50.53% 49.79% 52.11% 54.44% 56.77% 59.10%Intangible assets, net 9.07% 10.13% 9.34% 8.46% 8.09% 7.72% 7.35% 6.98%Other assets 3.42% 10.12% 3.33% 3.36% 3.19% 3.02% 2.87% 2.76%
Total assets 154.55% 157.61% 156.07% 163.92% 166.83% 169.75% 172.67% 175.58%Liabilities and Shareholder's equityCurrent Liabilities
Accounts payable 8.96% 6.87% 5.91% 7.20% 7.36% 7.51% 7.66% 7.81%Deferred revenue 2.05% 2.07% 1.42% 1.95% 1.99% 2.03% 2.07% 2.11%Accrued payroll & related liabilities 3.52% 3.18% 3.96% 3.70% 3.72% 3.74% 3.76% 3.78%Accrued product warranties 0.86% 1.05% 0.83% 0.86% 0.85% 0.83% 0.81% 0.79%Advance payments from customers 2.17% 1.57% 1.15% 1.70% 1.75% 1.80% 1.85% 1.90%Accrued expenses 2.63% 2.05% 2.06% 2.25% 2.19% 2.12% 2.06% 1.99%Accrued income taxes 0.01% 3.07% 3.56% 1.59% 1.81% 2.03% 2.25% 2.47%Liabilities held for saleOther current liabilities 0.38% 1.00% 0.84% 0.85% 0.92% 0.99% 1.06% 1.13%Current portion, long-term debt
Total current liabilities 37.59% 21.76% 21.94% 20.12% 20.59% 21.05% 21.52% 21.99%Long-term debt 6.02% 30.20% 23.37% 28.30% 30.65% 33.01% 35.36% 37.72%Deferred income taxes 0.23% 0.14% 0.69% 0.27% 0.18% 0.09% 0.00% -0.09%Accrued income taxes 0.67% 0.58% 4.86% 2.50% 2.71% 2.92% 3.13% 3.34%Pension & other long-term liabilities 4.09% 3.96% 3.33% 3.64% 3.63% 3.62% 3.61% 3.60%Total Liabilities 86.20% 78.40% 76.12% 54.83% 57.76% 60.70% 63.63% 66.56%Shareholders equity:
Common stock 0.09% 0.73% 5.06% 4.56% 4.06% 3.56% 3.06% 2.56%Retained earnings (accumulated deficit) 113.89% 110.23% 103.13% 102.35% 97.14% 92.37% 88.85% 86.83%Accumulated other comprehensive earnings (loss) -8.04% -9.98% -6.30% -6.20% -5.75% -5.31% -4.93% -4.62%
Total shareholders' equity 105.94% 100.97% 101.90% 100.71% 95.45% 90.62% 86.98% 84.78%Total Liabilities and shareholders' equity 154.55% 157.61% 156.07% 155.54% 153.21% 151.31% 150.61% 151.34%
FLIR Systems, Inc.Value Driver Estimation
Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EEBITARevenue 1,557,067.00 1,662,167.00 1,800,434.00 1,828,314.00 1,970,002.00 2,133,830.00 2,300,452.00 2,456,169.00 - Cost of Goods Sold (771,006.00) (857,246.00) (983,958.00) (1,031,075.16) (1,056,906.07) (1,134,130.65) (1,211,187.98) (1,280,892.13)- Depreciation Expense (32,500.00) (37,800.00) (42,300.00) (41,043.13) (41,768.35) (42,558.47) (43,407.85) (44,311.82)- Research and Development (132,892.00) (147,537.00) (170,735.00) (168,672.58) (181,732.85) (196,833.79) (212,190.57) (226,539.64)- Selling, General, and Adminstrative (313,544.00) (322,435.00) (373,867.00) (363,173.20) (385,954.31) (412,241.18) (438,168.14) (461,140.42)+ Implied Interest on Operating Leases 586.14 591.24 889.12 1,236.97 1,236.97 1,236.97 1,236.97 1,236.97 Pre-tax Operating Income (EBITA) $ 307,125.00 $ 297,149.00 $ 229,574.00 $ 225,586.89 $ 304,877.39 $ 349,302.88 $ 396,734.43 $ 444,521.95
Less: Adjusted TaxesIncome Tax Expense 63,760.00 109,331.00 171,842.00 54,138.05 69,000.08 76,946.35 85,417.04 93,946.21 + Tax Shield on Interest Expense 2,746.77 3,523.85 3,276.78 4,483.02 5,240.90 6,121.34 7,078.64 8,069.54 - Tax on Interest Income (227.57) (273.39) (343.98) 308.50 331.01 357.01 383.25 407.45 - Tax on Non-Operating Income (2,457.20) 602.94 (808.08) 825.48 927.55 1,045.96 1,172.13 1,298.98 + Tax Shield on Restructuring Loss 265.40 279.05 121.88 - - - - - + Tax Shield on Loss of Assets Held for Sale - - 4,599.66 - - - - - + Tax Shield on Implied Interest on Operating Leases 114.30 115.29 173.38 241.21 241.21 241.21 241.21 241.21 Total Adjusted Taxes 64,201.70 113,578.73 178,861.63 59,996.26 75,740.75 84,711.87 94,292.28 103,963.39
Plus: Change in Deferred Taxes (45,770.00) 8,894.00 34,407.00 (25,631.87) (4,053.30) (4,696.03) (4,916.44) (4,813.05)
Net Operating Profit Less Adjusted Taxes (NOPLAT) $ 197,153.30 $ 192,464.27 $ 85,119.37 $ 139,958.76 $ 225,083.34 $ 259,894.99 $ 297,525.71 $ 335,745.51
Operating Current AssetsNormal Cash 425,449.42 454,166.70 491,946.46 491,946.46 491,946.46 491,946.46 491,946.46 491,946.46 Accounts Receivable 326,098.00 352,020.00 346,687.00 360,856.89 398,542.60 442,478.08 488,955.11 535,103.66 Inventory 393,092.00 371,371.00 372,183.00 381,487.58 391,024.76 400,800.38 410,820.39 421,090.90 Prepaid Expenses & Other Current Assets 95,539.00 79,917.00 81,915.00 83,083.97 82,815.79 82,438.22 81,043.57 78,167.33
Less: Non Interest-Bearing Current LiabiitiesAccounts Payable 139,540.00 114,225.00 106,389.00 131,725.36 144,896.50 118,856.50 107,814.33 90,562.25 Deferred Revenue 31,933.00 34,420.00 25,614.00 35,737.40 39,274.86 43,372.80 47,656.36 51,839.65 Accrued Payroll Liabities 54,806.00 52,874.00 71,310.00 67,728.56 73,338.36 79,828.36 86,483.46 92,787.67 Accrued Product Warranties 13,406.00 17,476.00 15,024.00 15,799.58 16,677.85 17,689.86 18,666.97 19,498.96 Advanced Payments from Customers 33,848.00 26,019.00 20,672.00 31,098.41 34,507.04 38,458.35 42,627.52 46,758.01 Accrued Expenses 40,930.00 34,022.00 37,089.00 41,216.48 43,126.51 45,322.06 47,361.57 48,966.45 Accrued Income Taxes 201.00 51,017.00 64,136.00 - - - - -
Net Operating Working Capital $ 925,514.42 $ 927,421.70 $ 952,497.46 $ 994,069.09 $ 1,012,508.52 $ 1,074,135.21 $ 1,122,155.32 $ 1,175,895.36
Plus: Net Property, Plant, and Equipment 272,629.00 271,785.00 263,996.00 268,660.72 273,742.92 279,206.26 285,020.77 291,161.86
Plus: Net Other Operating AssetsNet Intangible Assets 141302 168460 168130 168,130.00 168,130.00 168,130.00 168,130.00 168,130.00 Capitalized PV of Operating Leases 12714 12825 19287 26,832.27 26,832.27 26,832.27 26,832.27 26,832.27 Other Operating Assets 53210 168155 59869 61,365.73 62,899.87 64,472.36 66,084.17 67,736.28 Total Other Operating Assets, Net 207,226.45 349,440.21 247,285.79 256,328.00 257,862.14 259,434.64 261,046.45 262,698.55
Less: Other Operating LiabilitesAccrued Income Taxes (Long-Term) 10,457.00 9,643.00 87,483.00 45,663.57 53,374.43 62,332.18 72,071.38 82,151.58
Invested Capital 1,394,912.87$ 1,539,003.91$ 1,376,296.25$ $ 1,473,394.25 $ 1,490,739.14 $ 1,550,443.92 $ 1,596,151.16 $ 1,647,604.19
NOPLAT 197,153.30 192,464.27 85,119.37 139,958.76 225,083.34 259,894.99 297,525.71 335,745.51 Beg. Invested Capital 1,355,195.79 1,394,912.87 1,539,003.91 1,376,296.25 1,473,394.25 1,490,739.14 1,550,443.92 1,596,151.16 ROIC 14.55% 13.80% 5.53% 10.17% 15.28% 17.43% 19.19% 21.03%
NOPLAT 197,153.30 192,464.27 85,119.37 139,958.76 225,083.34 259,894.99 297,525.71 335,745.51 Change in Invested Capital 39,717.08 144,091.04 (162,707.66) 97,097.99 17,344.90 59,704.78 45,707.23 51,453.03 FCF $ 157,436.22 $ 48,373.23 $ 247,827.02 $ 42,860.76 $ 207,738.45 $ 200,190.20 $ 251,818.48 $ 284,292.48
NOPLAT 197,153.30 192,464.27 85,119.37 139,958.76 225,083.34 259,894.99 297,525.71 335,745.51 Beg. Invested Capital 1,355,195.79 1,394,912.87 1,539,003.91 1,376,296.25 1,473,394.25 1,490,739.14 1,550,443.92 1,596,151.16 WACC Estimation 8.40% 8.40% 8.40% 8.40% 8.40% 8.40% 8.40% 8.40%EP $ 83,307.19 $ 75,281.64 $ (44,167.94) $ 24,340.06 $ 101,307.72 $ 134,662.27 $ 167,277.37 $ 201,657.43
FLIR Systems, Inc.Weighted Average Cost of Capital (WACC) EstimationCost of EquityBeta 1.016Risk Free 3.190%Market Risk Premium 5.740%Cost of Equity 9.022%
Cost of DebtPre-tax 4.610%Tax Rate 19.500%After-tax Cost of Debt 3.711%
Market Value of EquityShare Price $45.86Shares Outstanding 137,456 Market Value of Equity 6,303,732$
Market Value of DebtSTD & Current Portion of LTD 394,933.00$ LTD 420,684.00$ PV of Operating Leases 19,286.79$ Market Value of Debt 834,903.79$
Market Weights% Equity 88%% Debt 12%
WACC 8.40%
FLIR Systems, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 3.50% CV ROIC 21.03% WACC 8.40% Cost of Equity 9.02%
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E
DCF ModelNOPLAT 139,958.76 225,083.34 259,894.99 297,525.71 335,745.51 Beg. Invested Capital 1,376,296.25 1,473,394.25 1,490,739.14 1,550,443.92 1,596,151.16 ROIC 10.17% 15.28% 17.43% 19.19% 21.03%
NOPLAT 139,958.76 225,083.34 259,894.99 297,525.71 335,745.51 Less Capital Expenditures 97,097.99 17,344.90 59,704.78 45,707.23 51,453.03 FCF 42,860.76 207,738.45 200,190.20 251,818.48 284,292.48 CV (T = 4) 5,711,010.03
CF to DiscountPeriods to Discount 1 2 3 4 4Discount Factor 1.08 1.18 1.27 1.38 1.38PV of Cash Flows 39,539.19 176,787.93 157,161.59 182,372.37 4,136,036.53
Value of Operating Assets 4,691,897.61 Add Excess Cash 268,371.92 Add Other Assets 61,365.73 Less PV of Operating Leases 26,832.27 Less Debt 436,689.11 Less Pension Liability 66,541.54 Less ESOP 65,561.86
Value of Equity 4,426,010.48 Shares Outstanding 136,220.92 Intrinsic Value 32.49$ Intrinsic Value as of 11/30/18 34.67$
EP ModelNOPLAT 139959Beg. Invested Capital 1376296ROIC 10.17%
EP 24,340.06$ 101,307.72$ 134,662.27$ 167,277.37$ 201,657.43$ CV (T = 4) 4,114,858.88
Cash Flow to Discount 24,340.06$ 101,307.72$ 134,662.27$ 167,277.37$ 4,114,858.88$ Periods to Discount 1 2 3 4 4Discount Factor 1.08 1.18 1.27 1.38 1.38PV of Cashflows $ 22,453.78 $ 86,214.09 $ 105,718.14 $ 121,145.87 $ 2,980,069.47
Value of Economic Profit 3,315,601.35$ + Beg. Invested Capital (T = 0) 1,376,296.25$ Value of Operating Assets 4,691,897.61$
Add Excess Cash 268,371.92 Add Other Assets 61,365.73 Less PV of Operating Leases 26,832.27 Less Debt 436,689.11 Less Pension Liability 66,541.54 Less ESOP 65,561.86 Value of Equity 4,426,010.48$ Shares outstanding 136,220.92 Intrinsic Value 32.49$ Intrinsic Value as of 11/30/18 34.67$
FLIR Systems, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E
EPS 1.64$ 2.11$ 2.37$ 2.64$ 2.92$
Key Assumptions CV growth 3.50% CV ROE 18.62% Cost of Equity 9.02%Payout Ratio 55.47%Future Cash Flows P/E Multiple (CV Year) EPS (CV Year) 2.92$ Future Stock Price 42.99$ Dividends Per Share 0.91$ 1.16$ 1.31$ 1.46$ 1.61$ Future Cash Flows 0.91$ 1.17$ 1.31$ 1.47$ 29.36$
Discounted Cash Flows 0.8347 0.9836 1.0132 1.0380 20.7843
Intrinsic Value 24.65$
FLIR Systems, Inc.Relative Valuation Models
EPS EPSTicker Company Price 2018E 2019E P/E 18 P/E 19HRS Harris Corporation $149.75 $7.87 $8.96 19.03 16.71 lll L3 Technoloies $190.45 $10.15 $11.60 18.76 16.42 COL Rockwell Collins $127.47 $6.89 $7.61 18.50 16.75
Average 18.76 16.63
FLIR FLIR Systems, Inc. $45.86 1.64 2.11 28.0 21.8
Implied Relative Value: P/E (EPS18) $ 30.79 P/E (EPS19) 35.05$
FLIR Systems, Inc.Key Management Ratios
Fiscal Years Ending 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Liquidity RatiosCurrent Ratio 4.716 5.466 3.820 5.330 4.865 4.737 4.326 2.200 3.220 3.513 3.798 3.719 3.960 4.114 4.359Quick Ratio 3.068 3.700 2.132 3.309 2.743 2.998 2.862 1.365 1.972 2.192 2.427 2.438 2.635 2.802 3.039Operating Cash Flow Ratio 1.267 1.530 1.021 1.053 1.192 1.284 0.731 0.471 0.863 0.781 0.674 0.859 0.850 0.961 1.033
Activity or Asset-Management RatiosInventory Turnover Ratio 2.430 2.300 2.400 2.240 1.880 2.090 2.350 2.250 2.340 2.530 2.736 2.736 2.865 2.985 3.079Receivable Turnover 4.870 4.840 4.820 4.640 4.260 4.810 4.770 4.570 4.900 5.150 5.168 5.188 5.074 4.940 4.797Total Asset Turnover 0.950 0.840 0.830 0.770 0.650 0.660 0.650 0.650 0.660 0.660 0.659 0.707 0.742 0.774 0.796
Financial Leverage RatiosDebt to Equity Ratio 0.686 0.381 0.384 0.506 0.511 0.624 0.655 0.814 0.776 0.747 0.485 0.507 0.507 0.512 0.510Equity Multiplier 1.481 1.234 1.220 1.360 1.361 1.452 1.462 1.459 1.561 1.532 1.485 1.507 1.507 1.512 1.510
Profitability RatiosProfit Margin 18.90% 20.10% 17.90% 14.30% 15.80% 11.80% 13.10% 15.50% 10.00% 5.96% 12.22% 14.46% 14.89% 15.33% 15.79%ROE 0.28% 0.23% 16.30% 14.03% 13.90% 10.97% 12.44% 14.65% 9.93% 5.84% 12.14% 15.15% 16.43% 17.62% 18.62%ROA 18.00% 16.90% 13.36% 10.32% 10.21% 7.55% 8.51% 10.04% 6.36% 3.82% 8.17% 10.05% 10.90% 11.65% 12.33%
BetaShare Price 34.67$ 0.9 0.94 1 1.016 1.02 1.04 1.06
2.00% 32.48048887 31.27667462 29.6158862 29.19968327 29.09727654 28.59480019 28.107716122.50% 34.45163344 33.07282671 31.18478182 30.71417751 30.59854107 30.03203958 29.48429679
CV NOPLAT 2.80% 35.82306888 34.31582407 32.26255443 31.75267132 31.62749913 31.01494095 30.423704813.00% 36.8323455 35.22709948 33.04860401 32.50909662 32.3767412 31.7295371 31.105657973.15% 37.6461225 35.95972058 33.67805481 33.11423172 32.97598569 32.30040023 31.649826783.25% 38.2183659 36.47375708 34.11838226 33.53723607 33.39479632 32.69902142 32.029483413.50% 39.76507512 37.85845689 35.29914224 34.67027245 34.51629157 33.76502254 33.04346042
COGS MarginShare Price 34.67$ 51.00% 52.00% 53.00% 54.15% 55.00% 56.00% 57.00%
8.00% 46.60938165 43.84925155 41.08912145 37.91497184 35.56886126 32.80873116 30.048601068.50% 45.51541052 42.75528042 39.99515032 36.82100071 34.47489013 31.71476003 28.95462993
R&D Margin 9.00% 44.42143939 41.66130929 38.90117919 35.72702958 33.380919 30.6207889 27.86065889.48% 43.3712271 40.611097 37.8509669 34.67681729 32.33070671 29.57057661 26.81044651
10.00% 42.23349712 39.47336702 36.71323693 33.53908731 31.19297673 28.43284663 25.6727165410.50% 41.13952599 38.37939589 35.6192658 32.44511618 30.0990056 27.3388755 24.5787454111.00% 40.04555486 37.28542476 34.52529466 31.35114505 29.00503447 26.24490437 23.48477427
Depreciation as % of PPEShare Price 34.67$ 13.00% 14.00% 15.00% 16.00% 17.00% 18.00% 19.00%
7.00% 50.42484618 50.08909954 49.78152003 49.50068829 49.24522858 49.01380821 48.805136847.50% 43.77705269 43.48670017 43.22068409 42.97777933 42.75679848 42.55659118 42.37604366
WACC 8.00% 38.60610013 38.35102206 38.11730607 37.90387787 37.70969621 37.53375234 37.375069558.42% 35.07438074 34.84337067 34.63169492 34.43838201 34.26249034 34.10310766 33.959350729.00% 31.08351399 30.8796694 30.69287263 30.52226812 30.36702659 30.22634463 30.099444339.50% 28.26194753 28.07728296 27.90805374 27.75348602 27.61282975 27.48535824 27.37036785
10.00% 25.87407344 25.70561915 25.55123899 25.41022813 25.28190334 25.16560271 25.0606853
CV ROICShare Price 34.67$ 18.00% 19.00% 20.00% 20.97% 21.00% 22.00% 23.00%
2.95% 35.21889628 35.63713344 36.01354688 36.34436708 36.35411142 36.66371555 36.946397573.00% 34.86540831 35.27922416 35.65165842 35.97898143 35.98862276 36.29495397 36.57464769
Risk-Free Rate 3.10% 34.17776897 34.58298769 34.94768453 35.26820732 35.27764835 35.57761545 35.851498453.19% 33.579984 33.97773303 34.33570716 34.65032152 34.65958851 34.95402611 35.222860433.25% 33.19206622 33.58497009 33.93858357 34.24936547 34.25851957 34.54937049 34.814930023.30% 32.87505353 33.26399912 33.61405016 33.92170111 33.930763 34.21868376 34.481567933.50% 31.66083335 32.03462912 32.37104531 32.66671295 32.67542187 32.95212783 33.2047724
Market Risk PremiumShare Price 34.67$ 4.30% 4.80% 5.20% 5.76% 6.00% 6.25% 6.50%
4.00% 48.83922825 43.05950734 39.29196031 34.95147704 33.35411672 31.82809555 30.425874444.50% 48.18845171 42.54849664 38.86312024 34.60852878 33.04040713 31.54112519 30.16244459
Pre-Tax Cost of Debt 4.00% 48.83922825 43.05950734 39.29196031 34.95147704 33.35411672 31.82809555 30.425874444.61% 48.0475352 42.43763873 38.76997424 34.53393214 32.97213392 31.47863914 30.105056965.00% 47.55430326 42.04903897 38.44314005 34.27188297 32.73219502 31.25894751 29.903212945.50% 46.93614349 41.56074037 38.03174351 33.94136515 32.42933553 30.9814425 29.648079556.00% 46.33336576 41.08322487 37.62866595 33.61680731 32.13168891 30.70849415 29.39694764
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 3,212Average Time to Maturity (years): 5.40Expected Annual Number of Options Exercised: 595
Current Average Strike Price: 29.66$ Cost of Equity: 9.02%Current Stock Price: $45.86
2018E 2019E 2020E 2021E 2022EIncrease in Shares Outstanding: 595 595 595 595 595Average Strike Price: 29.66$ 29.66$ 29.66$ 29.66$ 29.66$ Increase in Common Stock Account: 17,642 17,642 17,642 17,642 17,642 (Assumes common stock an
Change in Treasury Stock 83,919 83,919 83,919 83,919 83,919Expected Price of Repurchased Shares: 45.86$ 50.00$ 54.51$ 59.43$ 64.79$ Number of Shares Repurchased: 1,830 1,678 1,540 1,412 1,295
Shares Outstanding (beginning of the year) 137,456 136,221 135,137 134,193 133,375Plus: Shares Issued Through ESOP 595 595 595 595 595Less: Shares Repurchased in Treasury 1,830 1,678 1,540 1,412 1,295 Shares Outstanding (end of the year) 136,221 135,137 134,193 133,375 132,675
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol FLIRCurrent Stock Price $45.86Risk Free Rate 3.19%Current Dividend Yield 1.05%Annualized St. Dev. of Stock Returns 26.77%
Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 3,212 29.66 5.40 20.41$ 65,562$ Total 3,212 29.66$ 5.40 22.65$ 65,562$
Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)
Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 0.03 Leases2017 9265 2016 5148 2015 64312018 5660 2017 3464 2016 26612019 2805 2018 2614 2017 17722020 1539 2019 1611 2018 16222021 1135 2020 990 2019 948Thereafter 808 Thereafter 419 Thereafter 624Total Minimum Payments 21212 Total Minimum Payments 14246 Total Minimum Payments 14058Less: Interest 1925 Less: Interest 1421 Less: Interest 1344PV of Minimum Payments 19287 PV of Minimum Payments 12825 PV of Minimum Payments 12714
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 4.61% Pre-Tax Cost of Debt 4.61% Pre-Tax Cost of Debt 4.61%Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 9265 8856.7 1 5148 4921.1 1 6431 6147.62 5660 5172.1 2 3464 3165.4 2 2661 2431.63 2805 2450.3 3 2614 2283.4 3 1772 1547.94 1539 1285.1 4 1611 1345.2 4 1622 1354.45 1135 906.0 5 990 790.3 5 948 756.76 & beyond 808 616.6 6 & beyond 419 319.7 6 & beyond 624 476.2PV of Minimum Payments 19286.8 PV of Minimum Payments 12825.2 PV of Minimum Payments 12714.5
Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating OperatingFiscal Years Ending 0.03 Leases Fiscal Years Ending 31.6274991333734 Leases Fiscal Years Ending Leases2014 11680 2013 12051 2012 159272015 7557 2014 8967 2013 78562016 2435 2015 4710 2014 56992017 1488 2016 3381 2015 19492018 1428 2017 2344 2016 896Thereafter 1718 Thereafter 5625 Thereafter 174Total Minimum Payments 26306 Total Minimum Payments 37078 Total Minimum Payments 32501Less: Interest 2421 Less: Interest 4395 Less: Interest 2643PV of Minimum Payments 23885 PV of Minimum Payments 32683 PV of Minimum Payments 29858
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 4.61% Pre-Tax Cost of Debt 4.61% Pre-Tax Cost of Debt 4.61%Number Years Implied by Year 6 Payment 1.2 Number Years Implied by Year 6 Payment 2.4 Number Years Implied by Year 6 Payment 1.0
Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 11680 11165.3 1 12051 11519.9 1 15927 15225.12 7557 6905.6 2 8967 8194.1 2 7856 7178.93 2435 2127.1 3 4710 4114.4 3 5699 4978.34 1488 1242.5 4 3381 2823.3 4 1949 1627.55 1428 1139.9 5 2344 1871.1 5 896 715.26 & beyond 1428 1305.0 6 & beyond 2344 4160.6 6 & beyond 174 132.8PV of Minimum Payments 23885.4 PV of Minimum Payments 32683.4 PV of Minimum Payments 29857.7
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