Technology FLIR Systems (NASDAQ:FLIR) Recommendation: BUY · FLIR Systems, Inc. (NASDAQ:FLIR) is a leader in the innovative design, manufacturing, and sale of world-class perception

FLIR Systems Inc. 1

Krause Fund Research Spring 2018 Technology Recommendation: BUY Analysts Luke Honsey [email protected]

Brian Kearney [email protected]

Company Overview FLIR Systems, Inc. (NASDAQ:FLIR) is a leader in the innovative design, manufacturing, and sale of world-class perception and awareness devices. While focusing on thermal imaging and threat detection, FLIR devices have application for use in the daily lives of millions. Within Government and Defense, Residential, and Industrial spaces, FLIR creates products to help ensure safety, security, and awareness to military, private contractors, and general consumers. Stock Performance Highlights 52 week High $52.88 52 week Low $33.95 Beta Value 1.016 Average Daily Volume 1.077 m Share Highlights Market Capitalization $6.914 b Shares Outstanding 138.92m EPS (2017) $0.77 Forward P/E Ratio 28.76 Dividend Yield 1.28% Dividend Payout Ratio 39.52% Company Performance Highlights ROA 10.24% ROE 15.66% Revenue 2017 (MM) $1,800.43 EBITDA 2017 (MM) $360.97 Financial Ratios Current Ratio 3.51 Debt to Equity 22.93%

FLIR Systems (NASDAQ:FLIR)

April 16, 2018

Current Price $52.16 Target Price $56-62

FEAR THE FLIR

• FLIR is tightening focus on its value creating business operations by realigning its operating segments for the first time since 2013 • FLIR benefited from a 390 basis point reduction in their tax rate. As a result, FLIR raised guidance 1% on 2018 CapEx in preparation for increased company growth • Niche Market: FLIR is as an electronic equipment company in terms of day-to-day operations and as a buyer of inputs, but as a defense company in terms of the end market of its goods and primary source of revenue • A 13.2% increase in U.S. Defense Spending sparked a $74.7 (MM) investment from the U.S. Army for FLIR’s surveillance equipment—adding to a healthy backlog • FLIR has successful developed a vertically integrated supply chain process that provides them with a competitive advantage in pricing and production • The recently implemented FLIR Method takes action on accelerating organic growth and increasing profitability by sliming margins and tightening focus • FLIR’s Emerging Markets Operating Segment is expanding after the successful launch of the Automotive Development Kit (ADK) for autonomous vehicles FLIR Systems’ Outperformance of the S&P 500

Source: Thestreet.comi

FLIR Systems Inc. 2

Our team of analysts have recommended a BUY rating for FLIR Systems Inc. We came to this conclusion based on in depth economic, industry, and company specific research. FLIR’s recent company realignment will allow FLIR to focus its attention on long term growth. We believe that with the introduction of new leadership, implementation of the FLIR Method, rapidly growing OEM & Emerging segment, and its continued dominance in the thermal and optical equipment market represent a buying opportunity. U.S. Real Gross Domestic Product Real Gross Domestic Product (GDP) is the measure of the market’s total economic output during a given period after adjustments for inflations are made. Real GDP is an important economic indicator because it helps reflect the overall health of the economy. During a time of economic expansion, consumer spending and consumption increases. The result is a larger top and bottom line for companies. The chart below displays the Real U.S. GDP growth from previous quarters. Real GDP declined .3% from 2017 Q3 to Q4, making the 2017 Real GDP growth rate come in at 2.3%.

Source: U.S. Bureau of Economic Analysisii We believe Real GDP will grow at 2% over the next five years. Growth is being hindered from fears of a United States v. China trade war, upward pressure on inflation, and a rising interest rate environment. Despite the recent selloff in the market, we predict Real GDP will continue to grow steadily. There are catalysts for continued Real GDP growth as well, such as the most recent tax cut and the historically high Consumer Confidence Index (CCI). Even though there was a modest retreat in confidence in the

month of March, the index levels remain high and suggest further strong growth in the months ahead. We predict the tax cut will also stimulate investment and economic expansion, helping push Real GDP forward in a time of a market uncertainty. Assuming consistent Real GDP growth, FLIR will be able to maintain its operations. Since FLIR receives 26%~ of its revenue from the U.S. Government, and Real GDP and defense spending are closely correlated, significant changes in Real GDP growth could affect FLIR going forward. Inflation Rate (Consumer Price Index) The Consumer Price Index (CPI) measures the changes in the prices consumers pay for a basket of selected goods and services. It is an important economic indicator that is released on a monthly basis which helps gauge the inflation rate. The rate is currently at 2.2%. Below is a chart of the CPI rate as shown as an annual percent change. Inflation has been relatively steady since the recession, and hovering around the Fed’s target inflation rate of 2%.

Source: FRED Economic Dataiii Going forward, we expect inflation and the CPI to be at the Fed’s target of 2%. There has been recent fears that inflation would elevate substantially, but we do not see validity in these claims. Part of the reason why inflation is speculatively going to be higher is due to the recent tax cut and a rise in wage growth. Although we recognize that the rise in wages increased company costs, we don’t believe these costs will be equally translated into increased costs for consumers. In addition, we are currently in a rising interest rate environment. The recent federal funds rate hikes should keep inflation in check for the coming years. For FLIR, a low, steady-state inflation rate environment is best. Rising inflation will increase FLIR’s cost of manufacturing through increasing input prices. This increase would put pressure on FLIR to raise prices, or to

Executive Summary

Economic Outlook

FLIR Systems Inc. 3

take a hit on their margins. In a competitive environment, this could significantly hurt FLIR. Fortunately, we don’t forecast FLIR experiencing this issue because of our 2% inflation estimate. Interest Rates Interest rates are largely influenced by the Federal Funds Rate, the rate charged to banks for overnight loans. Post-recession, the U.S. has been in a historically low interest rate environment. This environment was created by the Fed in an attempt to stimulate economic growth through decreasing the cost of borrowing. Since late 2015, the Fed has slowly began to increase this rate. At the last meeting, the recently appointed Fed Chair, Jerome Powell, elected to raise the Federal Funds Rate to its highest level since 2008 at 1.75%. Looking ahead, we predict that the Fed will have another two rate hikes before the end of the year. Through raising these rates, it should begin to normalize the cost of borrowing and give the Fed some ammunition to use if the economy were to have a pullback. On the downside, it will hurt companies by increasing their cost of debt. Ultimately, we see this as a sign that our economy is healthy and expected to enter a period of steady growth. The increase in rates has been long awaited and shouldn’t serve as a shock to corporations or the markets. We do not anticipate FLIR’s business to be hurt from the recent rate hikes. FLIR recently raised over $400 million in debt and we don’t not expect them to do another round of debt financing for another 3-5 years. Since their cost of borrowing is constant, a rise in the market cost of borrowing will not increase FLIR’s cost of borrowing in the near future. U.S. Capital Markets Outlook The U.S. Economy saw a significant amount of growth in 2017 with the S&P 500 rising 23%. Going forward, we are forecasting a reduced, but steady, growth rate for the U.S. economy. We believe that a steady Real GDP growth rate, low inflation, recently passed tax legislation, and historically high CCI will push the economy forward in 2018. We forecast the U.S. economy to continue to grow in next year despite the increased volatility in the market from fears of a trade war, a rising interest rate environment, and historically stretched valuations.

FLIR’s Industry Position FLIR Systems operates within two sectors, Electronic Equipment and Defense. They primarily produce electronic equipment within the Technology Sector. The Electronic Equipment Industry consists of manufacturers of various equipment that is used in the manufacturing of hardware. This includes fiber optic technology, communication processors, and electronic switchboards. While FLIR partially fits into this industry because of their development of thermal imaging equipment, they also behave like a company in the Defense Industry. FLIR generates a majority of its revenue from domestic and foreign government contracts and bulk orders from these entities. Since FLIR is dependent upon contracts, defense spending, and global shipments, it earns its revenue from acting similarly to a company in the defense business. This is also because FLIR isn’t an intermediary in the supply chain process. FLIR sells a majority of their goods as final products, while many companies that produce electronic equipment sell their products solely as intermediate goods. For this reason, we will be positioning FLIR as an electronic equipment company in terms of day-to-day operations and as a buyer of inputs, but as a defense company in terms of the end market of its goods and primary source of revenue. Electronic Equipment Industry The Electronic Equipment Industry is filled with manufacturers who produce the fundamental components that go into making additional products, such as consumer devices. Due to an increase in the global use of technology over the last two decades, this industry has grown increasingly large. As a result, the industry is competitive and is in the mature phase of its life cycle. We expect this industry to continue to have low revenue growth of 2% annually. Trends The Electronic Equipment Industry has outperformed the S&P 500 significantly over the last two years. Part of this growth can be attributable to the general outperformance of the Technology Industry. In addition to the outperformance of technology relative to the market, the electronic equipment segment has benefited from increased consumer spending. While most manufacturers produce intermediary goods, the goods are demanded from

Industry Analysis

FLIR Systems Inc. 4

primarily wholesalers. These wholesalers have steadily ramped up their order quantity due to increased adoption of electronic devices in a variety of end uses. This increased demand can be illustrated through the graph below in terms of the electronic equipment performance relative to the S&P 500 over the last two years. FLIR Systems has been able to take advantage of this increase in demand as well. Their commercial and government orders have increased substantially and their stock price has been rewarded as a result.

Source: Bloomberg Industry Revenue and Growth Catalysts The Electronic Equipment Industry is mature. Projections show 2% ~ annual growth over the next six years. Despite low growth expectations, the industry plays an essential role in the economy as a supplier of many of the components to all electronic goods.

Source: IBISWorld Although the industry does not have high percentage growth expectations, the industry is still expected to grow year-over-year on a nominal revenue basis. Recently, the changing automotive market and advances in the communication space has driven up demand for electronic equipment. The automotive market has been

revolutionized in the last decade. Technology has been slowly incorporated into newer vehicles. Between hands-free communication, LCD displays, and increased sensory systems, each car rolled off the production line incorporates more and more electronic components. As the industry evolves, we expect there to be increased demand for electronic equipment in the new wave of Level 3 and Level 4 autonomous vehicles and traditional vehicles alike. Advances in the communication industry are also helping increase the demand for electronic equipment. In addition to an increased adoption of broadband-enabled devices, such as tablets and e-readers, there is projected growth in the industry based on establishing dominant 4G technology and beginning to invest in 5G. We believe that this will help drive revenue for the Electronic Equipment Industry as this infrastructure is rolled out. Industry Specific Indicators One indicator that is closely correlated to revenue growth in the electronic equipment space is the quantity of LCD panel shipments. The amount of LCD panels shipped has slowly increased over the last two and a half years. It has been hindered by cuts in prices and lower demand for small-mid size TVs. Similar to our projection for industry revenue, we predict LCD panel shipments to continue to grow at a low annualized rate of 1-2%.

Source: Bloomberg Porter’s Five Forces Threat of New Entrants: Low In order to be competitive in the electronic equipment production space, a company must have competitive advantages, high amount of capital, reliable suppliers, cost efficiency strategies, and the technology to maintain and develop new equipment. Since this industry is mature, has low margins, and requires large amounts of capital up front and to maintain competitive status, the threat of new entrants is low.

FLIR Systems Inc. 5

Threat of Suppliers: Low Electronic equipment manufacturers are buyers of essential components. These components include semi-conductors, cables, wire harnesses, and various forms of plastic. As a generalization of the industry, these products are not expensive to create and there are many suppliers both domestically and internationally. Many companies in the Electronic Equipment Industry also incorporate versions of vertical integration into their supply chain process since the cost of manufacturing essential components is shadowed by the opportunity of cutting out third-party supplier. FLIR is one of the companies to incorporate this model. They manufacture many of the critical components for their products, including infrared detectors, gimbals, pan-tilts, optics, coatings, laser sub-systems, and software for their systemsiv. Due to the low cost of manufacturing, amount of manufactures, and ability for companies to vertically integrate supply chain processes, the threat of suppliers is low. Threat of Buyers: Medium Similar to how manufacturers are positioned, buyers also share smaller segments of the overall market for electronic equipment. Since there are many smaller buyers in the market, it decreases the threat of buyers. In addition, many buyers contract out their suppliers for years at a time. Since these contracts then have larger termination of contract fees, it limits flexibility of buyers to switch suppliers without notice. We believe that the threat of buyers isn’t centered around leaving the supplier for another one with cheaper prices, but deciding to vertically integrate its supply chain process through its own production or through mergers and acquisitions instead. Threat of Substitutes: Medium Competition drives the threat of substitution in the Electronic Equipment Industry. Most companies are protected in two ways. One way they are protected is from competitive advantages in the efficiency of their production, relationships with buyers, and bulk orders under long-term contracts. The other form of protection companies have is through patents and other intangible assets. Both of these forms of protection are useful when trying to prevent other companies from producing similar products, but it does not eliminate the threat entirely. Competitive Rivalry: High There are high levels of competition within manufacturing electronic equipment. Costs of producing electronic components has decreased as technology has improved. Since the cost to produce is cheaper, it introduced

additional competitors to the industry and increased the level of competition. As a result, margins have decreased and the market is shared by many companies.

Source: Bloomberg While the market is shared by dozens of companies with no more than $30b of market cap in the U.S., these companies have to compete against international manufacturers such as Samsung Inc.—who receives over 31% of its revenue from consumer electronics and electronic componentsv. Firms based overseas often have competitive advantages with cheaper input prices and costs of labor, which in turn increases competition in the broader market and drives down margins of U.S. based companies even further. Defense Industry The Bloomberg Industry Classification Standard of the Defense Industry is recognized with a market cap of $556B in the United States. The defense sector contains companies who work off of government contracts to develop military-grade technology and infrastructure. The United States allocates the most money to military growth and development in the world. This presents a great opportunity to companies within this space to secure government contracting and funding.

Source: Bloomberg

FLIR Systems Inc. 6

Over the past year, the Defense Industry has outperformed the market. Increased military spending and a new administration has helped push the sector up further. FLIR has been able to capitalize on the growth in the Defense Industry, sending their stock up almost 10% higher than an index of defense companies. It is clear that FLIR behaves similarly in the market to defense companies. Increased Defense Spending The passing of the $1.3T government spending bill on March 23, 2018 directed $639B to military spending. A large portion of it is going to be used for updating and revitalizing military equipment and infrastructure. The budget request made by President Trump was $52B above the defense budget cap stated in the Budget and Control Act of 2011vi. We believe that part of the reason why the proposal was over budget is because of China’s recent military spending bill. China announced in early March that it plans to boost its military spending by 8.1% in 2018vii. Under this new bill, the U.S. increased their defense spending by 13.2%. The current government administration is showing a continued commitment to military spending which gives the defense industry strong growth potential.

$- $100 $200 $300 $400 $500 $600 $700

Military Spending 2017 (billions)

Source: CNBCviii Defense Contracts There are hundreds of individual companies under contract from the Department of Defense totaling up to $212 billion in dollars obligated in 2015ix. Lockheed Martin, Boeing, General Dynamics, and Raytheon are the leaders in the defense contract space, representing a combined total of 18% of total dollars obligated in contractual agreements. Government contracts are highly sought after. From a company’s perspective, it represents an opportunity to have a boost in production and a stable stream of future revenue. The U.S. Government is an extremely large buyer of defense related products, and has significant power in negotiations as a result.

Future Growth We believe that the U.S. will continue to increase their military spending annually under the current administration. In addition, rising global tensions have led to increased demand for defense products. We forecast the Defense Industry to rise at a faster rate of 3.5% than its counterpart: the Aerospace Industry. FLIR will be in a position to capitalize on continued growth in the defense space. FLIR Systems Summary FLIR Systems is a leader in the innovative design, manufacturing, and sale of world-class perception and awareness devices. There has been many changes to the company in the past couple of years. FLIR is currently in the process of realigning their operating segments, strategizing with new leadership, and focusing their attention to long term growth. We are confident that FLIR will have the foundation needed to maintain and create shareholder value. Business Units On August 30th, 2017 FLIR management announced they would be realigning their corporate structure. The six current business segments, will be realigned into the following three divisions: Government and Defense, Industrial, and Commercial.

Company Analysis

FLIR Systems Inc. 7

Government and Defense Realigns the two current units of Surveillance and Detection but exclude the Outdoor and Tactical Systems (OTS) business. Industrial This unit will consist of the current Original Equipment Manufacturing and Emerging Markets segments, but will exclude the Intelligent Traffic Systems (ITS) business. Commercial Combines the Maritime and Security segments and will put the ITS and OTS businesses under its umbrella. Effects of Realignment Overview FLIR has not gone through a significant restructuring event or realignment since 2013. We view this operational decision as having minimal short-term consequences that will lead to long-term growth. The company is realigning into three business units which are described above. The goal of this realignment is to increase focus on its core value driver products and their respective end market industries. FLIR recognized that they were being stretched by countless industries in which their products were being used. As a result, FLIR was able to separate its business into three main units and strategically tighten focus. New Leadership In addition to combining their operating segments, FLIR appointed new leadership to run the respective units. This includes the naming of David Ray as the President of FLIR Systems’ Government and Defense Business Unitx. David Ray signed on with FLIR Systems after over 15 years of working as Vice President for Raytheon Company—an indirect competitor of FLIR. Investors have strong sentiment that Mr. Ray will be able to use his expertise to grow out that portion of FLIR’s business. We believe that with time, he will be able to bring value to FLIR. The new leadership will also help increase focus in how their products are being produced and distributed to their end markets. Divestiture of Security Businesses As part of the effort to refocus FLIR for long term growth, FLIR sold off two of its security businessxi. In February, 2018 it completed the sale of its Canadian security products subsidiary, Lorex, and its Toronto-headquartered small and medium-sized (SMB)

security products businessxii. Together, the two businesses generated $140MM in revenue annually but failed to contribute to FLIR’s bottom line. Since this segment was breakeven operationally, it should aid FLIR in improving margins and tightening focus on its other segments. FLIR Method The last primary effect of FLIR’s realignment is related to the development of the FLIR method. In the second half of 2017, CEO Jim Cannon implemented his new method. Similar to many of the effects and reasoning behind FLIR’s realignment, its aim was to tighten focus on its current business. Mr. Cannon describes the method as their “continuous business improvement initiatives that will accelerate organic growth, improve profitability, and generate excess cash to maximize value creation.” xiii More specifically, FLIR is implementing several productivity enhancement projects, creating manufacturing efficiencies through its vertically integrated supply chain model, and standardizing internal operational processes. We believe that this is a sound strategy that will aid FLIR in seeking long term growth and profitability. Operating Segments Overview With the exception of FLIR’s recent divestiture of almost half of its security division, FLIR still produces and distributes to end markets in their original six operating segments.

Source: FLIR 10K Surveillance Within the Surveillance business segment, FLIR develops enhanced imaging and recognition systems. They developed the business model “Commercially Developed, Military Qualified” (CDMQ) which

FLIR Systems Inc. 8

provides law enforcement, public safety officials and military the highest grade equipment available. Surveillance develops hand-held and weapon-mounted thermal imaging systems, and are sold either off-the-shelf or through custom contracting. Surveillance accounts for 30.3% or $545.8MM of revenue. Instruments The Instruments business segment provides devices to industrial and commercial companies for use in measuring, assessing, and visualizing thermal energy, gases, and electricity. The devices are sold by Extech— a subsidiary of FLIR. Revenue in 2017 was $357.8MM, and accounted for 19.9% of total sales. Security The Security segment develops and manufactures cameras and video recording systems for use in critical infrastructure defense. Over the past two years, FLIR has phased out the development of personal consumer security systems. They recently have been putting more focus onto critical infrastructure and enterprise segments of the security market. Revenue in 2017 was $243MM or 12.4% of total revenue. OEM and Emerging Markets Original Equipment Manufacturing and Emerging Markets provides thermal imaging components and camera cores to third parties to create other forms of imaging systems. This segment also holds early-stage development projects including imaging systems for mobile devices, and thermal imaging for commercial-use unmanned aerial systems. Revenue within this segment in 2017 was $347.2MM and accounted for 19.3% of revenue. Maritime The Maritime segment includes the development and manufacturing of electronic and imaging instruments for recreational and commercial use. The Maritime segments provides components for boats of all sizes. The instruments and other FLIR branded products are sold under the Raymarine Brand— another FLIR subsidiary. Revenue for Maritime in 2017 was $189.7MM and accounted for 10.5% of total revenue. Detection The Detection segment creates sensors, instruments and platform solutions that assist in the detection of chemical, biological, radiological, nuclear, and explosive (“CBRNE”) threats in military settings. The United States Government is the main proprietor of FLIR’s Detection technology. Revenue for Detection was $128.5MM which accounted for 7.1% of total revenue.

Competitive Advantages Niche Market FLIR Systems operates in a narrowly defined market that conjoins the defense and electronic equipment industry. One of the reasons why they are segmented into this position is due to the products that they manufacture. There are only two other publically traded companies that are in the business of producing thermal and other optical equipment. These companies are L-3 Communications and Harris. Despite the competition that these companies provide, FLIR has a larger market share than both of them combinedxiv. FLIR is truly an industry leader in producing their thermal imaging equipment and their position within the market proves it. FLIR is able to consistently provide quality products to buyers at reasonable prices. Supply Chain FLIR has been able to successfully vertically integrate a majority of their supply chain through the use of acquisitions and development of in house manufacturing capabilities. In 2015 and 2016, FLIR was active in the Mergers and Acquisitions (M&A) market. Their acquisitions of Armasight, Point Grey Research, and DVTEL totaled $386 million dollarsxv. While Point Grey and DVTEL represented ways to more effectively target the OEM and Video Surveillance markets respectively, Armasight was able to provide cost synergies in production. Since they were a privately held producer of military optical products, FLIR was able to leverage their market expertise, manufacturing techniques, and expand their brand in the hunting and military optical market. Since FLIR has been able to create efficiencies in their production and limit the amount of third party suppliers that they buy through, FLIR has been able to improve their margins and set more strategic prices on their products. Growth Catalysts Realignment We anticipate FLIR’s recent realignment as being one of the largest growth catalysts. Through their recent acquisitions, appointment of new leadership, divestitures, and implementation of the FLIR method, FLIR will be able to create a stable platform to grow off of. Overtime, we expect to see improvement on their margins and continued product innovation.

FLIR Systems Inc. 9

OEM Over the last two years, FLIR has seen 30% and 45% growth respectively in their OEM and Emerging Operating Segment. In the OEM space, FLIR provides thermal and visible spectrum camera cores and sensors to manufacturers of finished goods. These products are less complex than a fully developed thermal imaging system and go to customers requiring a product at a lower level of integration. End products include applications in X-ray, automotive, medical devices, and security markets. Emerging Markets The emerging markets side of the operating segment has also seen high amounts of growth. For FLIR, emerging market business are ones identified as having high growth potential but are currently not large enough to represent their own segmentxvi. Currently, FLIR is working to grow their Intelligent Traffic Systems (ITS) business. The ITS business focusses on developing software-enabled automotive and pedestrian monitoring control systems, among other programs. FLIR’s investment in this industry is serious, as can be seen by their purchase of Point Grey Research in 2016—a company focused on visible camera technology. Point Grey has been striving towards more accurately measuring temperatures remotely, seeing through factory obscurants, and better characterizing human activity in retail settings. The future of this market includes applications in consumer driven settings all over the U.S., such as in pedestrian malls, as well as in factories. The data collected through its technology on consumers, and safety provided by its temperature monitoring ability, could provide lucrative growth in the years ahead. Defense Spending As mentioned in the Industry Analysis, increased defense spending has had a positive impact on FLIR. Since they derive a large amount of business from the U.S. Government, they will be influenced by its budget. Fortunately, we expect to see continued annual defense spending increases under the current administration. Capital Expenditures 2018 During the earnings conference call in February, 2018, managers estimated that FLIR would have a higher amount of capital expenditures (CapEx) for 2018. The managers predicted CapEx to be 2.5%-3% of revenue—a .5%-1% increase from years prior. We believe that the sudden need to raise CapEx is correlated with a large backlog, future projected growth, and growing infrastructure requirements for its newly acquired businesses.

Backlog FLIR has seen increased demand of their products in recent years. This can be attributed to an increase in defense spending and the acquisition of multiple companies. In 2017, their total backlog totaled $593 million of promised goods. Their security operating segment represents over half of the total backlog of products. As mentioned earlier, FLIR purchased Armasight in 2016 in an effort to bulk up their Surveillance Operating Segment. In addition to the increased amount of orders as a result of the purchase, FLIR also earned a $74.7 million contract from the U.S. Army in September of 2017. This order helps prove that FLIR is a reliable and trusted supplier of equipment.

Source: FLIR 10K The Surveillance Operating Segment isn’t the only division that is experiencing a backlog of products. All six segments are. We believe that this illustrates how all of FLIR’s products are currently being demanded, not just a portion of them. We see FLIR’s backlog as a positive attribute, and don’t anticipate it becoming an issue in the coming years. Automotive Development Kit At the beginning of the year, FLIR released their first generation Automotive Development Kit (ADK). The emergence of this product is significant, as it represents an entrance into a new market—autonomous-vehicles. FLIR’s thermal camera is integrated into autonomous vehicles and used as an imaging system to help direct the vehicle. What’s unique about this product, is that it’s the first thermal version to hit the market. It has advantages because it can perform in any lighting environment, and detects obstructions and individuals in the same way. In addition, FLIR’s thermal camera can reach out

FLIR Systems Inc. 10

farther, represented by the orange cone ahead of the headlights in the figure. This increases safety through awareness. We expect this product to help drive the Emerging Markets segment in the coming years.

Source: FLIR.com Investment Negatives Initial Inefficiencies FLIR has realigned a significant portion of their business in 2017. We believe that anytime there are large amount of changes, that they will be accompanied by inefficiencies. As a result, we have forecasted worse margins and a slower revenue growth rate for 2018. We anticipate that FLIR will be able to use this realignment to their advantage. However, it is possible that it will not drive as much growth as managers initially expected. Sensitive to Government Budget Since FLIR earns much of its revenue from the U.S. Government, they are sensitive to changes in the defense budget. In addition to fluctuations in the total amount of annual defense spending, FLIR earns its revenue on a contractual basis. If the U.S. Military wanted to invest in a different optical technology, FLIR could lose a significant portion of its revenue. Fierce Competition Although FLIR operates in a niche market and is an industry leader in the development of thermal and optical technology, they are subject to competition. There are two types of competition that could destroy value in FLIR technology. Either there could be technological advances that could render many of their products obsolete, or another firm in the defense space could make a significant investment in thermal technology if they were desperate to win a contract. While FLIR is an industry leader, they are a small firm compared to the defense giants such as Raytheon and Boeing. It will be necessary for FLIR to continue research and development to mitigate this risk.

We are issuing a BUY rating on FLIR Systems. We have determined a price range of $56-62 per share, with the equity currently trading at $52.16 per share. Revenue Decomposition Overview We forecasted revenues based on historical information, management estimates, and our own beliefs regarding the direction of the company, industry, and economy. We believe that the distribution of revenue by segment will change in our CV year from 2017.

Surveillance FLIR’s surveillance segment still represents the largest revenue stream for the company. High amount of backlog, increased investment from the U.S. Army, and the appointment of a new President of the Government and Defense Unit will drive future growth in this operating segment. We forecasted this at 7% growth year over year. Instruments For the Industrial Business Unit, instruments represents a large percentage of its revenue. We forecast this unit as maintaining its 20% ~ slice of FLIR’s total revenue and predict 6% growth annually. Maritime Although FLIR does not derive a significant percentage of total revenue from its Maritime Operating Segment, it still represents a growing area on the commercial side of their business. We forecasted revenue growing 5% until CV. OEM and Emerging In the OEM and Emerging operating segment, we forecast this growing at the most rapid pace than any other portion of FLIR’s business. We predict revenue in this area to grow 25% in 2018 and decline 5% each year until it reaches CV at 5% growth. We believe that the

Valuation Analysis

FLIR Systems Inc. 11

development of products such as the ADK, continued research within the ITS business, and growing demand for FLIR’s OEM components, will drive high levels of growth in this segment. Security For security, we forecasted a 40% decline in revenue for 2018, attributable to FLIR’s divestiture of its two subsidiaries operating in this segment. After the decline, we forecast this segment to continue to grow at 5% year over year. In 2022, this portion of FLIR’s business will represent a much smaller slice of revenue than it did in 2017. Detection The last operating segment represents the brother to the surveillance business. Due to increased defense spending and government contracts, we forecast this operating segment growing slightly less than surveillance, at 6% annually. Margins Overview Forthcoming, FLIR Systems has made it a priority to slim margins, and increase net profits. Management adheres to this by business realignment, and divesting their low-profit divisions. Realignment and Divestiture FLIR’s recent divestiture and realignment will have a large impact on future margins. Their divestiture in Lorex, a security subsidiary of FLIR, represented a way to increase future shareholder value. Within company realignment, the shift of operating segments to business units saves costs by shifting company interest into more efficient industries. Cost of Goods Sold We started our cost of goods forecast by using historical data. Since FLIR’s costs are directly associated with sales, we forecasted them as a percentage of revenue. For 2018, we lowered our margins slightly due to inefficiencies that could be associated with the recent realignment. After 2018 we see FLIR improving their cost of goods sold margin by 50 basis points each year until our CV period of 2022. FLIR has been focusing on becoming increasingly vertically integrated. This was made apparent through their purchase of Armasight in 2016. Between their recent acquisition, new leadership, and focus on efficiencies through the FLIR method, we see margins improving. Operating Expenses Selling, General and Administrative Expense (SG&A) were forecasted from taking an average of prior years’ percent of revenue and following the prior five years

decreasing trend. As revenue continues to grow, we see SG&A as a factor of revenue to decrease. From a research and development perspective (R&D) it will always be necessary for FLIR to continue reinvesting into the business to stay competitive. With this, we decided to keep forecasted R&D a constant percentage of revenue up until and into the CV period. Weighted Average Cost of Capital Overview The weighted average cost of capital (WACC) for FLIR Systems represents the discount rate assigned to its business based on cost of equity and cost of debt assumptions. FLIR’s WACC is heavily dependent on the cost of equity because of their low debt levels. As a result of their large levels of equity, FLIR’s assigned discount rate is high. We straight lined FLIR’s WACC for all five years of our model based on our belief that their capital structure will maintain its weightings. Cost of Equity The risk-free rate we chose to use for our calculation was the 30-year treasury yield which is currently 3.03%. We have assumed a return on the market of 7.827% which we found by using a geometric mean of the past 15 years of S&P 500 returns. We choose 15 years because it provides a timeframe that holds most of FLIR’s core growth. Adjusting for the risk-free rate, we calculated a market-risk premium of 4.824%. Our beta came out to 1.016 which we assumed by averaging weekly Bloomberg data from 1/1/2014-4/11/2018. Using the CAPM model, we arrived at a cost of equity of 7.93%. Cost of Debt FLIR Systems does not have long-term debt due past 2021. Since they did not have any company bonds in the 30-year time horizon being currently traded, we had to use Level 2 fair value inputs. We incorporated their Baa3 Moody’s rating and BBB S&P rating and found similar bonds. These bonds had a yield to maturity of 4.78%. With FLIR’s current 21.5% effective tax rate, our after-tax cost of debt became 3.75%. Weights The capital structure of a firm has a large impact on the discount rate assigned to it. To find the weights for the WACC calculations, we took the shares outstanding times the current share price. For debt we added long-term, short-term and the present value of operating leases together. With this, our value of equity and debt totaled $7,246.05 (MM) and $448.07 (MM) respectively. By taking total equity over the sum of equity plus debt and debt over the same sum, we arrived at our weights of

FLIR Systems Inc. 12

94.18% for equity and 5.82% for debt. We don’t anticipate FLIR changing their capital structure. As a result, we straight lined WACC for all five years of our analysis. Tax Rate Effective Tax Rate In 2017, FLIR paid additional taxes on tax liabilities, leaving themselves with a 59.6% effective tax rate. Without paying the additional taxes, they were on track to pay taxes an adjusted effective rate of 25.4% rate. This year’s effective rate of 21.5% signifies a 390 basis point reduction in their respective ratexvii. The reduction in the tax rate has a significant effect on FLIR’s bottom line and gives them more cash for CapEx xii. Valuation Models DCF and EP Model We believe that our discounted cash flow and economic profit models give the most accurate representation of FLIR’s intrinsic value. Both of these methods take into consideration all operations of the company, include vital information not located in the main financial statements, and value the company based on the present value of its free cash flow. For our models, we assumed a terminal growth rate of 4% given historical defense industry returns, GDP estimates, and inflation estimates. We also forecasted NOPLAT to reach $442.16 million and EP to reach $316.34 million by the continuing value year of 2022. We forecast FLIR to have a decreased revenue growth rate in 2018, and steady revenue growth from 2019 until 2022. Using our assumptions and calculations, we arrived at an intrinsic stock value of $57.46. Dividend Discount Model We do not believe that the dividend discount model (DDM) is an accurate representation of FLIR’s value. Despite FLIR having a higher dividend payout ratio of 39.52%, we believe that cash flows better reflect the operating performance of the company. In forecasting the DDM, we arrived at a share price of $45.64. To us, the value of FLIR is understated in this model compared to our DCF and EP forecasts. The DDM is heavily dependent on future dividend payments which is subject to management discretion. We believe that the best representation of FLIR’s financial and operating performance is through their cash flows. Relative Valuation For our relative valuation model, we chose to compare FLIR to its two primary competitors in the defense industry—L3 Technologies and Harris. We compared FLIR to these companies on a P/E and using an EV/EBITDA multiple basis. FLIR’s P/E ratio is slightly

above the average of their two peers, which is 23.63. We believe this is in part due to FLIR’s peers being almost three times the size of FLIR in terms of EV. Using our estimated 2018 EPS of $2.01 and the average competitor P/E of 23.63, we arrived at a stock price of $47.48, which is undervalued compared to our DCP and EP models. In addition to P/E, we used EV and EBITDA to derive a stock price for FLIR. Through averaging the EV/EBITDA multiple of L3 and Harris and applying that to our 2018 EBITDA estimate of $416.4 (MM) we calculated a stock price of $42.27. We believe that both of these valuation methods would be more effective if the companies were closer in size. Since FLIR is still a small company, we are assigning it a higher future growth rate. We still conclude that our DCF and EP models are the most accurate representation of the intrinsic stock value of FLIR. Overview In addition to our valuation methods, we analyzed FLIR Systems by running sensitivity tests. These tests consisted of using small changes in various margins, growth rates, and other assumptions to see how they would affect our share price. Here are some of the tests we ran. CV NOPLAT Growth v. Beta We tested the CV growth of NOPLAT to Beta to measure how the stock price changed in relation to these values. We found that our model is sensitive to both of these assumptions. Since our CV NOPLAT is our perpetuity growth rate and represents around 90% of our DCF price, any small changes in the growth rate drastically affects our share price. For Beta, the higher the beta, the riskier the stock, the lower its respective value.

COGS Margin 2018E v. R&D Margin Since our model and investment thesis includes a reduction in margins after 2018, we wanted to see how they held up in sensitivity analysis. For COGS, a one year change in its margin doesn’t have a drastic effect on our share price. In the long term, R&D margin significantly affects our share price. This helps show how important margins can be in valuation.

Sensitivity Analysis

FLIR Systems Inc. 13

Depreciation v. Effective Tax Rate After the U.S. Government passed a historical change in the corporate tax rate, we wanted to test how it, along with depreciation, would affect our share price. FLIR benefited from a 390 basis point reduction in their tax rate in 2018. That alone put FLIR’s price over $3 higher than it would have been without the bill passing. We also found that our model is not extremely sensitive to depreciation, mainly since FLIR doesn’t have a large amount of PPE.

PPE Growth 2018E v. WACC One other sensitivity test we wanted to run was how changes in the growth rate of PPE and fluctuations in our discount rate would affect FLIR’s price. We found that FLIR is sensitive to changes in the WACC. For PPE, FLIR announced that it would increase its CapEx in 2018. While their purchases may have a multiplier effect, we found that the share price is not significantly affected by one year of high PPE growth.

FLIR Systems Inc. 14

Important Disclaimer This report was created by students enrolled in Applied Equity Valuation 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. i The Street. (2018). FLIR Systems, Inc. <https://www.thestreet.com/quote/FLIR.html> ii Bureau of Economic Analysis. (10/27/207). “Gross Domestic Product, Third Quarter 2017”. https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_adv.pdf iii “Consumer Price Index for All Urban Consumers: All Items.” FRED, 11 Apr. 2018, fred.stlouisfed.org/series/CPIAUCS iv FLIR Systems, Inc. (2018). Form 10K. Retrieved from < http://investors.flir.com/sec-filings/sec-filing/10-k/0000354908-18-000014> v Bloomberg L.P. (2018). vi “DoD Releases Fiscal Year 2018 Budget Proposal.” U.S. DEPARTMENT OF DEFENSE, www.defense.gov/News/News-Releases/News-Release-View/Article/1190216/dod-releases-fiscal-year-2018-budget-proposal/. vii Tweed, David, et al. “China Military Spending Quickens as Xi Seeks ‘World Class’ Force.”Bloomberg, 4 Mar. 2018, www.bloomberg.com/news/articles/2018-03-05/china-military-spending-quickens-as-xi-seeks-world-class-force. viii Schoen, John W. “Here's How US Defense Spending Stacks up against the Rest of the

World.” CNBC, CNBC, 2 May 2017, www.cnbc.com/2017/05/02/how-us-defense-spending-stacks-up-against-the-rest-of-the-world.html. ixhttps://en.wikipedia.org/wiki/Top_100_Contractors_of_the_U.S._federal_government x FLIR Systems, Inc. (2018). Form 8-K. http://investors.flir.com/news-releases/news-release-details/flir-systems-sells-retail-and-smb-visible-spectrum-security. xi FLIR Systems, Inc. (2018). Form 8-K. http://investors.flir.com/news-releases/news-release-details/flir-systems-sells-retail-and-smb-visible-spectrum-security. xii FLIR Systems, Inc. (2018). Form 10K. Retrieved from < http://investors.flir.com/sec-filings/sec-filing/10-k/0000354908-18-000014> xiii FLIR Systems, Inc. (2/14/2018). “4Q 2017 Earnings Call”. xiv Ibis World Encyclopedia. (2018). xv “FLIR Systems Buys Point Grey Research for $253 Million.” NASDAQ.com, 4 Oct. 2016, www.nasdaq.com/article/flir-systems-buys-point-grey-research-for-253-million-cm688428 xvi FLIR Systems, Inc. (2018). Form 10K. Retrieved from < http://investors.flir.com/sec-filings/sec-filing/10-k/0000354908-18-000014> xvii FLIR Systems, Inc. (2/14/2018). “4Q 2017 Earnings Call”.

FLIR Systems Inc. Key Assumptions for Valuation Model

Ticker Symbol FLIRCurrent Share Price $52.16Current Model Date 4/16/2018FY End (month/day) Dec. 31Shares Outstanding (mm) 138.92

Pretax Cost of Debt 4.70%Beta (4-year, weekly) 1.016Risk-Free Rate 3.03%Equity Risk Premium 4.82%Cost of Equity 7.93%WACC 7.69%CV Growth of NOPLAT 4.00%Marginal Tax Rate 21.5%CV ROIC 27.02%DCF Price 56.43$ EP Price 56.43$

Adjusted Price (April 16, 2018) 57.46$

FLIR Systems Inc.Revenue Decomposition

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ERevenue Surveillance 503.045 532.476 545.76 583.96 624.83 668.57 715.37 765.45

Y/Y Growth 2.20% 5.85% 2.49% 7.00% 7.00% 7.00% 7.00% 7.00%Instruments 347.476 336.141 357.83 379.30 402.06 426.19 451.76 478.86

Y/Y Growth -1.88% -3.26% 6.45% 6.00% 6.00% 6.00% 6.00% 6.00%OEM & Emerging 186.722 243.678 347.16 433.95 520.74 598.85 658.74 691.67

Y/Y Growth -17.69% 30.50% 42.47% 25.00% 20.00% 15.00% 10.00% 5.00%Maritime 177.948 185.726 189.69 199.18 209.14 219.59 230.57 242.10

Y/Y Growth -7.62% 4.37% 2.14% 5.00% 5.00% 5.00% 5.00% 5.00%Sercurity 226.575 240.01 231.46 138.87 145.82 153.11 160.76 168.80

Y/Y Growth 26.51% 5.93% -3.56% -40.00% 5.00% 5.00% 5.00% 5.00%Detection 115.301 124.136 128.54 136.25 144.42 153.09 162.27 172.01

Y/Y Growth 34.50% 7.66% 3.54% 6.00% 6.00% 6.00% 6.00% 6.00%Total Revenue 1557.067 1662.167 1,800.43 1871.51 2047.01 2219.40 2379.48 2518.90

Y/Y Growth 1.73% 6.75% 8.32% 3.95% 9.38% 8.42% 7.21% 5.86%

Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E 2022E% of Total Sales

Surveillance 32.31% 32.04% 30.31% 31.20% 30.52% 30.12% 30.06% 30.39%Instruments 22.32% 20.22% 19.87% 20.27% 19.64% 19.20% 18.99% 19.01%OEM & Emerging 11.99% 14.66% 19.28% 23.19% 25.44% 26.98% 27.68% 27.46%Martime 11.43% 11.17% 10.54% 10.64% 10.22% 9.89% 9.69% 9.61%Security 14.55% 14.44% 12.86% 7.42% 7.12% 6.90% 6.76% 6.70%Detection 7.41% 7.47% 7.14% 7.28% 7.06% 6.90% 6.82% 6.83%

Totals 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

FLIR Systems Inc.Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ERevenue 1,557.07$ 1,662.17$ 1,800.43$ 1,871.51$ 2,047.01$ 2,219.40$ 2,379.48$ 2,518.90$ Cost of goods sold 753.97 837.53 870.65 917.04 992.80 1,065.31 1,130.25 1,183.88 Depreciation & amortization 49.53 57.51 71.01 78.93 82.88 84.54 86.23 87.95

Gross profit 753.56 767.12 858.78 875.54 971.33 1,069.55 1,163.00 1,247.06 Opperating Expenses

Research & development 132.89 147.54 170.74 163.76 179.11 194.20 208.20 220.40 Selling, general & administrative 313.54 322.44 373.87 374.30 399.17 421.69 440.20 466.00

Restructuring expenses 1.36 1.43 0.63 - - - - - Loss on Net Assets Held for Sale 23.59 - - - - -

Total operating expenses 447.80 471.40 568.82 538.06 578.28 615.88 648.41 686.40 Earnings (loss) from operations 305.76 295.72 289.96 337.48 393.05 453.67 514.59 560.66

Interest expense 14.09 18.07 16.80 19.77 19.78 20.55 21.35 41.89 Interest income 1.17 1.40 (1.76) 1.04 0.78 0.82 0.91 1.90 Other income (expense), net 12.60 (3.09) 4.14 31.38 6.06 6.29 6.75 7.65

Earnings Before Income Tax 305.45 275.96 279.07 348.04 378.55 438.58 499.08 524.53 Income tax provision (benefit) 63.76 109.33 171.84 74.83 81.39 94.29 107.30 112.77

Net earnings (loss) 241.69 166.63 107.22 273.21 297.16 344.29 391.78 411.75

Weighted average shares outstanding - basic 139.35 137.14 137.46 Year end shares outstanding 137.35 136.33 137.46 135.98 134.65 133.46 132.41 131.47 Dividends/Share 0.44 0.48 0.60 0.79 0.87 1.02 1.17 1.24

Net earnings (loss) per share 1.73 1.22 0.78 2.01 2.21 2.58 2.96 3.13

FLIR Systems Inc.Balance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssetsCurrent Assets

Cash & cash equivalents 472.79$ 361.35$ 519.09$ $ 388.38 $ 408.88 $ 455.49 $ 950.60 $ 597.10 Accounts receivable, net 326.10 352.02 346.69 355.59 388.93 421.69 452.10 478.59 Inventories 393.09 371.37 372.18 430.45 470.81 510.46 547.28 579.35 Assets Held For Sale, Net 67.34 Prepaid expenses & other current assets 95.54 79.92 81.92 56.15 61.41 66.58 71.38 75.57

Total current assets 1,287.51 1,164.66 1,387.22 1,230.56 1,330.04 1,454.22 2,021.36 1,730.61 Property & equipment, net 272.63 271.79 264.00 303.60 318.78 325.15 331.65 338.29 Deferred income taxes, net 55.43 45.24 21.00 31.90 31.90 31.90 31.90 31.90 Goodwill 596.32 801.41 909.81 909.81 909.81 909.81 909.81 909.81 Intangible assets, net 141.30 168.46 168.13 182.65 177.23 184.50 193.64 231.69 Other assets 53.21 168.16 59.87 68.10 70.77 73.50 76.13 79.36 Total assets 2,406.40 2,619.71 2,810.03 2,726.62 2,838.52 2,979.09 3,564.50 3,321.65

Liabilities and Shareholders' EquityAccounts payable 139.54 114.23 106.39 112.29 122.82 133.16 142.77 151.13 Deferred Revenue 65.78 60.44 46.29 65.50 71.65 77.68 83.28 88.16 Accrued payroll & related liabilities 54.81 52.87 71.31 71.12 75.84 80.12 83.64 88.54 Accrued product warranties 13.41 17.48 15.02 18.72 20.47 22.19 23.79 25.19 Accrued expenses 40.93 34.02 37.09 37.43 40.94 44.39 47.59 50.38 Liabilities Held for Sale 39.54 Accrued income taxes 0.20 51.02 64.14 - - - - - Other current liabilities 5.99 16.66 15.16 9.60 8.08 8.51 8.94 9.34 Current portion, long-term debt 264.69 15.00 - 420.68

Total current liabilities 585.35 361.71 394.93 314.66 339.80 366.06 810.70 412.74 Long-term debt 93.75 501.92 420.68 420.88 437.33 454.25 470.50 490.42 Deferred income taxes 3.62 2.33 12.50 8.92 8.92 8.92 8.92 8.92 Accrued income taxes 10.46 9.64 87.48 10.40 10.40 10.40 10.40 10.40 Pension & other long-term liabilities 63.71 65.77 59.87 63.12 63.12 63.12 63.12 63.12 Total Liabilities 756.89 941.38 975.47 817.98 859.58 902.75 1,363.64 985.60 Shareholders' Equity

Common stock 1.37 12.14 91.16 108.26 108.26 108.26 108.26 108.26 Retained earnings (accumulated deficit) 1,773.27 1,832.14 1,856.76 1,913.74 1,984.04 2,081.45 2,205.96 2,341.15 Accumulated other comprehensive earnings (loss) (125.13) (165.95) (113.36) (113.36) (113.36) (113.36) (113.36) (113.36)

Total shareholders' equity 1,649.52 1,678.33 1,834.56 1,908.64 1,978.94 2,076.34 2,200.86 2,336.05 Total Liabilities and Shareholders' Equity 2,406.40 2,619.71 2,810.03 2,726.62 2,838.52 2,979.09 3,564.50 3,321.65

FLIR Systems Inc.Historical Cash Flow Statement

Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014 2015 2016 2017CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings 230.21 248.13 221.47 222.40 177.02 200.26 241.69 166.63 107.22Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities

Depreciation & amortization 42.43 61.30 77.50 59.72 62.80 57.25 49.53 57.51 71.01Deferred income taxes -0.61 -14.10 -12.20 -10.94 -2.71 -1.24 2.86 5.61 25.97Stock-based compensation arrangements 23.96 25.58 24.92 26.25 27.82 30.79 25.75 27.80 31.02

Loss (Gain) on Assets Held For Sale -4.13 -19.17 23.59Other, Net 0.25 10.32 12.65 -1.81 4.56 -0.79 7.72 11.99 -31.26

Increase (Decrease) In Cash, Net of Acquisitions, Resulting From Changes In:Accounts receivable 9.98 -47.71 17.99 10.69 48.64 -76.71 28.26 -10.70 -7.76Inventories -0.30 -25.15 -48.36 -26.03 35.18 11.36 -74.82 51.17 -32.96Prepaid expenses -22.95 23.98 -11.47 8.32 5.43 5.75 1.86 -7.71 1.22Other assets -10.91 -28.57 -5.59 1.88 -1.52 -24.26 -4.33 -10.75 12.03Accounts payable 3.29 11.56 -5.57 -1.67 -8.62 15.04 38.66 -33.47 21.56Deferred revenue -6.21 -15.45 5.43 1.15 -0.66 0.09 3.50 2.93 -9.22Accrued payroll & other liabilities -20.33 -5.75 -25.60 -25.42 36.02 17.24 -10.70 -10.15 17.08Accrued income taxes 13.89 -2.93 -9.87 13.11 -18.90 -8.50 -1.08 66.30 84.35Pension & other long-term liabilities 9.06 14.06 2.58 7.89 -10.10 4.09 3.69 2.58 -5.59

Net Cash Provided From Operating Activities 271.76 255.25 243.89 285.55 354.97 226.24 293.43 319.75 308.25

CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property & equipment -41.87 -65.97 -41.95 -58.09 -52.06 -61.26 -68.23 -35.94 -42.11Business acquisitions, net of cash acquired -73.57 -402.72 -27.18 -105.91 -20.07 - -92.26 -419.20Proceeds from sale of assets 2.89 0.23 - - - 12.00 25.65 7.33 3.69Other investments 4.85 3.08 1.99 -3.00 - - - -

Net Cash Provided From Investing Activities -107.70 -465.39 -67.14 -167.00 -72.13 -49.26 -134.85 -447.81 -38.42

CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds (repayments) of long-term debt, including current portion - - 247.71 - 150.00 - - 524.56 0.00Repayment of long-term debt -0.03 - - - -11.25 -15.00 -15.00 -367.44 -97.50Repurchase of common stock -73.17 -35.73 -160.67 -214.20 -162.08 -139.24 -123.19 -66.06 0.00Dividends paid - - -38.04 -42.45 -51.40 -56.51 -61.40 -65.92 -82.61Proceeds from shares issued pursuant to stock-based compensation plans 22.33 21.47 21.71 11.20 8.65 47.58 22.50 11.97 58.24Excess tax benefit (Deficit) of stock options exercised 8.83 7.65 5.20 1.28 1.07 11.16 -7.03 -5.99 -10.73Other financing activities -1.50 0.12 -0.46 -0.17 -1.10 -0.02 -0.02 0.01 -0.02

Net Cash Provided From Financing Activities -43.54 -6.49 75.45 -244.33 -66.11 -152.03 -184.15 31.14 -132.61

Effect of exchange rate changes on cash 12.08 -12.29 -4.49 6.68 4.02 -36.06 -33.02 -14.51 20.52Net increase (decrease) in cash & cash equivalents 132.61 -228.91 247.71 -119.11 220.74 -11.10 -58.59 -111.44 157.74Cash & cash equivalents, beginning of year 289.44 422.05 193.14 440.85 321.74 542.48 531.37 472.79 361.35Cash & cash equivalents, end of year 422.05 193.14 440.85 321.74 542.48 531.37 472.79 361.35 519.09

FLIR Systems Inc.Forecasted Cash Flow Statement

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022ECASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings 273.21 297.16 344.29 391.78 411.75Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities

Depreciation & amortization 78.93 82.88 84.54 86.23 87.95Deferred income taxes -14.47 0.00 0.00 0.00 0.00Change in Assets Held For Sale 27.80 0.00 0.00 0.00 0.00Accounts receivable -8.90 -33.35 -32.75 -30.41 -26.49Inventories -58.26 -40.37 -39.65 -36.82 -32.07Prepaid expenses 25.77 -5.27 -5.17 -4.80 -4.18Other assets -8.24 -2.66 -2.74 -2.63 -3.22Accounts payable 5.90 10.53 10.34 9.60 8.37Deferred revenue 19.22 6.14 6.03 5.60 4.88Accrued payroll & other liabilities -0.19 4.72 4.28 3.52 4.90Product warranties 3.69 1.76 1.72 1.60 1.39Accrued expenses 0.34 3.51 3.45 3.20 2.79Accrued income taxes -141.22 0.00 0.00 0.00 0.00Other current liabilities -5.55 -1.52 0.43 0.43 0.40Pension & other long-term liabilities 3.25 0.00 0.00 0.00 0.00

Net Cash Provided From Operating Activities 201.28 323.55 374.77 427.30 456.47

CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property & equipment -79.47 -55.05 -46.24 -46.37 -46.50Business acquisitions (goodwill) 0.00 0.00 0.00 0.00 0.00Intangible assets -53.59 -37.59 -51.95 -55.50 -86.14Other investments 0.00 0.00 0.00 0.00 0.00

Net Cash Provided From Investing Activities -133.06 -92.64 -98.19 -101.87 -132.64

CASH FLOWS FROM FINANCING ACTIVITIESShort-term and current portion of long-term debt 0.00 0.00 0.00 420.68 -420.68Long-term debt 0.20 16.45 16.91 16.25 19.92Repurchase of common stock -108.26 -108.26 -108.26 -108.26 -108.26Dividends paid -107.97 -118.60 -138.63 -159.01 -168.30Common stock issuances 17.10 0.00 0.00 0.00 0.00

Net Cash Provided From Financing Activities -198.94 -210.40 -229.97 169.67 -677.33

Effect of exchange rate changes on cashNet increase (decrease) in cash & cash equivalents -130.71 20.50 46.61 495.10 -353.49Cash & cash equivalents, beginning of year 519.09 388.38 408.88 455.49 950.60Cash & cash equivalents, end of year 388.38 408.88 455.49 950.60 597.10

FLIR Systems Inc.Common Size Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ERevenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of goods sold 48.42% 50.39% 48.36% 49.00% 48.50% 48.00% 47.50% 47.00%Depreciation & amortization 3.18% 3.46% 3.94% 4.22% 4.05% 3.81% 3.62% 3.49%Gross profit 48.40% 46.15% 47.70% 46.78% 47.45% 48.19% 48.88% 49.51%Operating Expenses

Research & development 8.53% 8.88% 9.48% 8.75% 8.75% 8.75% 8.75% 8.75%Selling, general & administrative 20.14% 19.40% 20.77% 20.00% 19.50% 19.00% 18.50% 18.50%

Restructuring expenses 0.09% 0.09% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00%Total operating expenses 28.76% 28.36% 31.59% 28.75% 28.25% 27.75% 27.25% 27.25%

Earnings (loss) from operations 19.64% 17.79% 16.11% 18.03% 19.20% 20.44% 21.63% 22.26%Interest expense 0.90% 1.09% 0.93% 1.06% 0.97% 0.93% 0.90% 1.66%Interest income 0.07% 0.08% -0.10% 0.06% 0.04% 0.04% 0.04% 0.08%Other income (expense), net 0.81% -0.19% 0.23% 1.68% 0.30% 0.28% 0.28% 0.30%

Earnings Before Income Tax 19.62% 16.60% 15.50% 18.60% 18.49% 19.76% 20.97% 20.82%Income tax provision (benefit) 4.09% 6.58% 9.54% 4.00% 3.98% 4.25% 4.51% 4.48%

Net earnings (loss) 15.52% 10.02% 5.96% 14.60% 14.52% 15.51% 16.46% 16.35%

FLIR Systems Inc.Common Size Balance Sheet as Percent of Total Assets

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssetsCurrent Assets

Cash & cash equivalents 19.65% 13.79% 18.47% 14.24% 14.40% 15.29% 26.67% 17.98%Accounts receivable, net 13.55% 13.44% 12.34% 13.04% 13.70% 14.15% 12.68% 14.41%Inventories 16.34% 14.18% 13.24% 15.79% 16.59% 17.13% 15.35% 17.44%Prepaid expenses & other current assets 3.97% 3.05% 2.92% 2.06% 2.16% 2.23% 2.00% 2.27%

Total current assets 53.50% 44.46% 49.37% 45.13% 46.86% 48.81% 56.71% 52.10%Property & equipment, net 11.33% 10.37% 9.39% 11.13% 11.23% 10.91% 9.30% 10.18%Deferred income taxes, net 2.30% 1.73% 0.75% 1.17% 1.12% 1.07% 0.89% 0.96%Goodwill 24.78% 30.59% 32.38% 33.37% 32.05% 30.54% 25.52% 27.39%Intangible assets, net 5.87% 6.43% 5.98% 6.70% 6.24% 6.19% 5.43% 6.98%Other assets 2.21% 6.42% 2.13% 2.50% 2.49% 2.47% 2.14% 2.39%Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and Shareholders' EquityAccounts payable 5.80% 4.36% 3.79% 4.12% 4.33% 4.47% 4.01% 4.55%Deferred revenue 2.73% 2.31% 1.65% 2.40% 2.52% 2.61% 2.34% 2.65%Accrued payroll & related liabilities 2.28% 2.02% 2.54% 2.61% 2.67% 2.69% 2.35% 2.67%Accrued product warranties 0.56% 0.67% 0.53% 0.69% 0.72% 0.74% 0.67% 0.76%Accrued expenses 1.70% 1.30% 1.32% 1.37% 1.44% 1.49% 1.34% 1.52%Accrued income taxes 0.00% 0.00% 1.41% 0.00% 0.00% 0.00% 0.00% 0.00%Other current liabilities 0.01% 1.95% 2.28% 0.35% 0.28% 0.29% 0.25% 0.28%Current portion, long-term debt 0.25% 0.64% 0.54% 0.00% 0.00% 0.00% 11.80% 0.00%

Total current liabilities 24.32% 13.81% 14.05% 11.54% 11.97% 12.29% 22.74% 12.43%Long-term debt 3.90% 19.16% 14.97% 15.44% 15.41% 15.25% 13.20% 14.76%Deferred income taxes 0.15% 0.09% 0.44% 0.33% 0.31% 0.30% 0.25% 0.27%Accrued income taxes 0.43% 0.37% 3.11% 0.38% 0.37% 0.35% 0.29% 0.31%Pension & other long-term liabilities 2.65% 2.51% 2.13% 2.31% 2.22% 2.12% 1.77% 1.90%Total Liabilities 31.45% 35.93% 34.71% 30.00% 30.28% 30.30% 38.26% 29.67%Shareholders' Equity

Common stock $0.01 Par Value 0.06% 0.46% 3.24% 3.97% 3.81% 3.63% 3.04% 3.26%Retained earnings (accumulated deficit) 73.69% 69.94% 66.08% 70.19% 69.90% 69.87% 61.89% 70.48%Accumulated other comprehensive earnings (loss) -5.20% -6.33% -4.03% -4.16% -3.99% -3.81% -3.18% -3.41%

Total shareholders' equity 68.55% 64.07% 65.29% 70.00% 69.72% 69.70% 61.74% 70.33%Total Liabilities and Shareholders' Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

FLIR Systems Inc.Common Size Balance Sheet as Percent of Revenue

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssetsCurrent Assets

Cash & cash equivalents 30.36% 21.74% 28.83% 20.75% 19.97% 20.52% 39.95% 23.70%Accounts receivable, net 20.94% 21.18% 19.26% 19.00% 19.00% 19.00% 19.00% 19.00%Inventories 25.25% 22.34% 20.67% 23.00% 23.00% 23.00% 23.00% 23.00%Assets Held for Sale 3.74% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses & other current assets 6.14% 4.81% 4.55% 3.00% 3.00% 3.00% 3.00% 3.00%

Total current assets 82.69% 70.07% 77.05% 65.75% 64.97% 65.52% 84.95% 68.70%Property & equipment, net 17.51% 16.35% 14.66% 16.22% 15.57% 14.65% 13.94% 13.43%Deferred income taxes, net 3.56% 2.72% 1.17% 1.70% 1.56% 1.44% 1.34% 1.27%Goodwill 38.30% 48.21% 50.53% 48.61% 44.45% 40.99% 38.24% 36.12%Intangible assets, net 9.07% 10.13% 9.34% 9.76% 8.66% 8.31% 8.14% 9.20%Other assets 3.42% 10.12% 3.33% 3.64% 3.46% 3.31% 3.20% 3.15%Total assets 154.55% 157.61% 156.07% 145.69% 138.67% 134.23% 149.80% 131.87%

Liabilities and Shareholders' EquityAccounts payable 8.96% 6.87% 5.91% 6.00% 6.00% 6.00% 6.00% 6.00%Deferred revenue 4.22% 3.64% 2.57% 3.50% 3.50% 3.50% 3.50% 3.50%Accrued payroll & related liabilities 3.52% 3.18% 3.96% 3.80% 3.71% 3.61% 3.52% 3.52%Accrued product warranties 0.86% 1.05% 0.83% 1.00% 1.00% 1.00% 1.00% 1.00%Accrued expenses 2.63% 2.05% 2.06% 2.00% 2.00% 2.00% 2.00% 2.00%Accrued income taxes 0.01% 3.07% 3.56% 0.00% 0.00% 0.00% 0.00% 0.00%Other current liabilities 0.38% 1.00% 0.84% 0.51% 0.39% 0.38% 0.38% 0.37%Current portion, long-term debt 17.00% 0.90% 0.00% 0.51% 0.39% 0.38% 0.38% 0.37%

Total current liabilities 37.59% 21.76% 21.94% 16.81% 16.60% 16.49% 34.07% 16.39%Long-term debt 6.02% 30.20% 23.37% 22.49% 21.36% 20.47% 19.77% 19.47%Deferred income taxes 0.23% 0.14% 0.69% 0.48% 0.44% 0.40% 0.37% 0.35%Accrued income taxes 0.67% 0.58% 4.86% 0.56% 0.51% 0.47% 0.44% 0.41%Pension & other long-term liabilities 4.09% 3.96% 3.33% 3.37% 3.08% 2.84% 2.65% 2.51%Total Liabilities 43.71% 41.99% 40.68% 57.31% 39.13%Shareholders' Equity

Common stock $0.01 Par Value 0.09% 0.73% 5.06% 5.78% 5.29% 4.88% 4.55% 4.30%Retained earnings (accumulated deficit) 113.89% 110.23% 103.13% 102.26% 96.92% 93.78% 92.71% 92.94%Accumulated other comprehensive earnings (loss) -8.04% -9.98% -6.30% -6.06% -5.54% -5.11% -4.76% -4.50%

Total shareholders' equity 105.94% 100.97% 101.90% 101.98% 96.67% 93.55% 92.49% 92.74%Total Liabilities and Shareholders' Equity 154.55% 157.61% 156.07% 145.69% 138.67% 134.23% 149.80% 131.87%

FLIR Systems Inc.Value Driver Estimation

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EEBITARevenue 1557.07 1662.17 1800.43 1871.51 2047.01 2219.40 2379.48 2518.90Cost of Revenue 753.97 837.53 870.65 917.04 992.80 1065.31 1130.25 1183.88Depreciation 49.53 57.51 71.01 78.93 82.88 84.54 86.23 87.95Gross Profit (Loss) 753.56 767.12 858.78 875.54 971.33 1069.55 1163.00 1247.06Research and Development Expenses 132.89 147.54 170.74 163.76 179.11 194.20 208.20 220.40Sales, General and Administrative Expenses 313.54 322.44 373.87 374.30 399.17 421.69 440.20 466.00Plus: Implied Lease Interest 0.60 0.60 0.90 1.29 1.43 1.50 1.53 1.56EBITA 307.72 297.75 315.08 338.76 394.48 455.16 516.12 562.22

Adjusted TaxesIncome Tax Expense 63.76 109.33 171.84 74.83 81.39 94.29 107.30 112.77Restructuring Expenses 1.36 1.43 0.63 0.00 0.00 0.00 0.00 0.00 -Tax on Interest Income 0.25 0.30 -0.38 0.22 0.17 0.18 0.20 0.41 +Tax on Interest Expense 3.03 3.89 3.61 4.25 4.25 4.42 4.59 9.01+Other Income (Expenses) 2.71 -0.66 0.89 6.75 1.30 1.35 1.45 1.65+Tax on Lease Interest 0.13 0.13 0.19 0.28 0.31 0.32 0.33 0.34Taxes 62.60 112.28 174.51 72.39 84.48 97.51 110.57 120.06

Change in Deferred Taxes -45.77 8.89 34.41 -14.47 0.00 0.00 0.00 0.00

NOPLAT 199.36 194.37 174.97 251.90 310.00 357.66 405.54 442.16

Normal Cash 217.08 231.74 251.01 260.92 285.39 309.43 331.74 351.18A/R 326.10 352.02 346.69 355.59 388.93 421.69 452.10 478.59Inventory 393.09 371.37 372.18 430.45 470.81 510.46 547.28 579.35Prepaid Expenses and Other Current Assets 95.54 79.92 81.92 56.15 61.41 66.58 71.38 75.57Operating CA: 1031.81 1035.05 1051.80 1103.10 1206.55 1308.16 1402.51 1484.69

Accounts payable 139.54 114.23 106.39 112.29 122.82 133.16 142.77 151.13Deferred Revenue 65.78 60.44 46.29 65.50 71.65 77.68 83.28 88.16Accrued payroll & related liabilities 54.81 52.87 71.31 71.12 75.84 80.12 83.64 88.54Accrued product warranties 13.41 17.48 15.02 18.72 20.47 22.19 23.79 25.19Accrued expenses 40.93 34.02 37.09 37.43 40.94 44.39 47.59 50.38Accrued income taxes 0.20 51.02 64.14 0.00 0.00 0.00 0.00 0.00Other current liabilities 5.99 16.66 15.16 9.60 8.08 8.51 8.94 9.34

Non-Interest CL: 320.65 346.71 355.39 314.66 339.80 366.06 390.02 412.74

Net Operating Working Capital 711.16 688.33 696.41 788.44 866.75 942.10 1012.49 1071.94

NET PP&E 272.63 271.79 264.00 303.60 318.78 325.15 331.65 338.29

Intangible Assets, Net 141.30 168.46 168.13 182.65 177.23 184.50 193.64 231.69PV of Operating Leases 12.80 19.25 27.38 30.36 31.88 32.52 33.17 33.83Other Longterm Operating Assets 53.21 168.16 59.87 68.10 70.77 73.50 76.13 79.36Net other Operating Assets 207.31 355.87 255.38 281.12 279.87 290.52 302.94 344.88

Income Tax Payable 10.46 9.64 87.48 10.40 10.40 10.40 10.40 10.40

Net Operating Long-term Liabilities 10.46 9.64 87.48 10.40 10.40 10.40 10.40 10.40

Invested Capital 1180.65 1306.34 1128.30 1362.76 1455.00 1547.37 1636.69 1744.71

NOPLAT 199.36 194.37 174.97 251.90 310.00 357.66 405.54 442.16Change in IC 49.71 125.70 -178.04 234.45 92.24 92.37 89.32 108.02FCF 149.65 68.67 353.01 17.45 217.76 265.28 316.23 334.14

NOPLAT 199.36 194.37 174.97 251.90 310.00 357.66 405.54 442.16Beg. IC 1130.94 1180.65 1306.34 1128.30 1362.76 1455.00 1547.37 1636.69ROIC 17.6% 16.5% 13.4% 22.3% 22.7% 24.6% 26.2% 27.0%

Beg IC 1130.94 1180.65 1306.34 1128.30 1362.76 1455.00 1547.37 1636.69ROIC 17.63% 16.46% 13.39% 22.33% 22.75% 24.58% 26.21% 27.02%WACC 7.69% 7.69% 7.69% 7.69% 7.69% 7.69% 7.69% 7.69%EP 112.41 103.60 74.54 165.16 205.23 245.80 286.58 316.34

FLIR Systems Inc.Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity Beta 1.016Risk Free 3.03%Market Risk Premium 4.82%Cost of Equity 7.93%

Cost of DebtPre-tax 4.78%Tax Rate 21.50%After-tax Cost of Debt 3.75%

Market Value of EquityShare Price 52.16$ Shares Outstanding 138.92 Market Value of Equity 7,246.05$

Market Value of Debt STD & Current Portion LTD -$ LTD 420.68$ PV Operating Leases 27.38$ Market Value of Debt 448.07$

Market Weights% Equity 94.18%% Debt 5.82%

WACC 7.69%

FLIR Systems Inc.Discounted Cash Flow Statement (DCF) Valuation ModelsFiscal Year End 12/31

Key Inputs: CV Growth 4.00% CV ROIC 27.02% WACC 7.69% Cost of Equity 7.93%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022EFiscal Years Ending 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022DCF ModelNOPLAT 251.90 310.00 357.66 405.54 442.16Beg. Invested Capital 1,128.30 1,362.76 1,455.00 1,547.37 1,636.69 ROIC 22.3% 22.7% 24.6% 26.2% 27.0%

NOPLAT 251.90 310.00 357.66 405.54 442.16 -CapEx 234.45 92.24 92.37 89.32 108.02 FCF 17.45 217.76 265.28 316.23 334.14 CV (T=9) 10,214.79

CF to Discount 17.45 217.76 265.28 316.23 10,214.79 Periods to Discount 1.00 2.00 3.00 4.00 4.00 Discount Factor 1.08 1.16 1.25 1.34 1.34 PV of Cash Flows 16.21 187.78 212.43 235.14 7,595.62

0.00Value of Operating Assets 8247.17

+ Excess Cash 127.45+ Other Assets 59.87- Debt -420.68- PV Operating Leases -27.38- Pension Liability -59.87- ESOP -86.64

Value of Equity 7839.91Shares Outstanding 138.92

Intrinsic Value of Stock 56.43$

Intrinsic Value as of Today 57.46

Model Date 4/16/2018Next FYE 12/31/2018Last FYE 12/31/2017Days in FY 365 Days to FYE 259 Elapsed Fraction 0.290

FLIR Systems Inc.Economic Profit (EP) Valuation ModelsFiscal Year End 12/31

Key Inputs: CV Growth 4.00% CV ROIC 27.02% WACC 7.69% Cost of Equity 7.93%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022

EP ModelNOPLAT 251.90 310.00 357.66 405.54 442.16 Beginning Invested Capital 1,128.30 1,362.76 1,455.00 1,547.37 1,636.69 ROIC 0.22 0.23 0.25 0.26 0.27

EP 165.16 205.23 245.80 286.58 316.34 CV (T=9) 8,577.81

Cash Flow to Discount 165.16 205.23 245.80 286.58 8,577.81 Periods to Discount 1.00 2.00 3.00 4.00 4.00 Discount Factor 1.08 1.16 1.25 1.34 1.34 PV of Cashflows 153.37 176.97 196.82 213.10 6,378.38

Value of Economic Profit 7,118.65 + Beginning Invested Capital (T=0) 1,128.30

Value of Operating Assets 8246.95+ Excess Cash 127.45+ Other Assets 59.87- Debt -420.68- PV Operating Leases -27.38- Pension Liability -59.87- ESOP -86.64

Value of Equity 7839.69Shares Outstanding 138.92

Intrinsic Value of Stock (as of FYE, 12/31/17) 56.43$

Intrinsic Value as of Today 57.46$

Model Date 4/16/2018Next FYE 12/31/2018Last FYE 12/31/2017Days in FY 365 Days to FYE 259 Elapsed Fraction 0.290

FLIR Systems Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E

EPS 2.01$ 2.21$ 2.58$ 2.96$ 3.13$

Key Assumptions CV growth 4.00% CV ROE 18.15% Cost of Equity 7.93%

Future Cash Flows P/E Multiple (CV Year) 19.83 EPS (CV Year) 3.13 Future Stock Price 62.11$ Dividends Per Share 0.79 0.87 1.02 1.17 1.24 Future Cash Flows 0.79 0.87 1.02 1.17 62.11

Discounted Cash Flows 0.74 0.75 0.81 0.86 42.41

Intrinsic Value (as of 12/31/18) 44.83$

FLIR Systems Inc.Relative Valuation Models

EPS EPS EBITDA EBITDA EV/EBITDA EV/EBITDATicker Company Price 2018E 2019E P/E 18 P/E 19 EV (mm) 2018E 2019E 2018E 2019E

LLL L3 Technologies 208.00$ 9.58 10.89 21.71 19.10 19,019.30$ 1,343.17$ 1,466.41$ 14.16 12.97HRS Harris Corp 165.08$ 6.46 7.77 25.55 21.25 23,110.00$ 1,444.00$ 1,578.00$ 16.00 14.65

Average 23.63 20.17 Average 15.08 13.81

EPS EPS EBITDA EBITDA EV/EBITDA EV/EBITDATicker Company Price 2018E 2019E P/E 18 P/E 19 EV (mm) 2018E 2019E 2018E 2019EFLIR FLIR Systems Inc. 52.16$ 2.01 2.21 26.0 23.6 8,247.0 416.4 475.9 19.8 17.3

Implied Relative Value: P/E (EPS18) 47.48$ P/E (EPS19) 44.52$ EV/EBITDA (2018) 42.27$ EV/EBITDA (2019) 38.45$

FLIR Systems Inc.Key Management Ratios

Fix this worksheet Fiscal Years Ending 2018E Definitions 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Liquidity RatiosCurrent Ratio Current Assets/Current Liab. 2.20 3.22 3.51 3.91 3.91 3.97 2.49 4.19Quick Ratio (Cash + Other Liquid Assets)/Current Liab. 1.36 1.97 2.19 2.36 2.35 2.40 1.73 2.61Operating CF/Current Liabilities Cash Flows from Operations/Current Liab. 0.50 0.88 0.78 0.64 0.95 1.02 0.53 1.11

Activity or Asset-Management RatiosInventory Turnover COGS/Average Inventory 2.11 2.19 2.34 2.29 2.20 2.17 2.14 2.10Receivables Turnover Revenue/Avg. Accounts Receivables 4.57 4.90 5.15 5.33 5.50 5.48 5.45 5.41Total Asset Turnover Revenue/Avg. Total Assets 0.65 0.66 0.66 0.68 0.74 0.76 0.73 0.73

Financial Leverage RatiosDebt Ratio Long Term Debt/Total Equity 0.06 0.30 0.23 0.22 0.22 0.22 0.21 0.21Interest Coverage Interest Expense/Earnings Before Taxes 21.68 15.27 16.61 17.60 19.14 21.34 23.38 12.52Debt/Equity Total Debt/Total Equity 0.22 0.31 0.23 0.22 0.22 0.22 0.40 0.21Long Term Debt/Total Assets Long Term Debt/Total Assets 0.04 0.19 0.15 0.15 0.15 0.15 0.13 0.15

Profitability RatiosReturn on Assets (ROA) Net Income/Avg. Total Assets 10.15% 6.63% 3.95% 9.87% 10.68% 11.84% 11.97% 11.96%Return on Equity (ROE) Net Income/Avg. Total Equity 14.83% 10.01% 6.10% 14.60% 15.29% 16.98% 18.32% 18.15%EBIT/Revenue Earnings Before Interst and Tax/Total Revenue 19.64% 17.79% 16.11% 18.03% 19.20% 20.44% 21.63% 22.26%

Payout Policy RatiosDividend Payout Ratio Dividend Per Share/EPS 25.40% 39.56% 77.04% 39.52% 39.52% 39.52% 39.52% 39.52%Total Payout (Dividends + Repurchases/Net Income) 76.38% 79.21% 77.04% 79.14% 76.34% 71.71% 68.22% 67.17%

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 Leases2018 9.862 2016 9.265 2016 5.1482019 6.66 2017 5.660 2017 3.4642020 5.082 2018 2.805 2018 2.6142021 4.275 2019 1.539 2019 1.6112022 2.906 2020 1.135 2020 0.990Thereafter 2.097 Thereafter 0.808 Thereafter 0.419Total Minimum Payments 30.882 Total Minimum Payments 21.212 Total Minimum Payments 14.246Less: Interest 3.50 Less: Interest 1.96 Less: Interest 1.45PV of Minimum Payments 27.38 PV of Minimum Payments 19.25 PV of Minimum Payments 12.80

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.70% Pre-Tax Cost of Debt 4.70% Pre-Tax Cost of Debt 4.70%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 9.862 9.4 1 9.265 8.8 1 5.148 4.92 6.66 6.1 2 5.66 5.2 2 3.464 3.23 5.082 4.4 3 2.805 2.4 3 2.614 2.34 4.275 3.6 4 1.539 1.3 4 1.611 1.35 2.906 2.3 5 1.135 0.9 5 0.99 0.86 & beyond 2.097 1.6 6 & beyond 0.808 0.6 6 & beyond 0.419 0.3PV of Minimum Payments 27.38 PV of Minimum Payments 19.25 PV of Minimum Payments 12.80

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: 1

Current Average Strike Price: 29.66$ Cost of Equity: 7.93%Current Stock Price: $52.16

2018E 2019E 2020E 2021E 2022EIncrease in Shares Outstanding: 0.5948 0.5948 0.5948 0.5948 0.5948Average Strike Price: 29.66$ 29.66$ 29.66$ 29.66$ 29.66$ Increase in Common Stock Account: 17.64 17.64 17.64 17.64 17.64

Change in Treasury Stock 108.26 108.26 108.26 108.26 108.26 Expected Price of Repurchased Shares: 52.16 56.30 60.76 65.58 70.78 Number of Shares Repurchased: 2.08 1.92 1.78 1.65 1.53

Shares Outstanding (beginning of the year) 137.46 135.98 134.65 133.46 132.41 Plus: Shares Issued Through ESOP 0.59 0.59 0.59 0.59 0.59 Less: Shares Repurchased in Treasury 2.08 1.92 1.78 1.65 1.53 Shares Outstanding (end of the year) 135.98 134.65 133.46 132.41 131.47

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol FLIRCurrent Stock Price $52.16Risk Free Rate 3.03%Current Dividend Yield 1.52%Annualized St. Dev. of Stock Returns 38.80%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 2 3 29.66 5.40 26.97$ 87$ Total 3 29.66$ 5.40 30.59$ 87$

Share Price Share Price57.46$ 0.90 0.94 0.98 1.02 1.06 1.10 1.14 57.46$ 7.25% 7.75% 8.25% 8.75% 9.25% 9.75% 10.25%

3.7% 63.41 59.94 56.80 53.94 51.34 48.95 46.76 40.0% 63.85 62.17 60.49 58.81 57.13 55.45 53.773.8% 64.98 61.33 58.04 55.06 52.34 49.85 47.57 43.0% 63.40 61.72 60.04 58.36 56.68 55.00 53.323.9% 66.65 62.81 59.35 56.23 53.39 50.80 48.43 46.0% 62.96 61.28 59.59 57.91 56.23 54.55 52.864.0% 68.42 64.37 60.74 57.46 54.49 51.79 49.33 49.0% 62.51 60.83 59.14 57.46 55.78 54.09 52.414.1% 70.31 66.03 62.20 58.76 55.66 52.84 50.27 52.0% 62.06 60.38 58.69 57.01 55.32 53.64 51.954.2% 72.33 67.79 63.76 60.14 56.88 53.94 51.25 55.0% 61.61 59.93 58.24 56.56 54.87 53.18 51.504.3% 74.49 69.68 65.41 61.60 58.18 55.09 52.29 58.0% 61.16 59.47 57.79 56.10 54.41 52.73 51.04

Share Price Share Price57.46$ 4.48% 4.58% 4.68% 4.78% 4.88% 4.98% 5.08% 57.46$ 8.0% 17.5% 19.5% 21.5% 23.5% 25.5% 35.0%2.88% 60.23 60.15 60.06 59.98 59.89 59.81 59.72 20.0% 71.82 63.69 61.96 60.22 58.48 56.73 48.352.93% 59.37 59.28 59.20 59.12 59.03 58.95 58.87 22.0% 70.76 62.72 61.01 59.30 57.58 55.85 47.582.98% 58.52 58.44 58.36 58.28 58.20 58.12 58.04 24.0% 69.69 61.76 60.07 58.38 56.68 54.98 46.803.03% 57.70 57.62 57.54 57.46 57.38 57.30 57.22 26.0% 68.63 60.80 59.13 57.46 55.78 54.10 46.033.08% 56.90 56.82 56.74 56.66 56.59 56.51 56.43 28.0% 67.56 59.83 58.19 56.54 54.89 53.23 45.263.13% 56.11 56.04 55.96 55.89 55.81 55.74 55.66 30.0% 66.50 58.87 57.25 55.62 53.99 52.35 44.493.18% 55.35 55.28 55.20 55.13 55.06 54.98 54.91 32.0% 65.43 57.90 56.30 54.70 53.09 51.47 43.72

Shares Price Share Price57.46$ 6.97% 7.22% 7.47% 7.69% 7.97% 8.23% 8.48% 57.46$ 4.12% 4.35% 4.55% 4.82% 4.95% 5.15% 5.35%

0.0% 75.74 69.41 63.99 59.87 55.20 51.46 48.27 9% 70.30 64.91 60.88 56.04 54.04 51.11 48.455.0% 74.79 68.52 63.15 59.07 54.45 50.74 47.58 12% 70.77 65.38 61.35 56.51 54.51 51.58 48.92

10.0% 73.84 67.62 62.31 58.26 53.69 50.01 46.88 15% 71.24 65.85 61.83 56.99 54.99 52.06 49.4015.0% 72.89 66.73 61.47 57.46 52.93 49.29 46.19 18% 71.71 66.32 62.30 57.46 55.46 52.53 49.8820.0% 71.94 65.84 60.62 56.66 52.17 48.56 45.49 21% 72.17 66.79 62.77 57.93 55.93 53.01 50.3525.0% 70.99 64.95 59.78 55.86 51.41 47.84 44.80 24% 72.64 67.26 63.24 58.41 56.41 53.48 50.8330.0% 70.03 64.06 58.94 55.05 50.65 47.12 44.11 27% 73.11 67.73 63.71 58.88 56.88 53.96 51.30

Beta R&D Margin

CV NOPLAT Growth

COGS Margin (18E)

Pre-Tax Cost of Debt Effective Tax Rate

Risk Free Rate Depreciation as % of PPE

WACC Market Risk Premium

PPE Growth (18E) Total Debt (18E)