OSI Systems, Inc.
OSI SYSTEMS INC (Form: 10-Q, Received: 10/28/2009 15:28:27)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark one)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2009

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                          

 

Commission File Number 0-23125

 


 

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 


 

California

 

33-0238801

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices)

 

(310) 978-0516

(Registrant’s telephone number, including area code)

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No x

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 26, 2009, there were 17,551,524 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

OSI SYSTEMS, INC.

 

INDEX

 

 

PAGE

PART I —FINANCIAL INFORMATION

3

Item 1 — Condensed Consolidated Financial Statements

3

Condensed Consolidated Balance Sheets at June 30, 2009 and September 30, 2009

3

Condensed Consolidated Statements of Operations for the three months ended September 30, 2008 and 2009

4

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2008 and 2009

5

Notes to Condensed Consolidated Financial Statements

6

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

21

Item 4 — Controls and Procedures

22

 

 

PART II — OTHER INFORMATION

22

Item 1 — Legal Proceedings

22

Item 1A - Risk Factors

22

Item 6 — Exhibits

23

Signatures

24

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(Unaudited)

 

 

 

June 30,

 

September 30,

 

 

 

2009

 

2009

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

25,172

 

$

24,630

 

Accounts receivable

 

110,453

 

112,542

 

Other receivables

 

2,950

 

3,397

 

Inventories

 

150,763

 

141,755

 

Deferred income taxes

 

20,128

 

21,073

 

Prepaid expenses and other current assets

 

13,777

 

14,440

 

 

 

 

 

 

 

Total current assets

 

323,243

 

317,837

 

Property and equipment, net

 

42,232

 

42,116

 

Goodwill

 

60,195

 

64,932

 

Intangible assets, net

 

32,451

 

32,837

 

Other assets

 

16,707

 

17,537

 

 

 

 

 

 

 

Total assets

 

$

474,828

 

$

475,259

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Bank lines of credit

 

$

4,000

 

$

2,000

 

Current portion of long-term debt

 

8,557

 

8,497

 

Accounts payable

 

54,980

 

53,320

 

Accrued payroll and employee benefits

 

22,416

 

17,300

 

Advances from customers

 

12,863

 

17,691

 

Accrued warranties

 

10,106

 

9,507

 

Deferred revenue

 

8,880

 

8,017

 

Other accrued expenses and current liabilities

 

13,833

 

15,947

 

Total current liabilities

 

135,635

 

132,279

 

Long-term debt

 

39,803

 

33,867

 

Other long-term liabilities

 

23,390

 

29,314

 

 

 

 

 

 

 

Total liabilities

 

198,828

 

195,460

 

Commitment and contingencies (Note 7)

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Preferred stock, no par value—authorized, 10,000,000 shares; no shares issued or outstanding

 

 

 

Common stock, no par value—authorized, 100,000,000 shares; issued and outstanding, 17,411,569 at June 30, 2009 and 17,545,162 shares at September 30, 2009

 

225,297

 

228,198

 

Retained earnings

 

53,124

 

55,634

 

Accumulated other comprehensive loss

 

(2,421

)

(4,033

)

Total shareholders’ equity

 

276,000

 

279,799

 

Total liabilities and equity

 

$

474,828

 

$

475,259

 

 

See accompanying notes to condensed consolidated financial statements

 

3



Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amount data)

(Unaudited)

 

 

 

For the Three Months Ended
September 30,

 

 

 

2008

 

2009

 

Revenues

 

$

148,161

 

$

133,761

 

Cost of goods sold

 

98,526

 

89,294

 

Gross profit

 

49,635

 

44,467

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative expenses

 

37,541

 

32,280

 

Research and development

 

10,213

 

7,989

 

Restructuring and other charges

 

801

 

 

Total operating expenses

 

48,555

 

40,269

 

Income from operations

 

1,080

 

4,198

 

Interest expense, net

 

(895

)

(605

)

Income before income taxes

 

185

 

3,593

 

Provision for income taxes

 

53

 

1,083

 

Net income

 

$

132

 

$

2,510

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.01

 

$

0.14

 

Diluted

 

$

0.01

 

$

0.14

 

Shares used in per share calculation:

 

 

 

 

 

Basic

 

17,797

 

17,503

 

Diluted

 

18,166

 

17,818

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

 

 

For the Three Months Ended
September 30

 

 

 

2008

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

132

 

$

2,510

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,359

 

4,181

 

Stock based compensation expense

 

1,193

 

1,128

 

Provision for (recapture of) losses on accounts receivable

 

1,144

 

(56

)

Equity in earnings (losses) of unconsolidated affiliates

 

25

 

(33

)

Deferred income taxes

 

(294

)

(909

)

Other

 

(18

)

(6

)

Changes in operating assets and liabilities—net of business acquisitions:

 

 

 

 

 

Accounts receivable

 

14,288

 

(1,360

)

Other receivables

 

(1,497

)

(45

)

Inventories

 

(9,228

)

9,087

 

Prepaid expenses and other current assets

 

(5,528

)

(1,502

)

Accounts payable

 

(1,643

)

(1,515

)

Accrued payroll and related expenses

 

(1,054

)

(2,841

)

Advances from customers

 

14,825

 

5,234

 

Accrued warranties

 

(492

)

(522

)

Deferred revenue

 

1,337

 

(772

)

Other accrued expenses and current liabilities

 

(2,863

)

(2,069

)

Net cash provided by operating activities

 

14,686

 

10,510

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of property and equipment

 

(2,186

)

(1,513

)

Proceeds from the sale of property and equipment

 

30

 

 

Acquisition of businesses

 

 

(3,241

)

Acquisition of intangible and other assets

 

(727

)

(495

)

Net cash used in investing activities

 

(2,883

)

(5,249

)

Cash flows from financing activities:

 

 

 

 

 

Net repayments of bank lines of credit

 

(9,413

)

(1,836

)

Payments on long-term debt

 

(1,794

)

(5,917

)

Net payments of capital lease obligations

 

(263

)

(168

)

Proceeds from exercise of stock options and employee stock purchase plan

 

1,599

 

1,585

 

Net cash used in financing activities

 

(9,871

)

(6,336

)

Effect of exchange rate changes on cash

 

884

 

533

 

Net increase (decrease) in cash and cash equivalents

 

2,816

 

(542

)

Cash and cash equivalents-beginning of period

 

18,232

 

25,172

 

Cash and cash equivalents-end of period

 

$

21,048

 

$

24,630

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

1,063

 

$

639

 

Income taxes

 

$

1,139

 

$

1,805

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

 

Description of Business

 

OSI Systems, Inc., together with its subsidiaries (the “Company”), is a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications. The Company sells its products in diversified markets, including homeland security, healthcare, defense and aerospace.

 

The Company has three operating divisions: (i) Security, providing security inspection systems and related services; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and anesthesia systems, and related services; and (iii) Optoelectronics and Manufacturing, providing specialized electronic components for the Security and Healthcare divisions as well as for applications in the defense and aerospace markets, among others.

 

Through its Security division, the Company designs, manufactures and markets security and inspection systems worldwide primarily under the “Rapiscan Systems” trade name. Rapiscan Systems products are used to inspect baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband and to screen people. These products are also used for the safe, accurate and efficient verification of cargo manifests for the purpose of assessing duties and monitoring the export and import of controlled materials. Rapiscan Systems products fall into four categories: baggage and parcel inspection, cargo and vehicle inspection, hold (checked) baggage screening and people screening.

 

Through its Healthcare division, the Company designs, manufactures and markets patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems worldwide primarily under the “Spacelabs” trade name. These products are used by care providers in critical care, emergency and perioperative areas within hospitals as well as physicians offices, medical clinics and ambulatory surgery centers.

 

Through its Optoelectronics and Manufacturing division, the Company designs, manufactures and markets optoelectronic devices and provides electronics manufacturing services worldwide for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics, computed tomography (CT), telecommunications, office automation, computer peripherals and industrial automation. The Company sells optoelectronic devices primarily under the “OSI Optoelectronics” trade name and performs electronics manufacturing services primarily under the “OSI Electronics” trade name. This division provides products and services to original equipment manufacturers as well as to the Company’s own Security and Healthcare divisions. The Optoelectronics and Manufacturing division also designs toll and traffic management systems under the “OSI LaserScan” trade name and systems for measuring bone density under the “Osteometer” trade name.

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of OSI Systems, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the Securities and Exchange Commission on August 28, 2009. The results of operations for the three months ended September 30, 2009, are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 

6



Table of Contents

 

Per Share Computations

 

The Company computes basic earnings per share by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The Company computes diluted earnings per share by dividing net income available to common shareholders by the sum of the weighted average number of common and dilutive potential common shares outstanding during the period. Potential common shares consist of restricted shares and shares issuable upon the exercise of stock options or warrants under the treasury stock method. Stock options and warrants to purchase a total of 1.1 million and 1.3 million shares of common stock for the three months ended September 30, 2008 and 2009, respectively, were not included in diluted earnings per share calculations because to do so would have been antidilutive. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three months Ended
September 30

 

 

 

2008

 

2009

 

 

 

 

 

 

 

Net income for diluted earnings per share calculation

 

$

132

 

$

2,510

 

 

 

 

 

 

 

Weighted average shares for basic earnings per share calculation

 

17,797

 

17,503

 

Dilutive effect of stock options and warrants

 

369

 

315

 

Weighted average shares for diluted earnings per share calculation

 

18,166

 

17,818

 

 

 

 

 

 

 

Basic net income per share attributable to OSI Systems

 

$

0.01

 

$

0.14

 

Diluted net income per share attributable to OSI Systems

 

$

0.01

 

$

0.14

 

 

Comprehensive Income

 

Comprehensive income (loss) is computed as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

2008

 

2009

 

Net income

 

$

132

 

$

2,510

 

Foreign currency translation adjustments

 

(6,408

)

(1,577

)

Unrealized gain (loss) from derivative contracts

 

55

 

(199

)

Unrealized gain on investments available for sale

 

 

146

 

Minimum pension liability adjustment

 

199

 

18

 

Comprehensive income (loss)

 

$

(6,022

)

$

898

 

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash, marketable securities, accounts receivable, accounts payable and debt instruments. The carrying values of financial instruments, other than debt instruments, are representative of their fair values due to their short-term maturities. The carrying values of the Company’s long-term debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable or comparable to current rates offered to the Company.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company has determined that all of its marketable securities fall into the “Level 1” category, which values assets at the quoted prices in active markets for identical assets; while the Company’s derivative instruments fall into the “Level 2” category, which values assets and liabilities from observable inputs other than quoted market prices. As of September 30, 2009, the fair value of such assets was $3.4 million, while at June 30, 2009, the fair value was $2.9 million. There were no assets or liabilities for which “Level 3” valuation techniques were used and there were no assets and liabilities measured at fair value on a non-recurring basis.

 

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Included in this category are cost and equity method investments that are written down to fair value when their declines are determined to be other-than-temporary, long-lived assets that are written down to fair value when they are held for sale or determined to be impaired, goodwill and other intangible assets that are written down to fair value when they are determined to be impaired, the remeasurement of retained investments in former consolidated subsidiaries, and the remeasurement of previous equity interests upon acquisition of a controlling interest.   During the three months ended June 30, 2009, the Company did not have any non-recurring fair value adjustments.

 

7



Table of Contents

 

Derivative Instruments and Hedging Activity

 

The Company’s use of derivatives consists primarily of foreign exchange contracts and interest rate swap agreements. As of September 30, 2009, the Company had outstanding foreign currency forward contracts totaling $7.0 million. In addition, to reduce the unpredictability of cash flows from interest payments related to variable, LIBOR-based debt, the Company has outstanding a three-year interest rate swap agreement, under which the Company incurs interest expense based upon a fixed 1.69% rate index for a portion of its term loan. The interest rate swap matures in March 2012. Each of these derivative contracts is considered an effective cash flow hedge in its entirety. As a result, the net gains or losses on such derivative contracts have been reported as a component of other comprehensive income in the Consolidated Financial Statements and are reclassified as net earnings when the hedged transactions settle.

 

Business Combinations

 

On July 28, 2009, the Company completed the acquisition of certain assets and the assumption of certain liabilities of RAD Electronics, Inc. The acquired operations design and manufacture cable assemblies and printed circuit boards for original equipment manufacturers in the commercial electronics industry. The Company acquired accounts receivable, inventory, and fixed assets, as well as all of the patents, intellectual property and intangible assets used in the acquired operations, all in exchange for (i) a $3.2 million cash payment due at the closing of the transaction and (ii) additional consideration that may become payable over the next four years depending on the performance of the acquired operations.  Under recently implemented guidelines for business combinations, the fair value of this contingent consideration was estimated to be $5.8 million and was recognized at the time of the acquisition as an other long-term liability in the condensed consolidated financial statements.  Such liability shall be assessed and adjusted, if necessary, throughout the contingency period with changes in fair value being recognized in the consolidated statement of operations. The acquisition of RAD Electronics, Inc. was not considered material to the balance sheet as of September 30, 2009 and consolidated statement of operations for the three months ended September 30, 2009.

 

Recent Accounting Updates Not Yet Adopted

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update amending revenue recognition requirements for multiple-deliverable revenue arrangements.  This update provides guidance on separating the deliverables and on the method to measure and allocate arrangement consideration, particularly when the arrangement includes both products and services provided to the customers.  The update is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption is permitted.  The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.

 

2. Balance Sheet Details

 

The following tables provide details of selected balance sheet accounts (in thousands):

 

 

 

June 30,
2009

 

September 30,
2009

 

Accounts receivable

 

 

 

 

 

Trade receivables

 

$

116,140

 

$

117,269

 

Receivables related to long term contracts—unbilled costs and accrued profit on progress completed

 

1,209

 

2,093

 

Total

 

$

117,349

 

$

119,362

 

Less: allowance for doubtful accounts

 

(6,896

)

(6,820

)

Accounts receivable, net

 

$

110,453

 

$

112,542

 

 

The Company expects to bill and collect the receivables for unbilled costs and accrued profits at September 30, 2009, during the next twelve months.

 

8



Table of Contents

 

 

 

June 30,
2009

 

September 30,
2009

 

Inventories, net

 

 

 

 

 

Raw materials

 

$

77,488

 

$

71,350

 

Work-in-process

 

24,648

 

23,977

 

Finished goods

 

48,627

 

46,428

 

Total

 

$

150,763

 

$

141,755

 

 

 

 

June 30,
2009

 

September 30,
2009

 

Property and equipment, net

 

 

 

 

 

Land

 

$

5,426

 

$

5,289

 

Buildings

 

8,927

 

8,800

 

Leasehold improvements

 

12,628

 

12,924

 

Equipment and tooling

 

48,659

 

49,739

 

Furniture and fixtures

 

4,802

 

4,889

 

Computer equipment

 

16,773

 

16,532

 

Computer software

 

11,032

 

12,329

 

Total

 

108,247

 

110,502

 

Less: accumulated depreciation and amortization

 

(66,015

)

(68,386

)

Property and equipment, net

 

$

42,232

 

$

42,116

 

 

3. Goodwill and Intangible Assets

 

The goodwill acquired during the period related to the acquisition of RAD Electronics, Inc.. The changes in the carrying value of goodwill for the three month period ended September 30, 2009, are as follows (in thousands):

 

 

 

Security
Group

 

Healthcare
Group

 

Optoelectronics
and
Manufacturing
Group

 

Consolidated

 

Balance as of June 30, 2009

 

$

17,112

 

$

35,736

 

$

7,347

 

$

60,195

 

Goodwill acquired during the period

 

 

 

4,677

 

4,677

 

Foreign currency translation adjustment

 

178

 

(130

)

12

 

60

 

Balance as of September 30, 2009

 

$

17,290

 

$

35,606

 

$

12,036

 

$

64,932

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

June 30, 2009  

 

September 30, 2009  

 

 

 

Weighted

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Average

 

Carrying

 

Accumulated

 

Intangibles

 

Carrying

 

Accumulated

 

Intangibles

 

 

 

Lives

 

Value  

 

Amortization

 

Net  

 

Value

 

Amortization

 

Net

 

Amortizable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software development costs

 

5 years

 

$

9,754

 

$

3,198

 

$

6,556

 

$

10,095

 

$

3,379

 

$

6,716

 

Patents

 

9 years

 

921

 

334

 

587

 

1,063

 

346

 

717

 

Core technology

 

10 years

 

2,224

 

977

 

1,247

 

2,147

 

997

 

1,150

 

Developed technology

 

13 years

 

17,360

 

7,169

 

10,191

 

17,315

 

7,607

 

9,708

 

Customer relationships/ backlog

 

7 years

 

9,456

 

4,876

 

4,580

 

10,393

 

5,170

 

5,223

 

Total amortizable assets

 

 

 

39,715

 

16,554

 

23,161

 

41,013

 

17,499

 

23,514

 

 

9



Table of Contents

 

 

 

 

 

June 30, 2009  

 

September 30, 2009  

 

 

 

Weighted

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Average

 

Carrying

 

Accumulated

 

Intangibles

 

Carrying

 

Accumulated

 

Intangibles

 

 

 

Lives

 

Value  

 

Amortization

 

Net  

 

Value

 

Amortization

 

Net

 

Non-amortizable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

 

9,290

 

 

9,290

 

9,323

 

 

9,323

 

Total intangible assets

 

 

 

$

49,005

 

$

16,554

 

$

32,451

 

$

50,336

 

$

17,499

 

$

32,837

 

 

Amortization expense related to intangibles assets was $1.0 million for each of the three months ended September 30, 2008 and 2009. At September 30, 2009, the estimated future amortization expense was as follows (in thousands):

 

2010 (remaining 9 months)

 

$

3,089

 

2011

 

4,096

 

2012

 

4,055

 

2013

 

3,772

 

2014

 

2,542

 

2015

 

581

 

2016 and thereafter

 

5,379

 

Total

 

$

23,514

 

 

4. Borrowings

 

The Company maintains a credit agreement with certain lenders allowing for initial borrowings of up to $124.5 million. The credit agreement consists of a $74.5 million, five-year, revolving credit facility (including a $45 million sub-limit for letters-of-credit) and a $50 million five-year term loan. Borrowings under the agreement bear interest at either (i) the London Interbank Offered Rate (LIBOR) plus between 2.00% and 2.50% or (ii) the bank’s prime rate plus between 1.00% and 1.50%. The rates are determined based on the Company’s consolidated leverage ratio. As of September 30, 2009, the weighted-average interest rate under the credit agreement was 3.1%. The Company’s borrowings under the credit agreement are guaranteed by the Company’s domestic subsidiaries and are secured by substantially all of the Company’s and its subsidiary guarantors’ assets. The agreement contains various representations, warranties, affirmative, negative and financial covenants, and conditions of default customary for financing agreements of this type, including restrictions on the Company’s ability to pay cash dividends. As of September 30, 2009, $37.4 million was outstanding under the term loan, $2.0 million was outstanding under the revolving credit facility, and $29.1 million was outstanding under the letter-of-credit facility.

 

Several of the Company’s foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies, to meet short-term working capital requirements and for the issuance of letters-of-credit. As of September 30, 2009, $18.8 million was outstanding under these letter-of-credit facilities, while no debt was outstanding. As of September 30, 2009, the total amount available under these credit facilities was $26.1 million, with a total cash borrowing sub-limit of $6.0 million.

 

In fiscal 2005, the Company entered into a bank loan of $5.3 million to fund the acquisition of land and buildings in the U.K. The loan is payable over a 20-year period. The loan bears interest at British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of September 30, 2009, $3.4 million remained outstanding under this loan at an interest rate of 1.7% per annum.

 

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

 

 

 

June 30,
2009

 

September 30,
2009

 

Five-year term loan due in fiscal 2013

 

$

42,763

 

$

37,431

 

Twenty-year term loan due in fiscal 2024

 

3,533

 

3,356

 

Capital leases

 

1,354

 

1,187

 

Other

 

710

 

390

 

 

 

48,360

 

42,364

 

Less current portion of long-term debt

 

8,557

 

8,497

 

 

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June 30,
2009

 

September 30,
2009

 

Long-term portion of debt

 

$

39,803

 

$

33,867

 

 

5. Stock-based Compensation

 

As of September 30, 2009, the Company maintained an equity participation plan and an employee stock purchase plan.

 

The Company recorded stock-based-compensation expense in the condensed consolidated statement of operations as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

2008

 

2009

 

Cost of goods sold

 

$

60

 

$

72

 

Selling, general and administrative

 

1,065

 

1,002

 

Research and development

 

68

 

54

 

 

 

$

1,193

 

$

1,128

 

 

As of September 30, 2009, total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted was approximately $8.7 million. The Company expects to recognize these costs over a weighted-average period of 2.7 years.

 

6. Retirement Benefit Plans

 

The Company sponsors a number of qualified and nonqualified defined benefit pension plans for its employees. The benefits under these plans are based on years of service and an employee’s highest twelve months’ compensation during the last five years of employment. The components of net periodic pension expense are as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

2008

 

2009

 

Service cost

 

$

316

 

$

82

 

Interest cost

 

79

 

10

 

Expected return on plan assets

 

(28

)

 

Amortization of net loss

 

26

 

27

 

Net periodic pension expense

 

$

393

 

$

119

 

 

For the three months ended September 30, 2008 and 2009, the Company made contributions of $0.4 million and $0.1 million, respectively, to these defined benefit plans.

 

In addition, the Company sponsors several defined contribution benefit plans. For the three months ended September 30, 2008 and 2009, the Company made contributions of $0.7 million and $0.8 million, respectively, to these defined contribution plans.

 

7. Commitments and Contingencies

 

Legal Proceedings

 

In November 2002, L-3 Communications Corporation (L-3) brought suit against the Company seeking a declaratory judgment that L-3 had not breached its obligations to us concerning the acquisition of PerkinElmer’s Security Detection Systems Business. The Company asserted counterclaims for, among other things, fraud and breach of fiduciary duty. In December 2006, judgment was entered in the Company’s favor. However, on appeal the judgment was reversed in part and vacated in part. The Court of Appeals has remanded the case to the trial court, where it is currently pending for retrial. In conjunction with this vacated judgment, L-3 asserted that it is entitled to reimbursement by the Company of certain costs related to the original judgment. On April 27, 2009, L-3’s assertion was upheld by the court requiring the Company to reimburse L-3 for such costs of approximately $2 million, which was accrued in restructuring and other

 

11



Table of Contents

 

charges during the third quarter of fiscal 2009.  Such amount has not been paid and remains in other long-term liabilities in the condensed consolidated financial statements .

 

The Company is also involved in various other claims and legal proceedings arising out of the ordinary course of business. In the Company’s opinion after consultation with legal counsel, the ultimate disposition of such proceedings is not likely to have a material adverse effect on its financial position, future results of operations, or cash flows.  The Company has not accrued for loss contingencies relating to such matters because the Company believes that, although unfavorable outcomes in the proceedings may be possible, they are not considered by management to be probable or reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, the impact on the Company’s results of operations, financial position and/or liquidity could be material.

 

Contingent Acquisition Obligations

 

Under the terms and conditions of the purchase agreements associated with the following acquisitions, the Company may be obligated to make additional payments.

 

In fiscal 2003, the Company purchased a minority equity interest in CXR Limited. In June 2004, the Company increased its equity interest to approximately 75% and in December 2004, the Company acquired the remaining 25%. As compensation to the selling shareholders for this remaining interest, the Company agreed to make certain royalty payments during the 18 years following the acquisition of this remaining interest. Royalty payments are based on the license of, or sales of products containing, technology owned by CXR Limited. As of September 30, 2009, no royalty payments had been earned.

 

In fiscal 2004, the Company acquired Advanced Research & Applications Corp. During the seven years following the acquisition, contingent consideration is payable based on net revenues of products developed prior to the acquisition, provided certain requirements are met. The contingent consideration is capped at $30.0 million. As of September 30, 2009, no contingent consideration had been earned.

 

In fiscal 2006, the Company acquired InnerStep, B.S.E., Inc. During the seven years following the acquisition, contingent consideration is payable based on its profits before interest and taxes, provided certain requirements are met. The contingent consideration is capped at $6.0 million. As of September 30, 2009, no contingent consideration had been earned.

 

In fiscal 2009, the Company acquired a company that offers services in connection with security inspection products. Contingent consideration is payable based on net receipts generated from new business during the three years following the acquisition, provided certain requirements are met. The contingent consideration is capped at $10.0 million. As of September 30, 2009, no contingent consideration had been earned.

 

During the first quarter of fiscal 2010, the Company acquired RAD Electronics, Inc.  During the four years following the acquisition, contingent consideration is payable based on the performance of its operations.  The contingent obligation is capped at $14.4 million.  The fair market value of contingent consideration estimated to be paid is recorded as a liability at the time of the acquisition.  As a result, the Company recorded $5.8 million as other long-term liabilities in the condensed consolidated financial statements as of September 30, 2009.

 

Environmental Contingencies

 

The Company is subject to various environmental laws. The Company’s practice is to ensure that Phase I environmental site assessments are conducted for each of its properties in the United States at which the Company manufactures products in order to identify, as of the date of such report, potential areas of environmental concern related to past and present activities or from nearby operations. In certain cases, the Company has conducted further environmental assessments consisting of soil and groundwater testing and other investigations deemed appropriate by independent environmental consultants.

 

During one investigation, the Company discovered soil and groundwater contamination at its Hawthorne, California facility. The Company filed the requisite reports concerning this problem with the appropriate environmental authorities in fiscal 2001. The Company has not yet received any response to such reports, and no agency action or litigation is presently pending or threatened. The Company’s site was previously used by other companies for semiconductor manufacturing similar to that presently conducted on the site by us, and it is not presently known who is responsible for the contamination or, if required, the remediation. The groundwater contamination is a known regional problem, not limited to the Company’s premises or its immediate surroundings.

 

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Table of Contents

 

The Company has also been informed of soil and groundwater evaluation efforts at a facility that its Ferson Technologies subsidiary previously leased in Ocean Springs, Mississippi. Ferson Technologies occupied the facility until October 2003. The Company believes that the owner and previous occupants of the facility have primary responsibility for any remediation that may be required and have an agreement with the facility’s owner under which the owner is responsible for remediation of pre-existing conditions. However, as site evaluation efforts are still in progress, and may be for some time, the Company is unable at this time to ascertain whether Ferson Technologies bears any exposure for remediation costs under applicable environmental regulations.

 

The Company has not accrued for loss contingencies relating to the above environmental matters because it believes that, although unfavorable outcomes may be possible, they are not considered by the Company’s management to be probable and reasonably estimable.

 

If one or more of these matters are resolved in a manner adverse to the Company, the impact on the Company’s results of operations, financial position and/or liquidity could be material.

 

Product Warranties

 

The Company offers its customers warranties on many of the products that it sells. These warranties typically provide for repairs and maintenance of products if problems arise during a specified time period after original shipment. Concurrent with the sale of products, the Company records a provision for estimated warranty expenses with a corresponding increase in cost of goods sold. The Company periodically adjusts this provision based on historical and anticipated experience. The Company charges actual expenses of repairs under warranty, including parts and labor, to this provision when incurred.

 

The following table presents changes in warranty provisions (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

2008

 

2009

 

Balance at beginning of period

 

$

11,597

 

$

10,106

 

Additions

 

1,016

 

271

 

Reductions for warranty repair costs and adjustments

 

(1,908

)

(870

)

Balance at end of period

 

$

10,705

 

$

9,507

 

 

8. Income Taxes

 

The provision for income taxes is determined using an effective tax rate that is subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which the Company operates, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, utilization of R&D tax credits and changes in or the interpretation of tax laws in jurisdictions where the Company conducts business. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers. The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, the provision for income taxes will be adjusted in the period such determination is made.

 

9. Segment Information

 

The Company operates in three identifiable industry segments: (i) Security, providing security and inspection systems; (ii) Healthcare, providing patient monitoring, diagnostic cardiology and anesthesia systems; and (iii) Optoelectronics and Manufacturing, providing specialized electronic components for affiliated end-products divisions, as well as for applications in the defense and aerospace markets, among others. The Company also has a Corporate segment that includes executive compensation and certain other general and administrative expenses. Interest expense, and certain expenses related to legal, audit and other professional service fees, are not allocated to industry segments. Both the Security and Healthcare divisions comprise primarily end-product businesses whereas the Optoelectronics and Manufacturing division comprises businesses that primarily supply components and subsystems to original equipment manufacturers, including to the businesses of the Security and Healthcare divisions. All intersegment sales are eliminated in consolidation.

 

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Table of Contents

 

The following table presents segment information (in thousands):

 

 

 

Three months ended
September 30,

 

 

 

2008

 

2009

 

Revenues — by Segment:

 

 

 

 

 

Security division

 

$

58,685

 

$

47,335

 

Healthcare division

 

54,827

 

46,962

 

Optoelectronics and Manufacturing division, including intersegment revenues

 

44,882

 

45,791

 

Intersegment revenues elimination

 

(10,233

)

(6,327

)

Total

 

$

148,161

 

$

133,761

 

Revenues — by Geography:

 

 

 

 

 

North America

 

$

106,190

 

$

96,075

 

Europe

 

35,090

 

30,535

 

Asia

 

17,114

 

13,478

 

Intersegment revenues elimination

 

(10,233

)

(6,327

)

Total

 

$

148,161

 

$

133,761

 

 

 

 

Three months ended
September 30,

 

 

 

2008

 

2009

 

Operating income (loss) — by Segment:

 

 

 

 

 

Security division

 

$

3,048

 

$

1,969

 

Healthcare division

 

(1,824

)

1,495

 

Optoelectronics and Manufacturing division

 

3,863

 

3,461

 

Corporate

 

(4,185

)

(3,280

)

Eliminations (1)

 

178

 

553

 

Total

 

$

1,080

 

$

4,198

 

 

 

 

June 30,
2009

 

September 30,
2009

 

Assets — by Segment:

 

 

 

 

 

Security division

 

$

191,164

 

$

193,184

 

Healthcare division

 

155,366

 

143,700

 

Optoelectronics and Manufacturing division

 

84,434

 

93,780

 

Corporate

 

47,633

 

47,810

 

Eliminations (1)

 

(3,769

)

(3,215

)

Total

 

$

474,828

 

$

475,259

 

 


(1)

Eliminations within operating income primarily reflect the change in the elimination of intercompany profit in inventory not-yet-realized; while the eliminations in assets reflect the amount of intercompany profits in inventory as of the balance sheet date. Such intercompany profit will be realized when inventory is shipped to the external customers of the Security and Healthcare divisions.

 

10. Subsequent Event

 

Subsequent events have been evaluated through October 27, 2009, the date the financial statements were issued. There were no items that would have a material impact to the financial statements presented in this Form 10-Q.

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement

 

Certain statements contained in this quarterly report on Form 10-Q that are not related to historical results, including, without limitation, statements regarding our business strategy, objectives and future financial position, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and involve risks and uncertainties. These forward-looking statements may be identified by the use of forward-looking terms such as “anticipate,” “believe,” “expect,” “may,” “could,” “likely to,” “should,” or “will,” or by discussions of strategy that involve predictions which are based upon a number of future conditions that ultimately may prove to be inaccurate. Statements in this quarterly report on Form 10-Q that are forward-looking are based on current expectations and actual results may differ materially. Forward-looking statements involve numerous risks and uncertainties described in this quarterly report on Form 10-Q, our Annual Report on Form 10-K and other documents previously filed or hereafter filed by us from time to time with the Securities and Exchange Commission. Such factors, of course, do not include all factors that might affect our business and financial condition. Although we believe that the assumptions upon which our forward-looking statements are based are reasonable, such assumptions could prove to be inaccurate and actual results could differ materially from those expressed in or implied by the forward-looking statements. All forward-looking statements contained in this quarterly report on Form 10-Q are qualified in their entirety by this statement. We undertake no obligation other than as may be required under securities laws to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies are detailed in our Annual Report on Form 10-K for the year ended June 30, 2009.

 

Recent Accounting Pronouncements

 

We describe recent accounting pronouncements in Item 1 — “Condensed Consolidated Financial Statements — Notes to Condensed Consolidated Financial Statements.”

 

Executive Summary

 

We are a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications. We sell our products and provide related services in diversified markets, including homeland security, healthcare, defense and aerospace. We have three operating divisions: (i) Security; (ii) Healthcare; and (iii) Optoelectronics and Manufacturing.

 

Security Division. Through our Security division, we design, manufacture, market and service security and inspection systems worldwide for sale primarily to federal, state and local and foreign government agencies. These products are used to inspect baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband as well as to screen people. Revenues from our Security division accounted for 35% and 40% of our total consolidated revenues for the three months ended September 30, 2009 and 2008, respectively.

 

Following the September 11, 2001 terrorist attacks, worldwide spending for the development and acquisition of security and inspection systems increased in response to the attacks and has continued at high levels. This spending has had a favorable impact on our business. However, future levels of such spending could decrease as a result of changing budgetary priorities or could shift to products that we do not provide. Additionally, competition for contracts with government agencies has become more intense in recent years as new competitors and technologies have entered this market.

 

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems for sale primarily to hospitals and medical centers. Our products monitor patients in critical, emergency and perioperative care areas of the hospital and provide such information, through wired and wireless networks, to physicians and nurses who may be at the patient’s bedside, in another area of the hospital or even outside the hospital. Revenues from our Healthcare division accounted for 35% and 37% of our total consolidated revenues for the three months ended September 30, 2009 and 2008, respectively.

 

The healthcare markets in which we operate are highly competitive. We believe that our customers choose among competing products on the basis of product performance, functionality, value and service. We also believe that the worldwide economic slowdown has caused some hospitals and healthcare providers to delay purchases of our products and services.  During this period of uncertainty, we anticipate lower sales of patient monitoring, diagnostic cardiology and anesthesia systems products than we have historically experienced, resulting in a negative impact on our sales. We cannot predict when the markets will recover and therefore when this period of delayed and diminished purchasing will end. A prolonged delay could have a material adverse effect on our business, financial condition and results of operations.

 

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Table of Contents

 

Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and value-added manufacturing services worldwide for use in a broad range of applications, including aerospace and defense electronics, security and inspection systems, medical imaging and diagnostics, computed tomography (CT), fiber optics, telecommunications, gaming, office automation, computer peripherals and industrial automation. We also provide our optoelectronic devices and value-added manufacturing services to our own Security and Healthcare divisions. Revenues from our Optoelectronics and Manufacturing division accounted for 30% and 23% of our total consolidated revenues for the three months ended September 30, 2009 and 2008, respectively.

 

For the three months ended September 30, 2009, we reported an operating profit of $4.2 million, as compared to $1.1 million for the comparable prior year period. We realized this $3.1 million year over year increase in operating profit despite a 10% decrease in total revenue during the same periods.  This improved profitability was driven primarily by a $7.5 million reduction in SG&A and R&D as a result of reducing our fixed cost structure by aggressive cost-cutting activities in fiscal 2009.  This effort was initiated when it became apparent to us that the worldwide economic slowdown was going to negatively impact our businesses, and in particular our Healthcare division.  In addition, in the first quarter of fiscal 2009, we recognized $0.8 million of non-recurring restructuring charges.  Overall, these cost savings more than offset the $5.2 million reduction in year-over-year gross profit as a result of the lower revenues in our Security and Healthcare divisions.

 

Results of Operations for the Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008 (amounts in millions)

 

Net Revenues

 

The table below and the discussion that follows are based upon the way in which we analyze our business. See Note 9 to the condensed consolidated financial statements for additional information about our business segments.

 

(in millions)

 

Q1
2009

 

% of
Net Sales

 

Q1
2010

 

% of
Net Sales

 

$ Change

 

% Change

 

Security division

 

$

58.7

 

40

%

$

47.3

 

35

%

$

(11.4

)

(19

)%

Healthcare division

 

54.8

 

37

%

47.0

 

35

%

(7.8

)

(14

)%

Optoelectronics and Manufacturing division

 

44.9

 

30

%

45.8

 

34

%

0.9

 

2

%

Intersegment revenues

 

(10.2

)

(7

)%

(6.3

)

(4

)%

3.9

 

38

%

Total revenues

 

$

148.2

 

 

 

$

133.8

 

 

 

$

(14.4

)

(10

)%

 

Net revenues for the three months ended September 30, 2009, decreased $14.4 million, or 10%, to $133.8 million from $148.2 million for the comparable prior year period.

 

Revenues for the Security division for the three months ended September 30, 2009, decreased $11.4 million, or 19%, to $47.3 million, from $58.7 million for the comparable prior year period. The decrease was attributable to: (i) a $3.8 million decrease in sales of baggage and parcel inspection, people screening and hold baggage screening equipment; (ii) a $7.0 million decrease in sales of cargo and vehicle inspection systems primarily in North America; and (iii) a $0.6 million decrease in service revenue.

 

Revenues for the Healthcare division for the three months ended September 30, 2009, decreased $7.8 million, or 14%, to $47.0 million, from $54.8 million for the comparable prior year period. The decrease was primarily attributable to: (i) a $3.7 million decrease in patient monitoring revenues; (ii) a $0.9 million decreased in our anesthesia revenues primarily in sales to other manufacturers; and (iii) a $3.2 million decrease in the revenues of other product lines such as ambulatory blood pressure monitors, pulse oximeters and clinical trials services. Such decreases were mainly a consequence of the worldwide economic slowdown that began during fiscal 2009 and continued into the three months ended September 2009, and the inability of some of our customers, who rely on the credit or equity markets for access to capital, to fund purchases of our products and services.

 

Revenues for the Optoelectronics and Manufacturing division for the three months ended September 30, 2009, increased $0.9 million, or 2%, to $45.8 million, from $44.9 million for the comparable prior year period. This growth was primarily the result of an increase in contract manufacturing sales of $5.6 million including new orders under an existing defense-industry related contract as well as new customer contracts, and was partially offset by decreases in commercial optoelectronics sales of $4.7 million.  The decreases in commercial optoelectronics sales were also driven by unfavorable economic conditions.  In addition, for the three months ended

 

16



Table of Contents

 

September 2009, the division recorded intercompany revenue of $ 6.3 million, compared to $10.2 million for the comparable prior year period.  This decrease resulted from lower sales by our Optoelectronics and Manufacturing division to both our Healthcare and Security divisions.  These fluctuations in intercompany sales are directionally consistent with the underlying businesses of our Security and Healthcare divisions. Intercompany sales by our Optoelectronics and Manufacturing division to our Security and Healthcare divisions are eliminated in consolidation.

 

Gross Profit

 

(in millions)

 

Q1
2009

 

% of Net
Sales

 

Q1
2010

 

% of Net
Sales

 

Gross profit

 

$

49.7

 

33.5

%

$

44.5

 

33.3

%

 

Gross profit decreased $5.2 million, or 10%, to $44.5 million for the three months ended September 30, 2009, from $49.7 million for the comparable prior year period, primarily as a result of the decreased revenues discussed above. Although the gross profit margin was nearly the same in the three months ended September 2009 as compared to the prior year, the gross profit margin was negatively impacted by changes in the mix of product sold, most notably the 14% decrease in revenues in our Healthcare division (products sold by our Healthcare division generally carry higher gross margins than products sold by our other divisions) and the increase in contract manufacturing sales by our Optoelectronics and Manufacturing division (contract manufacturing sales generally carry lower gross margins than other products sold by this or other divisions).  These negative factors were offset by manufacturing efficiencies gained through facility consolidations and cost-cutting activities undertaken over the past several quarters.

 

Operating Expenses

 

(in millions)

 

Q1
2009

 

% of Net
Sales

 

Q1
2010

 

% of Net
Sales

 

$ Change

 

%
Change

 

Selling, general and administrative

 

$

37.6

 

25.4

%

$

32.3

 

24.1

%

$

(5.3

)

(14

)%

Research and development

 

10.2

 

6.9

%

8.0

 

6.0

%

(2.2

)

(22

)%

Restructuring, and other charges

 

0.8

 

0.5

%

 

%

(0.8

)

%

Total operating expenses

 

$

48.6

 

32.8

%

$

40.3

 

30.1

%

$

(8.3

)

(17

)%

 

Selling, general and administrative expenses . Selling, general and administrative (SG&A) expenses consist primarily of compensation paid to sales, marketing and administrative personnel, professional service fees and marketing expenses. For the three months ended September 30, 2009, SG&A expenses decreased by $5.3 million, or 14%, to $32.3 million, from $37.6 million for the comparable prior year period. This reduction in spending was a direct result of our ongoing cost containment initiatives and restructuring activities we have implemented company-wide, but which were most heavily focused in our Healthcare division. In addition, we continued to reduce spending in our Corporate segment by further reducing outside support related expenses.  Due to our ongoing cost containment and restructuring activities as well as focus on reducing support spending, our SG&A as a percentage of sales decreased to 24.1% in the three months ended September 2009, as compared to 25.4% in the three months ended September 2008.

 

Research and development . Research and development (R&D) expenses include research related to new product development and product enhancement expenditures. For the three months ended September 30, 2009, such expenses decreased $2.2 million, or 22%, to $8.0 million, from $10.2 million for the comparable prior year period. As a percentage of revenues, research and development expenses were 6.0% for the three months ended September 30, 2009, compared to 6.9% for the comparable prior year period. The decrease in research and development expenses for the three month period ended September 30, 2009 was primarily attributable to cost reduction efforts in our Healthcare division and R&D grant programs in our Security division.

 

Restructuring, and other charges . In response to the challenging economy, we initiated an aggressive cost-cutting plan in the first quarter of fiscal 2009 to reduce our fixed cost structure.  In conjunction with these efforts, we incurred restructuring charges of $0.5 million in our Healthcare division and $0.3 million in our Corporate segment for facility closure and employee severance during the first quarter of fiscal 2009.

 

Other Income and Expenses

 

(in millions)

 

Q1
2009

 

% of Net
Sales

 

Q1
2010

 

% of Net
Sales

 

$ Change

 

%
Change

 

Interest expense

 

$

1.0

 

0.7

%

$

0.7

 

0.5

%

$

(0.3

)

(30

)%

Interest income

 

(0.1

)

(0.1

)%

(0.1

)

(0.1

)%

 

 

Total other income and expense

 

$

0.9

 

0.6

%

$

0.6

 

0.4

%

$

(0.3

)

(33

)%

 

17



Table of Contents

 

Interest expense .  For the three months ended September 30, 2009, we incurred interest expense of $0.7 million, compared to $1.0 million for the comparable prior year period. This 30% decrease in interest expense was due to both lower, market-driven interest rates and the lower levels of borrowing as a result of the generation of significant positive cash flow from our operations.

 

Income taxes .  For the three months ended September 30, 2009, our income tax provision was $1.1 million, compared to $0.1 million for the comparable prior year period. Our effective tax rate for the three months ended September 30, 2009 was 30.2%, compared to 34.5% in the comparable prior year period. Our provision for income taxes is dependent on the mix of income from U.S. and foreign locations due to tax rate differences among countries as well as due to the impact of permanent taxable differences.

 

Liquidity and Capital Resources

 

We have financed our operations primarily through cash flow from operations, proceeds from equity issuances and our credit facilities. Cash and cash equivalents totaled $24.6 million at September 30, 2009, a decrease of $0.6 million from $25.2 million at June 30, 2009. The changes in our working capital and cash and cash equivalent balances during the three months ended September 30, 2009 are described below.

 

 

 

June 30, 2009

 

September 30, 2009

 

% Change

 

Working capital

 

$

187.6

 

$

185.6

 

(1

)%

Cash and cash equivalents

 

25.2

 

24.6

 

(2

)%

 

Working Capital . The decrease in working capital is primarily due to decreases in inventory of $9.0 million, as a result of inventory reduction initiatives in all three divisions and timing of product shipments in our Optoelectronic and Manufacturing division, and increases in advances from customers of $4.8 million in our Security division.  These decreases were partially offset by (i) a corresponding decrease in our bank lines of credit of $1.8 million; (ii) a decrease in accrued payroll and employee benefits of $5.1 million; (iii) a $1.7 million decrease in accounts payable; and (iv) a $2.1 million increase in accounts receivable partially driven by revenue growth in Contract manufacturing in our Optoelectronics and Manufacturing division.

 

 

 

Q1
2009

 

Q1
2010

 

% Change

 

Cash provided by operating activities

 

$

14.7

 

$

10.5

 

(29

)%

Cash used in investing activities

 

(2.9

)

(5.2

)

(79

)%

Cash used by financing activities

 

(9.9

)

(6.3

)

36

%

 

Cash Used in Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period, as net income, tax timing differences, and other items can significantly impact cash flows. Net cash provided by operations for the three months ended September 30, 2009 was $10.5 million, a $4.2 million reduction as compared to the $14.7 million generated in the comparable prior year period. The reduction was primarily due to the changes in working capital management in the current-year period versus the prior year period resulting in: (i) a $15.6 million decrease in cash from accounts receivable, primarily driven by the significant improvement we realized in the prior fiscal year in days-sales-outstanding; (ii)  a $9.6 million decrease in cash received as advances from customers; and (iii) a $2.1 million decrease in the change in deferred revenues.  These unfavorable changes in cash flow were partially offset by: (i) an $18.3 million reduction in the change in inventory; (ii) a $4.0 million reduction in the change in prepaid expenses and other current assets; and (iii) an increase in our net income of $0.3 million after giving consideration to various adjustments to net income for non-operating cash items, including depreciation and amortization, stock-based compensation, deferred taxes and provision for losses on accounts receivable, among others, for both periods.

 

Cash Used in Investing Activities. Net cash used in investing activities was $5.2 million for the three months ended September 30, 2009; an increase of $2.3 million as compared to $2.9 million used for the three months ended September 30, 2008. In the three months ended September 30, 2009, we used cash to acquire RAD Electronics, Inc for $3.2 million as compared to no acquisitions in the comparable prior year period.  During the three months ended September 30, 2009, we also invested $1.5 million in capital expenditures, compared to $2.2 million in capital expenditures during the comparable prior year period.

 

Cash Provided by Financing Activities. Net cash used in financing activities was $6.3 million for the three months ended September 30, 2009, compared to net cash used in financing activities of $9.9 million for the three months ended September 30, 2008. During the three

 

18



Table of Contents

 

months ended September 30, 2009, we paid down our revolving lines of credit by $1.8 million and we also paid down our ongoing scheduled debt and capital leases by an additional $6.1 million. In the prior year period, we paid down our revolving lines of credit by $9.4 million and we also paid down our ongoing scheduled debt and capital leases by an additional $2.1 million.   In addition, we received cash of $1.6 million in proceeds from the exercise of stock options, and purchase of stock under our employee stock purchase plan in both the three months ended September 30, 2009 and the comparable prior year period.

 

Borrowings

 

Outstanding lines of credit and current and long-term debt totaled $44.4 million at September 30, 2009, a decrease of $8.0 million from $52.4 million at June 30, 2009.

 

We maintain a credit agreement with certain lenders allowing for initial borrowings of up to $124.5 million. The credit agreement consists of a $74.5 million, five-year, revolving credit facility (including a $45 million sub-limit for letters-of-credit) and a $50 million five-year term loan. Borrowings under the agreement bear interest at either (i) the London Interbank Offered Rate (LIBOR) plus between 2.00% and 2.50% or (ii) the bank’s prime rate plus between 1.00% and 1.50%. The rates are determined based on our consolidated leverage ratio. As of September 30, 2009, the weighted-average interest rate under the credit agreement was 3.1%. Our borrowings under the credit agreement are guaranteed by our domestic subsidiaries and are secured by substantially all of our and our subsidiary guarantors’ assets. The agreement contains various representations, warranties, affirmative, negative and financial covenants, and conditions of default customary for financing agreements of this type, including restrictions on our ability to pay cash dividends. As of September 30, 2009, $37.4 million was outstanding under the term loan, $2.0 million was outstanding under the revolving credit facility, and $29.1 million was outstanding under the letter-of-credit facility.

 

Several of our foreign subsidiaries maintain bank lines-of-credit, denominated in local currencies, to meet short-term working capital requirements and for the issuance of letters-of-credit. As of September 30, 2009, $18.8 million was outstanding under these letter-of-credit facilities, while no debt was outstanding. As of September 30, 2009, the total amount available under these credit facilities was $26.1 million, with a total cash borrowing sub-limit of $6.0 million.

 

In fiscal 2005, we entered into a bank loan of $5.3 million to fund the acquisition of land and buildings in the U.K. The loan is payable over a 20-year period. The loan bears interest at British pound-based LIBOR plus 1.2%, payable on a quarterly basis. As of September 30, 2009, $3.4 million remained outstanding under this loan at an interest rate of 1.7% per annum.

 

Our long-term debt consisted of the following (in thousands):

 

 

 

June 30,
2009

 

September 30,
2009

 

Five-year term loan due in fiscal 2013

 

$

42,763

 

$

37,431

 

Twenty-year term loan due in fiscal 2024

 

3,533

 

3,356

 

Capital leases

 

1,354

 

1,187

 

Other

 

710

 

390

 

 

 

48,360

 

42,364

 

Less current portion of long-term debt

 

8,557

 

8,497

 

Long-term portion of debt

 

$

39,803

 

$

33,867

 

 

We anticipate that existing cash borrowing arrangements and future access to capital markets should be sufficient to meet our cash requirements for the foreseeable future. However, our future capital requirements will depend on many factors, including future business acquisitions, litigation, stock repurchases and levels of research and development spending, among other factors and the adequacy of available funds will depend on many factors, including the success of our businesses in generating cash, continued compliance with financial covenants contained in our credit facility, and the capital markets in general, among other factors.

 

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Table of Contents

 

Stock Repurchase Program

 

Our Board of Directors has authorized a stock repurchase program under which we can repurchase up to 3,000,000 shares of our common stock.  During the three months ended September 30, 2009, we did not repurchase any shares under this program and 711,205 shares were available for additional repurchase under the program as of September 30, 2009.

 

Dividend Policy

 

We have not paid cash dividends on our common stock in the past and have no plans to do so in the foreseeable future.

 

Contractual Obligations

 

Under the terms and conditions of the purchase agreements associated with the following acquisitions, we may be obligated to make additional payments:

 

In August 2002, we purchased a minority equity interest in CXR Limited. In June 2004, we increased our equity interest to approximately 75% and in December 2004, we acquired the remaining 25%. As compensation to the selling shareholders for this remaining interest, we agreed to make certain royalty payments during the 18 years following the acquisition of its remaining interest. Royalty payments are based on the license of, or sales of products containing technology owned by CXR Limited. As of September 30, 2009, no royalty payments had been earned.

 

In January 2004, we acquired Advanced Research & Applications Corp. During the seven years following the acquisition, contingent consideration is payable based on net revenues of products developed prior to the acquisition, provided certain requirements are met. The contingent consideration is capped at $30.0 million. As of September 30, 2009, no contingent consideration had been earned.

 

In July 2005, we acquired InnerStep, B.S.E., Inc. During the seven years following the acquisition, contingent consideration is payable based on its profits before interest and taxes, provided certain requirements are met. The contingent consideration is capped at $6.0 million. As of September 30, 2009, no contingent consideration had been earned.

 

In fiscal 2009, we acquired a company that offers services in connection with security inspection products. Contingent consideration is payable based on net receipts generated from new business during the three years following the acquisition, provided certain requirements are met. The contingent consideration is capped at $10.0 million. As of September 30, 2009, no contingent consideration had been earned.

 

During the first quarter of fiscal 2010, we acquired RAD Electronics, Inc.  During the four years following the acquisition, contingent consideration is payable based on the performance of its operations.  The contingent obligation is capped at $14.4 million.  Consistent with new accounting guidelines for acquisitions completed after January 1, 2009, the fair market value of contingent consideration deemed more-likely-than-not to be paid is recorded as a liability at the time of the acquisition.  As a result, we recorded $5.8 million as other long-term liabilities in the condensed consolidated financial statements as of September 30, 2009.

 

Contractual obligations are summarized below (in thousands):

 

 

 

Payments due by period

 

 

 

Total

 

Less than 1
year

 

2-3 years

 

4-5 years

 

After 5
years

 

Total debt (excluding capital lease obligations)

 

$

43,177

 

$

9,827

 

$

18,019

 

$

12,958

 

$

2,373

 

Capital lease obligations

 

$

1,187

 

$

477

 

$

710

 

$

 

$

 

Operating leases

 

$

39,035

 

$

8,054

 

$

17,231

 

$

11,289

 

$

2,461

 

Purchase obligations

 

$

36,387

 

$

31,810

 

$

4,577

 

$

 

$

 

Total contractual obligations

 

$

119,786

 

$

50,168

 

$

40,537

 

$

24,247

 

$

4,834

 

Other commercial commitments - letters of credits

 

$

47,811

 

$

26,535

 

$

20,804

 

$

 

$

472

 

 

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Table of Contents

 

Off Balance Sheet Arrangements

 

As of September 30, 2009, we did not have any significant off balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

For the three months ended September 30, 2009, no material changes occurred with respect to market risk as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

 

Market Risk

 

We are exposed to certain market risks, which are inherent in our financial instruments and arise from transactions entered into in the normal course of business. We may enter into derivative financial instrument transactions in order to manage or reduce market risk in connection with specific foreign-currency-denominated transactions. We do not enter into derivative financial instrument transactions for speculative purposes.

 

We are subject to interest rate risk on our short-term borrowings under our bank lines of credit. Borrowings under these lines of credit do not give rise to significant interest rate risk because these borrowings have short maturities and are borrowed at variable interest rates. Historically, we have not experienced material gains or losses due to interest rate changes.

 

Foreign Currency

 

We maintain the accounts of our operations in each of the following countries in the following currencies: Finland, France, Germany, Italy and Greece (Euros), Singapore (Singapore dollars and U.S. dollars), Malaysia (Malaysian ringgits), United Kingdom (U.K. pounds), Norway (Norwegian kroners), India (Indian rupees), Indonesia (Indonesian rupiah), Hong Kong (Hong Kong dollars), China (Chinese renminbi), Canada (Canadian dollars), Australia (Australian dollars) and Cyprus (Cypriot pounds). Foreign currency financial statements are translated into U.S. dollars at fiscal year-end rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and include them as a component of accumulated other comprehensive income. Transaction gains and losses, which were included in our condensed consolidated statement of operations, amounted to a loss of approximately $0.1 million during the three months ended September 30, 2009, as compared to a gain of $0.8 million for the comparable prior year period. Furthermore, a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net increase in our operating income of approximately $1 million in first quarter of fiscal 2008. Conversely, a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating income of approximately $1 million in first quarter of fiscal 2010.

 

Use of Derivatives

 

Our use of derivatives consists primarily of foreign exchange contracts and interest rate swap agreements. As discussed in Note 1 to the Consolidated Financials Statements, as of September 30, 2009, we had outstanding foreign currency forward contracts and an interest rate swap agreement, which were considered effective cash flow hedges in their entirety. As a result, the net losses on such derivative contracts have been reported as a component of other comprehensive income in the Consolidated Financials Statements and will be reclassified into net earnings when the hedged transactions settle.

 

Importance of International Markets

 

International markets provide us with significant growth opportunities. However, the following events, among others, could adversely affect our financial results in subsequent periods: periodic economic downturns in different regions of the world, changes in trade policies or tariffs, wars and other forms of political instability. We continue to perform ongoing credit evaluations of our customers’ financial condition and, if deemed necessary, we require advance payments for sales. We monitor economic and currency conditions around the world to evaluate whether there may be any significant effect on our international sales in the future. Due to our overseas investments and the necessity of dealing in local currencies in many foreign business transactions, we are at risk with respect to foreign currency fluctuations.

 

21



Table of Contents

 

Inflation

 

We do not believe that inflation had a material impact on our results of operations during the three months ended September 30, 2009.

 

Interest Rate Risk

 

We utilize short-term and long-term financing and may use interest rate hedges to manage the effect of interest rate changes on our existing debt. As of September 30, 2009, we had an interest rate swap agreement outstanding as discussed above under “Use of Derivatives.”

 

Item 4. Controls and Procedures

 

(a)  Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2009, the end of the period covered by this report, our management, including our Chief Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Such disclosure controls and procedures are designed to ensure that material information we must disclose in this report is recorded, processed, summarized and filed or submitted on a timely basis. Based upon that evaluation our management, Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2009.

 

(b)  Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are involved in various claims and legal proceedings which have been previously disclosed in our quarterly and annual reports. The results of such legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

 

We are also involved in various other claims and legal proceedings arising out of the ordinary course of business which have not been previously disclosed in our quarterly and annual reports. In our opinion, after consultation with legal counsel, the ultimate disposition of such proceedings will not likely have a material adverse effect on our financial position, future results of operations or cash flows.

 

Item 1A. Risk Factors

 

The discussion of our business and operations in this Quarterly Report on form 10-Q should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the Securities and Exchange Commission, which describe various risks and uncertainties to which we are or may become subject.

 

22



Table of Contents

 

Item 6. Exhibits

 

31.1

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

23



Table of Contents

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Hawthorne, State of California on the 27th day of October 2009.

 

 

OSI SYSTEMS, INC.

 

 

 

By:

/s/ Deepak Chopra

 

 

Deepak Chopra

 

 

President and Chief Executive Officer

 

 

 

By:

/s/ Alan Edrick

 

 

Alan Edrick

 

 

Executive Vice President and

 

 

Chief Financial Officer

 

24


Exhibit 31.1

 

CERTIFICATION

Certification required by Rule 13a-14(a) or Rule 15d-14(a)

and under Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Deepak Chopra, certify that:

 

1.   I have reviewed this Quarterly Report on Form 10-Q of OSI Systems, Inc.;

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 27, 2009

 

 

/s/ Deepak Chopra

 

Deepak Chopra

 

Chief Executive Officer

 


Exhibit 31.2

 

CERTIFICATION

Certification required by Rule 13a-14(a) or Rule 15d-14(a)

and under Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Alan Edrick, certify that:

 

1.       I have reviewed this Quarterly Report on Form 10-Q of OSI Systems, Inc.;

 

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 27, 2009

 

 

/s/ Alan Edrick

 

Alan Edrick

 

Chief Financial Officer

 


Exhibit 32.1

 

CERTIFICATION

Certification of Chief Executive Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

In connection with the Quarterly Report of OSI Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Deepak Chopra, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods presented in this Report.

 

Date: October 27, 2009

 

 

/s/ Deepak Chopra

 

Deepak Chopra

 

Chief Executive Officer

 


Exhibit 32.2

 

CERTIFICATION

Certification of Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

In connection with the Quarterly Report of OSI Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan Edrick, Chief Financial Officer of the Company, certify, pursuant to 18, U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1)          The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

2)          The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods presented in this Report.

 

Date: October 27, 2009

 

 

/s/ Alan Edrick

 

Alan Edrick

 

Chief Financial Officer