OSI Systems, Inc.
OSI SYSTEMS INC (Form: 10-Q, Received: 10/24/2012 16:57:01)

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, 2012

 

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 000-23125

 


 

OSI SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

33-0238801

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

12525 Chadron Avenue

Hawthorne, California 90250

(Address of principal executive offices) (Zip Code)

 

(310) 978-0516

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


 

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 x No o

 

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 x

 

Accelerated filer o

 

 

 

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 23, 2012, there were 19,990,702 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

OSI SYSTEMS, INC.

 

IND EX

 

 

 

PAGE

PART I —

FINANCIAL INFORMATION

3

Item 1 —

Condensed Consolidated Financial Statements

3

 

Condensed Consolidated Balance Sheets at June 30, 2012 and September 30, 2012

3

 

Condensed Consolidated Statements of Operations for the three months ended September 30, 2011 and 2012

4

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2011 and 2012

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2011 and 2012

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2 —

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3 —

Quantitative and Qualitative Disclosures about Market Risk

19

Item 4 —

Controls and Procedures

20

 

 

 

PART II — OTHER INFORMATION

21

Item 1 —

Legal Proceedings

21

Item 1A —

Risk Factors

21

Item 2 —

Unregistered Sales of Equity Securities and Use of Proceeds

21

Item 3 —

Defaults Upon Senior Securities

21

Item 4 —

Mine Safety Disclosures

21

Item 5 —

Other Information

21

Item 6 —

Exhibits

21

Signatures

 

22

 



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,

 

 

 

2012

 

2012

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

91,452

 

$

73,707

 

Accounts receivable, net of allowance for doubtful accounts of $5,054 and $5,300 as of June 30, 2012 and September 30, 2012, respectively

 

156,867

 

146,784

 

Inventories

 

195,178

 

195,388

 

Deferred income taxes

 

19,205

 

19,067

 

Prepaid expenses and other current assets

 

20,411

 

20,181

 

Total current assets

 

483,113

 

455,127

 

Property and equipment, net

 

111,664

 

172,522

 

Goodwill

 

82,149

 

82,435

 

Intangible assets, net

 

37,742

 

38,404

 

Other assets

 

35,228

 

38,237

 

Total assets

 

$

749,896

 

$

786,725

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

215

 

$

1,677

 

Accounts payable

 

56,422

 

85,325

 

Accrued payroll and related expenses

 

24,749

 

20,199

 

Advances from customers

 

22,677

 

20,733

 

Accrued warranties

 

17,562

 

16,919

 

Deferred revenue

 

20,194

 

17,321

 

Other accrued expenses and current liabilities

 

18,830

 

19,857

 

Total current liabilities

 

160,649

 

182,031

 

Long-term debt

 

2,467

 

12,161

 

Advances from customers

 

100,000

 

93,750

 

Other long-term liabilities

 

52,661

 

56,415

 

Total liabilities

 

315,777

 

344,357

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.001 par value—authorized, 10,000,000 shares; no shares issued or outstanding

 

 

 

Common stock, $0.001 par value—authorized, 100,000,000 shares; issued and outstanding, 19,821,064 at June 30, 2012 and 19,990,702 shares at September 30, 2012

 

282,756

 

279,809

 

Retained earnings

 

155,651

 

161,990

 

Accumulated other comprehensive income (loss)

 

(4,288

)

569

 

Total stockholders’ equity

 

434,119

 

442,368

 

Total liabilities and stockholders’ equity

 

$

749,896

 

$

786,725

 

 

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 data)

(Unaudited)

 

 

 

For the Three Months Ended
September 30,

 

 

 

2011

 

2012

 

Net revenues:

 

 

 

 

 

Products

 

$

133,906

 

$

148,864

 

Services

 

27,411

 

32,830

 

Total net revenues

 

161,317

 

181,694

 

Cost of goods sold:

 

 

 

 

 

Products

 

89,868

 

98,932

 

Services

 

18,592

 

21,407

 

Total cost of goods sold

 

108,460

 

120,339

 

Gross profit

 

52,857

 

61,355

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative expenses

 

34,367

 

39,925

 

Research and development

 

10,880

 

11,316

 

Total operating expenses

 

45,247

 

51,241

 

Income from operations

 

7,610

 

10,114

 

Interest and other expense, net

 

(799

)

(1,097

)

Income before income taxes

 

6,811

 

9,017

 

Provision for income taxes

 

2,050

 

2,678

 

Net income

 

$

4,761

 

$

6,339

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.24

 

$

0.32

 

Diluted

 

$

0.24

 

$

0.31

 

Shares used in per share calculation:

 

 

 

 

 

Basic

 

19,576

 

19,906

 

Diluted

 

20,089

 

20,571

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

OSI SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands)

(Unaudited)

 

 

 

For the Three Months Ended
September 30,

 

 

 

2011

 

2012

 

Net income

 

$

4,761

 

$

6,339

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustment

 

(3,260

)

5,311

 

Other

 

270

 

(454

)

Other comprehensive income (loss)

 

(2,990

)

4,857

 

Comprehensive income

 

$

1,771

 

$

11,196

 

 

See accompanying notes to condensed consolidated financial statements.

 

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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,

 

 

 

2011

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

4,761

 

$

6,339

 

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

 

 

 

 

 

Depreciation and amortization

 

4,832

 

4,907

 

Stock based compensation expense

 

1,511

 

3,533

 

Provision for losses on accounts receivable

 

305

 

294

 

Equity in earnings of unconsolidated affiliates

 

(44

)

(13

)

Deferred income taxes

 

(176

)

140

 

Other

 

13

 

1

 

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

 

 

 

 

 

Accounts receivable

 

5,553

 

11,190

 

Inventories

 

(16,579

)

2,286

 

Prepaid expenses and other current assets

 

5,691

 

2,318

 

Accounts payable

 

5,163

 

28,055

 

Accrued payroll and related expenses

 

(6,805

)

(4,656

)

Advances from customers

 

5,421

 

(8,954

)

Accrued warranties

 

37

 

(831

)

Deferred revenue

 

(2,433

)

(2,077

)

Other accrued expenses and current liabilities

 

2,744

 

(155

)

Net cash provided by operating activities

 

9,994

 

42,377

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of property and equipment

 

(3,148

)

(62,718

)

Acquisition of businesses

 

(3,189

)

(1,897

)

Acquisition of intangible and other assets

 

(869

)

(1,416

)

Net cash used in investing activities

 

(7,206

)

(66,031

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from long-term debt

 

 

11,100

 

Payments on long-term debt

 

(55

)

(55

)

Proceeds from exercise of stock options and employee stock purchase plan

 

1,109

 

2,951

 

Repurchase of common shares

 

 

(9,431

)

Net cash provided by financing activities

 

1,054

 

4,565

 

Effect of exchange rate changes on cash

 

(1,098

)

1,344

 

Net increase (decrease) in cash and cash equivalents

 

2,744

 

(17,745

)

Cash and cash equivalents-beginning of period

 

55,619

 

91,452

 

Cash and cash equivalents-end of period

 

$

58,363

 

$

73,707

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid (refunded), net during the period for:

 

 

 

 

 

Interest

 

$

950

 

$

129

 

Income taxes

 

$

(479

)

$

1,450

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



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, and a provider of security screening services. The Company sells its products and services in diversified markets, including homeland security, healthcare, defense and aerospace.

 

The Company has three operating divisions: (i) Security, providing security and inspection systems, turnkey security screening solutions 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 and electronic manufacturing services for the Security and Healthcare divisions, as well as to external original equipment manufacturer clients for applications in the defense, aerospace, medical and industrial markets, among others.

 

Through its Security division, the Company designs, manufactures, markets and services security and inspection systems worldwide, and provides turnkey security screening solutions. The Security division’s products are used to inspect baggage, cargo, vehicles and other objects for weapons, explosives, drugs and other contraband, and to screen people. These products and services 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.

 

Through its Healthcare division, the Company designs, manufactures, markets and services patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems worldwide. 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 diagnostic products, telecommunications, test and measurement devices, industrial automation systems, automotive diagnostic products and renewable energy technologies. This division provides products and services to original equipment manufacturers and end users as well as to the Company’s own Security and Healthcare divisions.

 

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, 2012, filed with the Securities and Exchange Commission on August 13, 2012. The results of operations for the three months ended September 30, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 

Per Share Computations

 

The Company computes basic earnings per share by dividing net income available to common stockholders 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 stockholders by the sum of the weighted average number of common and dilutive potential common shares outstanding. Potential common shares consist of the shares issuable upon the exercise of stock options or warrants under the treasury stock method.  Stock options to purchase a total of 0.1 million shares of common stock for the three months ended September 30, 2011 were not included in diluted earnings per share calculations because to do so would have been antidilutive, while no such shares were excluded from the calculations for the three months ended September 30, 2012.

 

7



Table of Contents

 

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,

 

 

 

2011

 

2012

 

Net income for diluted earnings per share calculation

 

$

4,761

 

$

6,339

 

 

 

 

 

 

 

Weighted average shares for basic earnings per share calculation

 

19,576

 

19,906

 

Dilutive effect of stock awards

 

513

 

665

 

Weighted average shares for diluted earnings per share calculation

 

20,089

 

20,571

 

 

 

 

 

 

 

Basic net income per share

 

$

0.24

 

$

0.32

 

Diluted net income per share

 

$

0.24

 

$

0.31

 

 

Cash Equivalents

 

The Company considers all highly liquid investments purchased with maturities of approximately three months or less as of the acquisition date to be cash equivalents.

 

Components of cash and cash equivalents consisted of:

 

 

 

June 30,
2012

 

September 30,
2012

 

Cash in bank

 

$

47,402

 

$

63,191

 

Money market

 

34,063

 

7,016

 

Commercial paper

 

9,987

 

3,500

 

Total

 

$

91,452

 

$

73,707

 

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash, marketable securities, derivative instruments, 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 and liabilities at the quoted prices in active markets for identical assets and liabilities; 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. There were no assets or liabilities where “Level 3” valuation techniques were used, and there were no assets and liabilities measured at fair value on a non-recurring basis.

 

The fair values of the Company’s assets (liabilities) were:

 

 

 

June 30,
2012

 

September 30,
2012

 

Level 1

 

$

10,955

 

$

12,191

 

Level 2

 

13

 

(24

)

Total

 

$

10,968

 

$

12,167

 

 

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, 2012, the Company had outstanding foreign currency forward contracts of approximately $6.2 million.  The foreign exchange contracts do not meet the criteria as an effective cash flow hedge.  Therefore, the net gain (loss) is reported in Interest expense and other income, net in the condensed consolidated statement of operations.  The interest rate swap agreement was entered into to improve the predictability of cash flows from interest payments related to variable, LIBOR-based debt for the duration of the term loan.

 

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Table of Contents

 

The interest rate swap matures in October 2019.  The interest rate swap is considered an effective cash flow hedge, and, as a result, the net gains or losses on such instrument were reported as a component of other comprehensive income in the condensed consolidated financial statements and are reclassified as net earnings when the hedge transaction settles.

 

Revenue Recognition

 

The Company recognizes revenue from sales of products upon shipment when title and risk of loss passes, and when terms are fixed and collection is probable. Revenue from services includes after-market services, installation and implementation of products, and turnkey security screening services.  The portion of revenue for the sale attributable to installation is deferred and recognized when the installation service is provided. In an instance where terms of sale include subjective customer acceptance criteria, revenue is deferred until the Company has achieved the acceptance criteria. Concurrent with the shipment of the product, the Company accrues estimated product return reserves and warranty expenses. Critical judgments made by management related to revenue recognition include the determination of whether or not customer acceptance criteria are perfunctory or inconsequential. The determination of whether or not customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of revenue recognized. Critical judgments also include estimates of warranty reserves, which are established based on historical experience and knowledge of the product under warranty.

 

Revenue from certain fixed-fee turnkey services agreements is recognized based upon proportional performance, measured by the actual number of hours incurred divided by the total estimated number of hours for the project. The impact of changes in the estimated hours to service the agreement is reflected in the period during which the change becomes known.

 

Revenues from out-of-warranty service maintenance contracts are recognized ratably over the term of such contract. For services not derived from specific maintenance contracts, revenues are recognized as the services are performed. Deferred revenue for such services arises from payments received from customers for services not yet performed.

 

Business Combinations

 

During the normal course of business the Company makes acquisitions.  In the event that an individual acquisition (or an aggregate of acquisitions) is material, appropriate disclosure of such acquisition activity is disclosed.

 

2. Balance Sheet Details

 

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

 

 

 

June 30,
2012

 

September 30,
2012

 

Inventories, net

 

 

 

 

 

Raw materials

 

$

103,747

 

$

108,548

 

Work-in-process

 

28,096

 

27,022

 

Finished goods

 

63,335

 

59,818

 

Total

 

$

195,178

 

$

195,388

 

 

 

 

June 30,
2012

 

September 30,
2012

 

Property and equipment, net

 

 

 

 

 

Land

 

$

5,193

 

$

8,126

 

Buildings

 

13,597

 

24,917

 

Leasehold improvements

 

12,385

 

11,569

 

Equipment and tooling

 

74,789

 

105,103

 

Furniture and fixtures

 

3,982

 

4,119

 

Computer equipment

 

13,937

 

15,316

 

Computer software

 

15,245

 

15,480

 

Construction in process

 

52,269

 

68,523

 

Total

 

191,397

 

253,153

 

Less: accumulated depreciation and amortization

 

(79,733

)

(80,631

)

Property and equipment, net

 

$

111,664

 

$

172,522

 

 

Construction in process includes costs primarily related to the construction of equipment and infrastructure associated with a program in Mexico.

 

9



Table of Contents

 

3. Goodwill and Intangible Assets

 

The changes in the carrying value of goodwill for the three month period ended September 30, 2012 are as follows (in thousands):

 

 

 

Security
Division

 

Healthcare
Division

 

Optoelectronics
and
Manufacturing
Division

 

Consolidated

 

Balance as of June 30, 2012

 

$

27,583

 

$

35,887

 

$

18,679

 

$

82,149

 

Goodwill acquired or adjusted during the period

 

 

 

 

 

Foreign currency translation adjustment

 

140

 

149

 

(3

)

286

 

Balance as of September 30, 2012

 

$

27,723

 

$

36,036

 

$

18,676

 

$

82,435

 

 

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

June 30, 2012

 

September 30, 2012

 

 

 

Weighted
Average
Lives

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Intangibles
Net

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Intangibles
Net

 

Amortizable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software development costs

 

5 years

 

$

15,175

 

$

4,140

 

$

11,035

 

$

16,686

 

$

4,391

 

$

12,295

 

Patents

 

15 years

 

4,259

 

526

 

3,733

 

4,497

 

559

 

3,938

 

Core technology

 

10 years

 

2,093

 

1,548

 

545

 

2,181

 

1,667

 

514

 

Developed technology

 

12 years

 

20,022

 

12,560

 

7,462

 

20,072

 

13,103

 

6,969

 

Customer relationships/backlog

 

8 years

 

11,955

 

7,611

 

4,344

 

8,778

 

4,754

 

4,024

 

Total amortizable assets

 

 

 

53,504

 

26,385

 

27,119

 

52,214

 

24,474

 

27,740

 

Non-amortizable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

 

10,623

 

 

10,623

 

10,664

 

 

10,664

 

Total intangible assets

 

 

 

$

64,127

 

$

26,385

 

$

37,742

 

$

62,878

 

$

24,474

 

$

38,404

 

 

Amortization expense related to intangibles assets was $1.1 million and $1.2 million for the three months ended September 30, 2011 and 2012, respectively. At September 30, 2012, the estimated future amortization expense was as follows (in thousands):

 

2013 (remaining 9 months)

 

$

3,340

 

2014

 

3,835

 

2015

 

2,343

 

2016

 

2,100

 

2017

 

1,742

 

2018

 

1,038

 

2019 and thereafter

 

13,342

 

Total

 

$

27,740

 

 

4. Borrowings

 

The Company has a $425 million credit agreement maturing November 2016. The credit agreement consists of a $425 million revolving credit facility, including a $375 million sub-limit for letters of credit. The Company has the ability to increase the facility by $100 million under certain circumstances. Borrowings under this facility bear interest at the London Interbank Offered Rate (LIBOR) plus a margin of 1.5% as of September 30, 2012. This margin is determined by the Company’s consolidated leverage ratio and may range from 1.5% to 2.0%. Letters of credit reduce the amount available to borrow by their face value. The unused portion of the facility bears a commitment fee of 0.25%. The Company’s borrowings under the credit agreement are guaranteed by the Company’s U.S. based subsidiaries and are secured by substantially all of the Company’s and certain subsidiaries’ assets. The agreement contains various representations, warranties, affirmative, negative and financial covenants, and conditions of default customary for financing agreements of this type. As of September 30, 2012, there were no borrowings under the revolving credit facility and letters-of-credit outstanding totaled $193.0 million.

 

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, 2012, $10.7 million was outstanding under these letter-of-credit facilities, while no debt was outstanding. As of September 30, 2012, the total amount available under these credit facilities was $34.1 million, with a total cash borrowing sub-limit of $4.2 million.

 

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Table of Contents

 

In September 2012, the Company entered into a term loan agreement for $11.1 million to fund the acquisition of land and a building in the state of Washington.  The loan is payable over seven years and bears interest at LIBOR plus 1.25%, which is payable on a monthly basis.  Concurrent with entering into the floating rate loan, the Company entered into an interest rate swap agreement that effectively locks the interest rate of the loan to 2.2% per annum for the term of the loan.

 

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 LIBOR plus 1.2%, payable on a quarterly basis. As of September 30, 2012, $2.7 million remained outstanding under this loan at an interest rate of 1.88% per annum.

 

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

 

 

 

June 30,
2012

 

September 30,
2012

 

Twenty-year term loan due in 2025

 

$

2,682

 

$

2,738

 

Seven-year term loan due in 2020

 

 

11,100

 

 

 

2,682

 

13,838

 

Less current portion of long-term debt

 

215

 

1,677

 

Long-term portion of debt

 

$

2,467

 

$

12,161

 

 

5. Stock-based Compensation

 

As of September 30, 2012, 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,

 

 

 

2011

 

2012

 

Cost of goods sold

 

$

118

 

$

136

 

Selling, general and administrative

 

1,330

 

3,332

 

Research and development

 

63

 

63

 

Stock-based compensation expense before taxes

 

$

1,511

 

$

3,531

 

Less: related income tax benefit

 

533

 

1,335

 

Stock-based compensation expense, net of estimated taxes

 

$

978

 

$

2,196

 

 

The following table summarizes stock-based compensation plan activity during the three months ended September 30, 2012:

 

 

 

 

 

Stock Option Activity

 

Restricted Stock Activity

 

 

 

Shares
Available
for Grant

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value (in
thousands)

 

Shares

 

Weighted
Average
Grant
Date Fair
Value

 

Balance as of June 30, 2012

 

1,090,876

 

1,059,397

 

$

23.01

 

7.2 years

 

$

42,729

 

580,468

 

$

28.93

 

Restricted stock shares granted

 

(234,941

)

 

 

 

 

 

 

 

 

234,941

 

57.63

 

Restricted stock shares vested

 

 

 

 

 

 

 

 

 

 

 

(145,136

)

27.80

 

Stock options granted

 

(10,000

)

10,000

 

61.99

 

 

 

 

 

 

 

 

 

Stock options exercised

 

116,905

(1)

(108,722

)

14.49

 

 

 

 

 

 

 

 

 

Stock options forfeited and cancelled

 

1,158

 

(1,158

)

16.72

 

 

 

 

 

 

 

 

 

Restricted stock shares forfeited and cancelled

 

3,526

 

 

 

 

 

 

 

 

 

(3,526

)

31.71

 

Balance as of September 30, 2012

 

967,524

(2)

959,517

 

$

24.39

 

7.2 years

 

$

51,290

 

666,747

 

$

39.28

 

 


(1)          These shares were returned to the shares available for grant pool as they were shares used for net settlement to cover option cost and tax obligations.

(2)          Of the 967,524 shares available for grant, 525,757 shares may be granted in the form of restricted stock.

 

As of September 30, 2012, total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted was approximately $24.3 million. The Company expects to recognize these costs over a weighted-average period of 2.3 years.

 

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6. Retirement Benefit Plans

 

The Company sponsors various retirement benefit plans including qualified and nonqualified defined benefit pension plans for its employees. The components of net periodic pension expense are as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

2011

 

2012

 

Service cost

 

$

157

 

$

278

 

Amortization of prior service cost

 

112

 

230

 

Net periodic pension expense

 

$

269

 

$

508

 

 

For both the three months ended September 30, 2011 and 2012, the Company made contributions of $0.1 million to these defined benefit plans.

 

In addition, the Company maintains various defined contribution plans. For the three months ended September 30, 2011 and 2012, the Company made contributions of $1.1 million and $1.0 million, respectively, to these defined contribution plans.

 

7. Commitments and Contingencies

 

Legal Proceedings

 

The Company is involved in various 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 certain acquisitions, the Company may be obligated to make additional payments based on the achievement by the acquired operations of certain sales or profitability milestones. The maximum amount of such payments under arrangements with contingent consideration caps is $63 million. In addition, one of the purchase agreements the Company entered into requires royalty payments through 2022 based on the license of, or sales of products containing the technology of CXR Limited, a company acquired in 2004.  For acquisitions that occurred prior to fiscal year 2010, which were accounted for under Statement of Financial Accounting Standards 141, “Business Combinations,” the Company accounts for such contingent payments as an addition to the purchase price of the acquired business. For acquisitions accounted for under Accounting Standards Codification 805, “Business Combinations” (“ASC 805”), the estimated fair value of these obligations is recorded as a liability in the condensed consolidated balance sheets with subsequent revisions reflected in the condensed consolidated statements of operations. As of September 30, 2012, pursuant to ASC 805, $20.8 million of contingent payment obligations are included in other long-term liabilities in the accompanying condensed consolidated balance sheets.

 

Advances from Customers

 

The Company receives advances from customers associated with certain projects.  In fiscal 2012, the Company entered into an agreement with the Mexican government to provide a turnkey security screening solution along the country’s borders, and in its ports and airports .  Associated with the agreement, the Company was provided an advance totaling $100 million.  The Company is obligated to provide a guarantee until the advance has been earned.

 

Environmental Contingencies

 

The Company is subject to various environmental laws. The Company’s practice is to conduct appropriate environmental investigations 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.

 

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Table of Contents

 

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 the Company, 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.

 

The Company has not accrued for loss contingencies relating to the above environmental matter because it believes that, although an unfavorable outcome may be possible, it is not considered by the Company’s management to be probable and reasonably estimable.  If this matter is 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 the 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 experience and anticipated expenses. 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,

 

 

 

2011

 

2012

 

Balance at beginning of period

 

$

14,530

 

$

17,562

 

Additions

 

834

 

632

 

Reductions for warranty repair costs and adjustments

 

(926

)

(1,275

)

Balance at end of period

 

$

14,438

 

$

16,919

 

 

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.  The assumptions used to estimate the annual effective tax rate includes 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, increases or decreases in uncertain tax positions, utilization of research and development 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 increase or decrease, respectively, in the period such determination is made.

 

9. Segment Information

 

The Company has determined that it operates in three identifiable industry segments, (a) security and inspection systems (Security division), (b) medical monitoring and anesthesia systems (Healthcare division) and (c) optoelectronic devices and manufacturing (Optoelectronics and Manufacturing division). The Company also has a corporate segment (Corporate) that includes executive compensation and certain other general and administrative expenses; expenses related to stock issuances; and legal and audit and other professional service fees not allocated to product segments. Both the Security and Healthcare divisions comprise primarily end-product businesses whereas the businesses of the Optoelectronics and Manufacturing division primarily supplies components and subsystems to original equipment manufacturers, including to the Security and Healthcare divisions. Sales between divisions are at transfer prices that approximate market values.  All other accounting policies of the segments are the same as described in Note 1, Summary of Significant Accounting Policies of the Form 10-K for the fiscal year ended June 30, 2012 .

 

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Table of Contents

 

The following tables present the operations and identifiable assets by industry segment (in thousands):

 

 

 

Three Months Ended
September 30,

 

 

 

2011

 

2012

 

Revenues — by Segment:

 

 

 

 

 

Security division

 

$

72,597

 

$

82,916

 

Healthcare division

 

46,520

 

51,581

 

Optoelectronics and Manufacturing division, including intersegment revenues

 

53,091

 

57,147

 

Intersegment revenues elimination

 

(10,891

)

(9,950

)

Total

 

$

161,317

 

$

181,694

 

Revenues — by Geography:

 

 

 

 

 

Americas

 

$

107,822

 

$

118,480

 

Europe

 

35,340

 

43,818

 

Asia

 

29,046

 

29,346

 

Intersegment revenues elimination

 

(10,891

)

(9,950

)

Total

 

$

161,317

 

$

181,694

 

 

 

 

Three Months Ended
September 30,

 

 

 

2011

 

2012

 

Operating income (loss) — by Segment:

 

 

 

 

 

Security division

 

$

3,845

 

$

4,465

 

Healthcare division

 

2,398

 

3,881

 

Optoelectronics and Manufacturing division

 

4,938

 

4,833

 

Corporate

 

(3,307

)

(3,249

)

Eliminations (1)

 

(264

)

184

 

Total

 

$

7,610

 

$

10,114

 

 

 

 

June 30,
 2012

 

September 30,
 2012

 

Assets — by Segment:

 

 

 

 

 

Security division

 

$

351,668

 

$

390,621

 

Healthcare division

 

162,583

 

159,658

 

Optoelectronics and Manufacturing division

 

132,281

 

144,515

 

Corporate

 

109,405

 

98,728

 

Eliminations (1)

 

(6,041

)

(6,797

)

Total

 

$

749,896

 

$

786,725

 

 


(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.

 

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Table of Contents

 

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

 

Forward-Looking Statements

 

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 the Private Securities Litigation Reform Act of 1995, 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, 2012.

 

Recent Accounting Pronouncements

 

There are no recent accounting pronouncements that, if implemented, would impact us materially.

 

Executive Summary

 

We are a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications, and provider of screening services.  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 and market security and inspection systems worldwide for sale primarily to U.S. and foreign government agencies, and provide turnkey security screening solutions. These products and services 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 46% and 45% of our total consolidated revenues for the three months ended September 30, 2012 and 2011, respectively.

 

As a result of the terrorist attacks of September 11, 2001, and subsequent attacks in other locations worldwide, security and inspection products have increasingly been used at a wide range of facilities other than airports, such as border crossings, railway stations, seaports, cruise line terminals, freight forwarding operations, sporting venues, government and military installations and nuclear facilities.  We believe that our wide-ranging product portfolio together with our ability to provide turnkey screening solutions position us to competitively pursue security and inspection opportunities as they arise throughout the world.

 

During our third quarter of fiscal 2012, our Security division won a six-year agreement with the Mexican government to provide a turnkey security screening solution along the country’s borders, and in its ports and airports.  We have begun recognizing revenue under this agreement and the results are reported as part of the service revenues.

 

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Table of Contents

 

Healthcare Division. Through our Healthcare division, we design, manufacture, market and service patient monitoring, diagnostic cardiology and anesthesia delivery and ventilation systems worldwide 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 28% and 29% of our total consolidated revenues for the three months ended September 30, 2012 and 2011, 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 anticipated lower sales of patient monitoring, diagnostic cardiology and anesthesia systems products than what we had historically experienced, which negatively impacted our sales. Although there are indications that a recovery is underway, we cannot predict when the markets will fully 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.

 

Optoelectronics and Manufacturing Division. Through our Optoelectronics and Manufacturing division, we design, manufacture and market optoelectronic devices and provide 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, telecommunications, office automation, computer peripherals, industrial automation, automotive diagnostic systems and renewable energy. We also provide our optoelectronic devices and value-added manufacturing services to our own Security and Healthcare divisions. External revenues from our Optoelectronics and Manufacturing division accounted for 26% of our total consolidated revenues for both the three months ended September 30, 2012 and 2011.

 

Results of Operations for the Three Months Ended September 30, 2012 (Q1 2013) Compared to Three Months Ended September 30, 2011 (Q1 2012) (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.

 

 

 

Q1
2012

 

% of
Net Sales

 

Q1
2013

 

% of
Net Sales

 

$ Change

 

% Change

 

Security division

 

$

72.6

 

45

%

$

82.9

 

46

%

$

10.3

 

14

%

Healthcare division

 

46.5

 

29

%

51.6

 

28

%

5.1

 

11

%

Optoelectronics and Manufacturing division

 

53.1

 

33

%

57.1

 

31

%

4.0

 

8

%

Intersegment revenues

 

(10.9

)

(7

)%

(9.9

)

(5

)%

1.0

 

(9

)%

Total revenues

 

$

161.3

 

 

 

$

181.7

 

 

 

$

20.4

 

13

%

 

Revenues for the Security division for the three months ended September 30, 2012 increased $10.3 million, or 14%, to $82.9 million, from $72.6 million for the comparable prior-year period. The increase was attributable to: (i) a $6.4 million or 19% increase in sales of our conventional equipment, primarily in baggage and parcel inspection lines; and (ii) a $4.1 million increase in the sales of radiation and nuclear sensing products.

 

Revenues for the Healthcare division for the three months ended September 30, 2012 increased $5.1 million, or 11%, to $51.6 million, from $46.5 million for the comparable prior-year period. The increase was primarily attributable to a $4.8 million, or 14%, increase in patient monitoring revenues primarily in North America as the economy continued to improve and the market has responded favorably to recently launched new product offerings.

 

Revenues for the Optoelectronics and Manufacturing division for the three months ended September 30, 2012 increased $4.0 million, or 8%, to $57.1 million, from $53.1 million for the comparable prior-year period. This change was driven by strength in our contract manufacturing sales driven by new customers.  The Optoelectronics and Manufacturing division recorded intersegment sales of $9.9 million, compared to $10.9 million in the comparable prior-year period.  Such intersegment sales are eliminated in consolidation.

 

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Table of Contents

 

Gross Profit

 

 

 

Q1
2012

 

% of Net
Sales

 

Q1
2013

 

% of Net
Sales

 

Gross profit

 

$

52.9

 

32.8

%

$

61.4

 

33.8

%

 

Gross profit increased $8.5 million, or 16%, to $61.4 million for the three months ended September 30, 2012, from $52.9 million for the comparable prior-year period and was primarily attributable to a 13% increase is sales.  The gross margin increased to 33.8% in the three months ended September 30, 2012, from 32.8% for the comparable prior-year period.  The increase was primarily attributable to the favorable sales mix in our Security division and strong healthcare sales which carry higher gross margins than our other two divisions partially offset by a reduced gross margin in our Optoelectronics and Manufacturing division due to an unfavorable sales mix.

 

Operating Expenses

 

 

 

Q1
2012

 

% of Net
Sales

 

Q1
2013

 

% of Net
Sales

 

$ Change

 

%
Change

 

Selling, general and administrative

 

$

34.4

 

21.3

%

$

39.9

 

22.0

%

$

5.5

 

16

%

Research and development

 

10.9

 

6.8

%

11.3

 

6.2

%

0.4

 

4

%

Total operating expenses

 

$

45.3

 

28.1

%

$

51.2

 

28.2

%

$

5.9

 

13

%

 

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, 2012, SG&A expenses increased by $5.5 million, or 16%, to $39.9 million, from $34.4 million for the comparable prior-year period. This increase was primarily attributable to an increase in costs to support the strong sales growth as well as incremental costs in our Security division in support of our operations related to the aforementioned program in Mexico.  As a percentage of revenue, SG&A expenses were 22.0% for the three months ended September 30, 2012, compared to 21.3% for the comparable prior-year period.

 

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, 2012, such expenses increased $0.4 million, or 4%, to $11.3 million, from $10.9 million for the comparable prior-year period. As a percentage of revenues, R&D expenses were 6.2% for the three months ended September 30, 2012, compared to 6.8% for the comparable prior-year period. The increase in R&D expenses for the three month period ended September 30, 2012, was primarily attributable to an increase in spending in our Security division in support of new product introductions.

 

Other Income and Expenses

 

 

 

Q1
2012

 

% of Net
Sales

 

Q1
2013

 

% of Net
Sales

 

$ Change

 

%
Change

 

Interest and other expense, net

 

$

0.8

 

0.5

%

$

1.1

 

0.6

%

$

0.3

 

38

%

 

Interest and other expense, net .  For the three months ended September 30, 2012, interest and other expense, net amounted to $(1.1) million as compared to $(0.8) million in the comparable prior-year period.  The increase was mainly due to higher utilization of the letters-of-credit facility in the three months ended September 30, 2012 compared to the comparable prior-year period.

 

Income taxes .  For the three months ended September 30, 2012, our income tax provision was $2.7 million, compared to $2.0 million for the comparable prior-year period. Our effective tax rate for the three months ended September 30, 2012 was 29.7%, as compared to 30.1% 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.

 

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Table of Contents

 

Liquidity and Capital Resources

 

To date, we have financed our operations primarily through cash flow from operations and our credit facilities. Cash and cash equivalents totaled $73.7 million at September 30, 2012, a decrease of $17.7 million from $91.5 million at June 30, 2012. The changes in our working capital and cash and cash equivalent balances during the three months ended September 30, 2012 are described below.

 

 

(in millions)

 

June 30, 2012

 

September 30, 2012

 

% Change

 

Working capital

 

$

322.5

 

$

273.1

 

(15

)%

Cash and cash equivalents

 

91.5

 

73.7

 

(19

)%

 

Working Capital . During the three months ended September 30, 2012, the Company utilized significant working capital to acquire a new headquarters and manufacturing facility for our Healthcare division and to prepare for our turnkey screening solutions program in Mexico.  Specific fluctuations in components of working capital included decreases due to: (i) a $28.9 million increase in accounts payable; (ii) a $17.7 million decrease in cash and cash equivalents; and (iii) a $10.1 million reduction in accounts receivable, reflecting the volatility of collections as a result of seasonality of sales.  These decreases were partially offset by (i) decreases in accrued payroll and employee benefits of $4.6 million and; (ii) a decrease in other accrued expenses and current liabilities of $3.7 million.

 

 

 

Three Months Ended
September 30, 2011

 

Three Months Ended
September 30, 2012

 

% Change

 

Cash provided by operating activities

 

$

10.0

 

$

42.4

 

324

%

Cash used in investing activities

 

(7.2

)

(66.0

)

817

%

Cash provided by financing activities

 

1.1

 

4.6

 

318

%

 

Cash Provided by 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, 2012, was $42.4 million, an increase of $32.4 million as compared to the $10.0 million generated in the comparable prior-year period. This increase was primarily due to the favorable fluctuation in the changes in working capital components in the current-year period versus the prior-year period, including: (i) $22.9 million from accounts payable; (ii) $18.9 million from inventory; (iii) $5.6 million from changes in accounts receivables; (iv) $2.1 million from accrued payroll and related expenses; and (v) an increase in our net income of $4.0 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.  These favorable changes in cash flows from operating activities were partially offset by an unfavorable change of (i) $14.4 million from advances from customers and; (ii) $7.6 million in other accrued expenses and current liabilities.

 

Cash Used in Investing Activities. Net cash used in investing activities was $66.0 million for the three months ended September 30, 2012, an increase of $58.8 million as compared to $7.2 million used for the three months ended September 30, 2011.  During the three months ended September 30, 2012, we invested $62.7 million in capital expenditures compared to $3.2 million during the comparable prior-year period.  This increase is primarily a result of the preparation of the program in Mexico and the purchase of a new building to serve as the future headquarters for our Healthcare division. In the three months ended September 30, 2012, we also used cash of $1.9 million for acquisitions of businesses as compared to $3.2 million expended in the comparable prior-year period.

 

Cash Provided by Financing Activities. Net cash provided by financing activities was $4.6 million for the three months ended September 30, 2012, compared to $1.1 million for the three months ended September 30, 2011. During the three months ended September 30, 2012, we entered into a new $11.1 million loan to acquire property in Washington State for our Healthcare division.  During the three months ended September 30, 2012, we received $3.0 million in net proceeds from the exercise of stock options and the purchase of stock under our employee stock purchase plan compared to $1.1 million in the prior year.  In addition, during the three months ended September 30, 2012, we used $9.4 million to repurchase shares of our common stock under our stock repurchase program and settle tax obligations arising out of our stock plans.

 

Borrowings

 

Outstanding lines of credit and current and long-term debt totaled $13.8 million at September 30, 2012, an increase of $11.1 million from $2.7 million at June 30, 2012. See Note 4 to the condensed consolidated financial statements for further discussion.

 

18



Table of Contents

 

Stock Repurchase Program

 

Our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to 3,000,000 shares of our common stock.  This program does not have an expiration date.  Upon repurchase, the shares are restored to the status of authorized but unissued, and we record them as a reduction in the number of shares of common stock issued and outstanding in our consolidated financial statements.

 

The following table presents the shares acquired during the quarter ended September 30, 2012:

 

 

 

Total number of
shares (or
units) purchased

 

Average price
paid per share (or unit)

 

Total number of
shares (or
units) purchased as
part of publicly
announced plans or
programs (1)

 

Maximum number
(or approximate
dollar value)
of shares (or
units) that may
yet be purchased
under the plans or
programs

 

July 1, 2012 to July 31, 2012

 

 

 

 

585,772

 

August 1, 2012 to August 31, 2012

 

78,603

(2)

$

73.12

 

 

585,772

 

September 1, 2012 to September 30, 2012

 

49,647

(3)

$

74.19

 

11,345

 

574,427

 

 

 

128,250

 

$

73.54

 

11,345

 

 

 

 


(1)          In March 1999, our Board of Directors authorized a stock repurchase program of up to 2,000,000 shares.  In September 2004, our Board of Directors authorized an additional 1,000,000 shares for repurchase pursuant to this program.

(2)          Includes a total of 58,206 shares, which were tendered to satisfy minimum statutory tax withholding obligations related to the vesting of restricted stock and the exercising of stock options.  In addition, 20,397 shares were tendered to cover the option cost obligation.

(3)          Includes a total of 38,302 shares, which were tendered to satisfy minimum statutory tax withholding obligations related to the vesting of restricted shares.

 

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

 

We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.  See Note 7 to the condensed consolidated financial statements for further discussion regarding significant changes in those obligations during the first three months of fiscal 2013.

 

Off Balance Sheet Arrangements

 

As of September 30, 2012, 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, 2012, 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, 2012.

 

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.

 

19



Table of Contents

 

Foreign Currency Exchange Risk

 

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 (U.S. dollars), Malaysia (U.S. dollars), United Kingdom (U.K. pounds), Norway (Norwegian kroners), India (Indian rupees), Indonesia (Indonesian rupiah), Hong Kong (Hong Kong dollars), China (Chinese yuan), Canada (Canadian dollars), Mexico (Mexican pesos and U.S. dollars), Australia (Australian dollars) and Cyprus (Cypriot pounds). Foreign currency financial statements are translated into U.S. dollars at period-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 (AOCI). Transaction gains and losses, which were included in our condensed consolidated statements of operations, amounted to a loss of $0.1 million and a loss of $0.5 million during the three months ended September 30, 2011 and 2012, respectively. Furthermore, a 10% appreciation of the U.S. dollar relative to each of the local currencies would have resulted in a net increase in our operating income of approximately $2 million in the first quarter of fiscal 2013. Conversely, a 10% depreciation of the U.S. dollar relative to each of the local currencies would have resulted in a net decrease in our operating income of approximately $2 million in the first quarter of fiscal 2013.

 

Use of Derivatives

 

Our use of derivatives consists primarily of foreign exchange contracts and an interest swap agreement. As discussed in Note 1 to the condensed consolidated financial statements, we had foreign currency forward contracts of approximately $6.2 million and an interest rate swap of $11 million outstanding as of September 30, 2012.

 

Importance of International Markets

 

International markets provide us with significant growth opportunities. However, as a result of our worldwide business operations, we are subject to various risks, including: international regulatory requirements and policy changes; difficulties in accounts receivable collection and the management of distributors; geopolitical and economic instability; currency exchange rate fluctuations; and tariff regulations. In response to these risks and others, we continue to perform ongoing credit evaluations of our customers’ financial condition and, if deemed necessary, we require advance payments for sales. Also, we monitor geopolitical, economic and currency conditions around the world to evaluate whether there may be any significant effect on our international sales in the future.

 

Inflation

 

We do not believe that inflation had a material impact on our results of operations during the three months ended September 30, 2012.

 

Interest Rate Risk

 

We classify all highly liquid investments with maturity of three months or less as cash equivalents and record them in the balance sheet at fair value.

 

Item 4. Controls and Procedur es

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2012, the end of the period covered by this report. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2012.

 

20



Table of Contents

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the first quarter of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are involved in various claims and legal proceedings arising out of the ordinary course of business. In our opinion, after consultation with legal counsel, the ultimate disposition of such proceedings will not 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, 2012, filed with the Securities and Exchange Commission on August 13, 2012, which describe various risks and uncertainties to which we are or may become subject. There have been no material changes to the risk factors included in our Annual Report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — See Stock Repurchase Program discussion under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 3. Defaults Upon Senior Securities — None

 

Item 4. Mine Safety Disclosures — None

 

Item 5. Other Information — None

 

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

 

 

101.INS

XBRL Instance Document ‡

 

 

101.SCH

XBRL Taxonomy Extension Schema Document‡

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document‡

 

 

101.DEF

XBRL Extension Definition‡

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document‡

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document‡

 


                      XBRL information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

21



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 24th day of October 2012.

 

 

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

 

22


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 15d-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 24, 2012

 

 

/s/ Deepak Chopra

 

Deepak Chopra

 

Chief Executive Officer

 

1


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 15d-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 24, 2012

 

 

/s/ Alan Edrick

 

Alan Edrick

 

Chief Financial Officer

 

1


Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of OSI Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012, 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 the Report.

 

Date: October 24, 2012

 

 

/s/ Deepak Chopra

 

Deepak Chopra

 

Chief Executive Officer

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

1


Exhibit 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of OSI Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012, 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 the Report.

 

Date: October 24, 2012

 

 

/s/ Alan Edrick

 

Alan Edrick

 

Chief Financial Officer

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

1